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BUSINESS DEVELOPMENT CORP OF AMERICA - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Business Development Corporation of America and the notes thereto, and other financial information included elsewhere in this Quarterly Report on Form 10-Q. We are externally managed by our adviser, BDCA Adviser, LLC (the "Adviser"). The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to: • our future operating results; • our business prospects and the prospects of our portfolio companies; • the impact of the investments that we expect to make; • the ability of our portfolio companies to achieve their objectives; • our expected financings and investments; • the adequacy of our cash resources and working capital; • the timing of cash flows, if any, from the operations of our portfolio companies; • our repurchase of shares; • actual and potential conflicts of interest with our Adviser and its affiliates; • the dependence of our future success on the general economy and its effect on the industries in which we invest; • the ability to qualify and maintain our qualification as a regulated investment company ("RIC") and a business development company ("BDC"); and • the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder. In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors discussed in Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013. Other factors that could cause actual results to differ materially include: • changes in the economy; • risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and • future changes in laws or regulations and conditions in our operating areas. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Overview We are a specialty finance company incorporated in Maryland in May 2010. We are an externally managed, non-diversified closed-end investment company that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). We are therefore required to comply with certain regulatory requirements. We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually hereafter, as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). We are managed by the Adviser, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The Adviser oversees the management of our activities and is responsible for making investment decisions with respect to our portfolio. Our Adviser is controlled by Nicholas S. Schorsch, our chairman and chief executive officer, and William M. Kahane, one of our directors, through their ownership of AR Capital, LLC (formerly known as American Realty Capital II, LLC) (the "Sponsor"). 51 -------------------------------------------------------------------------------- On January 25, 2011, we commenced our initial public offering (the "IPO") on a "reasonable best efforts basis" of up to 150.0 million shares of common stock, $0.001 par value per share, at an initial offering price of $10.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form N-2 (File No. 333-166636) (the "Registration Statement") filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. We sold 22,222 shares of common stock to our Adviser on July 8, 2010 at $9.00 per share, which represents the initial public offering price of $10.00 per share minus selling commissions of $0.70 per share and dealer manager fees of $0.30 per share. On August 25, 2011, we raised sufficient funds to break escrow on our IPO and commenced operations as of that date. As of June 30, 2014, we had issued 130.6 million shares of common stock for gross proceeds of $1.4 billion including the shares purchased by the Sponsor and shares issued under our distribution reinvestment plan ("DRIP"). As of June 30, 2014, we had repurchased 0.3 million shares of common stock for payments of $2.8 million. On July 13, 2012, we, through a wholly-owned, consolidated subsidiary, 405 TRS I, LLC ("405 Sub"), entered into a total return swap agreement ("TRS") with Citibank, N.A. ("Citi"), which was subsequently amended on October 17, 2012, December 7, 2012, May 10, 2013, July 18, 2013, October 15, 2013 and May 6, 2014, to increase the aggregate market value of the portfolio of loans selected by 405 Sub to $450.0 million. We terminated the amended and restated TRS with Citi on June 27, 2014. On June 27, 2014, we, through a wholly-owned, special purpose financing subsidiary, BDCA-CB Funding, LLC ("CB Funding"), entered into the Citi Credit Facility as administrative agent and U.S. Bank National Association ("U.S. Bank") as collateral agent, account bank and collateral custodian. The Citi Credit Facility provides for borrowings over a twenty four month period in an aggregate principal amount of up to $400 million on a committed basis, subject to the administrative agent's right to approve the assets acquired by CB Funding and pledged as collateral under the Citi Credit Facility. In connection with the Citi Credit Facility, on June 27, 2014, CB Funding entered into an Agreement and Plan of Merger (the "Merger Agreement") with 405 Loan Funding LLC ("Loan Funding"), an affiliate of Citi formed for the purpose of holding loans underlying a TRS with CB Funding. Pursuant to the terms of the Merger Agreement, CB Funding acquired such loans through the merger of Loan Funding with and into CB Funding. Pursuant to the Merger Agreement, CB Funding paid approximately $389.0 million for the assets held by Loan Funding. On July 24, 2012, we, through a wholly-owned, consolidated special purpose financing subsidiary, BDCA Funding I, LLC ("Funding I"), entered into a revolving credit facility (the "Wells Fargo Credit Facility") with Wells Fargo Bank, National Association as lender, Wells Fargo Securities as administrative agent (together, "Wells Fargo") and U.S. Bank as collateral agent, account bank and collateral custodian. The Wells Fargo Credit Facility, which was subsequently amended on April 26, 2013, September 9, 2013, and June 30, 2014, provides for borrowings in an aggregate principal amount of up to $300.0 million on a committed basis, with a term of 60 months. Funding I is included within our consolidated financial statements. The consolidated financial statements include both our accounts and the accounts of Funding I. All significant intercompany transactions have been eliminated in consolidation. On February 21, 2014, we, through a newly-formed, wholly-owned, consolidated special purpose financing subsidiary, BDCA 2L Funding I, LLC ("2L Funding I"), entered into a revolving credit facility with Deutsche Bank AG, New York Branch as administrative agent and U.S. Bank as collateral agent and collateral custodian (the "Deutsche Bank Credit Facility"). The Deutsche Bank Credit Facility provides for borrowings in an aggregate principal amount of up to $60.0 million on a committed basis, with a 36 month term. We have formed and expect to continue to form consolidated subsidiaries (the "Consolidated Holding Companies"). These Consolidated Holding Companies enable us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. 52 -------------------------------------------------------------------------------- Our investment objective is to generate both current income and to a lesser extent long-term capital appreciation through debt and equity investments. We anticipate that during our offering period we will invest largely in first and second lien senior secured loans and mezzanine debt issued by middle market companies. We may also purchase, directly and through the TRS, interests in loans through secondary market transactions in the "over-the-counter" market for institutional loans. First and second lien secured loans generally are senior debt instruments that rank ahead of subordinated debt and equity in bankruptcy priority and are generally secured by liens on the operating assets of a borrower which may include inventory, receivables, plant, property and equipment. Mezzanine debt is subordinated to senior loans and is generally unsecured. We define middle market companies as those with annual revenues between $10 million and $1 billion. We may also invest in the equity and junior debt tranches of collateralized loan obligation investment vehicles ("Collateralized Securities"). Structurally, Collateralized Securities are entities that are formed to manage a portfolio of senior secured loans made to companies whose debt is rated below investment grade or, in limited circumstances, unrated. The senior secured loans within these Collateralized Securities are limited to senior secured loans which meet specified credit and diversity criteria and are subject to concentration limitations in order to create a diverse investment portfolio. We expect that our investments will generally range between approximately $1 million and $25 million, although this investment size will vary proportionately with the size of our capital base. As we increase our capital base during our offering period, we will invest in, and ultimately intend to have a substantial portion of our assets invested in, customized direct loans to and equity securities of middle market companies. In most cases, companies to whom we provide customized financing solutions will be privately held at the time we invest in them. As a BDC, we are required to comply with certain regulatory requirements. For instance, we have to invest at least 70% of our total assets in "qualifying assets," including securities of U.S. operating companies whose securities are not listed on a national securities exchange, U.S. operating companies with listed securities that have equity market capitalizations of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, which, as defined in the 1940 Act, measures the ratio of total assets less total liabilities (excluding borrowings) to total borrowings, equals at least 200% after such borrowing, with certain limited exceptions. Investment Advisory and Administration Agreement Pursuant to the Investment Advisory Agreement we have with the Adviser, we pay the Adviser a fee for its services consisting of two components - a management fee and an incentive fee. The management fee is calculated at an annual rate of 1.5% of our average gross assets and is payable quarterly in arrears. The incentive fee consists of two parts. The first part, which we refer to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding quarter. The payment of the subordinated incentive fee on income is subject to payment of a preferred return to investors each quarter, expressed as a quarterly rate of return on adjusted capital at the beginning of the most recently completed calendar quarter, of 1.75% (7.00% annualized), subject to a "catch up" feature. The second part of the incentive fee, referred to as the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of our incentive fee capital gains, which equals our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. Realized gains received from loans underlying the total return swap we have with Citi will not be included for purposes of evaluating the incentive fee on capital gains. We have entered into a fund administration servicing agreement and a fund accounting servicing agreement with U.S. Bancorp Fund Services, LLC (the "Administrator"). The Administrator provides services, such as accounting, financial reporting, legal and compliance support and investor relations support, necessary to operate. On August 13, 2012, we entered into a custody agreement with U.S. Bank. Under the custody agreement, U.S. Bank will hold all of our portfolio securities and cash for certain of our subsidiaries, and will transfer such securities or cash pursuant to our instructions. The custody agreement is terminable by either party, without penalty, on not less than ninety days prior notice to the other party. Realty Capital Securities, LLC (the "Dealer Manager"), an affiliate of the Sponsor, serves as the dealer manager of the IPO. The Adviser and the Dealer Manager are related parties and receive compensation and fees for services related to the IPO and for the investment and management of our assets. The Adviser receives fees during the offering, operational and liquidation stages while the Dealer Manager receives fees during the offering stage. The Adviser pays to the Administrator a portion of the fees payable to the Adviser for the performance of these support services. 53 --------------------------------------------------------------------------------Significant Accounting Estimates and Critical Accounting Policies Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating plans occur we will describe additional critical accounting policies in the notes to our consolidated financial statements in addition to those discussed below. Set forth below is a summary of the significant accounting estimates and critical accounting policies that management believes are important to the preparation of our consolidated financial statements. Certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations and require the application of significant judgment by our management. As a result, these estimates are subject to a degree of uncertainty. These significant accounting estimates include: Valuation of Portfolio Investments Portfolio investments are reported on the consolidated statements of assets and liabilities at fair value. On a quarterly basis, the Company performs an analysis of each investment to determine fair value as follows: Securities for which market quotations are readily available on an exchange are valued at the reported closing price on the valuation date. The Company may also obtain quotes with respect to certain of the Company's investments from pricing services or brokers or dealers in order to value assets. When doing so, the Company determines whether the quote obtained is sufficient according to U.S. GAAP to determine the fair value of the security. If determined adequate, the Company uses the quote obtained. Investments without a readily determined market value are primarily valued using a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in fair value pricing the Company's 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, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, 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 an investment in an investment fund that does not have a readily determinable fair value, the Company measures the fair value of the investment predominately based on the net asset value per share of the investment fund if the net asset value of the investment fund is calculated in a manner consistent with the measurement principles of Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC"), Topic 946, Financial Services-Investment Companies, as of the Company's measurement date. However, in determining the fair value of the Company's investment, the Company may make adjustments to the net asset value per share in certain circumstances, based on the Company's analysis of any restrictions on redemption of the shares of the investment as of the measurement date. The value of our TRS was primarily based on the increase or decrease in the value of the loans underlying the TRS, as determined by Citi based upon indicative pricing by an independent third-party pricing service. 54 -------------------------------------------------------------------------------- For investments in Collateralized Securities, the Company models both the assets and liabilities of each Collateralized Securities' capital structure. The model uses a waterfall engine to store the collateral data, generate collateral cash flows from the assets, and distribute the cash flows to the liability structure based on the priority of payments. The waterfall cash flows are discounted using rates that incorporate risk factors such as default risk, interest rate risk, downgrade risk, and credit spread risk, among others. In addition, the Company considers broker quotations and/or quotations provided by pricing services as an input to determining fair value when available. As part of the Company's quarterly valuation process, the Adviser may be assisted by an independent valuation firm engaged by the Company's board of directors. The audit committee of the Company's board of directors reviews each preliminary valuation and the Adviser and an independent valuation firm (if applicable) will supplement the preliminary valuation to reflect any comments provided by the audit committee. The board of directors then discusses the valuations and determines the fair value of each investment, in good faith, based on the input of the Adviser, the independent valuation firm (to the extent applicable) and the audit committee of the board of directors. Because there is not a readily available market value for most of the investments in its portfolio, the Company values substantially all of its portfolio investments at fair value as determined in good faith by its board of directors, as described herein. 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 Company's investments may fluctuate from period to period. Additionally, the fair value of the Company's investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize significantly less than the value at which the Company has recorded it. Income Taxes We have elected to be treated for federal income tax purposes, and intend to qualify thereafter, as a RIC under Subchapter M of the Code. Generally, a RIC is exempt from federal income taxes if it distributes at least 90% of its ''investment company taxable income,'' as defined in the Code, each year. Distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to distribute sufficient distributions to maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income each calendar year and 98.2% of capital gain net income for the one year period ending on October 31 of such calendar year, if any, and any recognized and undistributed income from prior years for which we paid no federal income taxes. We will generally endeavor each year to avoid any federal excise taxes. New Accounting Pronouncement In June 2013, the FASB issued Accounting Standards Update ("ASU") 2013-08, Financial Services - Investment Companies (ASC Topic 946), which affects the scope, measurement and disclosure requirements for investment companies under U.S. GAAP. The amendments: (i) change the approach to the investment company assessment in ASC Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment company; (ii) require an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than the equity method of accounting; and (iii) require the following additional disclosures (a) the fact that the entity is an investment company and is applying the guidance in ASC Topic 946, (b) information about changes, if any, in an entity's status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. This guidance is effective for interim an annual reporting periods beginning on or after December 15, 2013. Management has reviewed the impact of this accounting pronouncement but does not believe it has a material impact on the Company. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. 55 --------------------------------------------------------------------------------Portfolio and Investment Activity During the six months ended June 30, 2014, we made $1.5 billion of investments in new portfolio companies and had $404.0 million in aggregate amount of exits and repayments, resulting in net investment activity of $1.1 billion for the period. Our portfolio composition, based on fair value at June 30, 2014 was as follows: June 30, 2014 Weighted Average Current Yield for Total Percentage of Portfolio Total Portfolio (1) Senior Secured First Lien Debt 60.9 % 7.5 % Senior Secured Second Lien Debt 9.8 10.2 Subordinated Debt 2.7 13.6 Collateralized Securities (2) 17.6 16.4 Equity/Other 9.0 N/A Total 100.0 % 9.3 % ______________ (1) Excludes the effect of the amortization or accretion of loan premiums or discounts. (2) Weighted average current yield for Collateralized Securities is based on the estimation of effective yield to expected maturity for each security as calculated in accordance with ASC Topic 325-40-35, Beneficial Interests in Securitized Financial Assets (see Note 2 - Summary of Significant Accounting Policies). During the year ended December 31, 2013, we made $815.9 million of investments in new portfolio companies and had $270.0 million in aggregate amount of exits and repayments, resulting in net investment activity of $545.9 million for the period. 56 --------------------------------------------------------------------------------Our portfolio composition, based on fair value, including the value of the TRS underlying loans, at December 31, 2013 was as follows: At December 31, 2013 Weighted Percentage Weighted Average Weighted of Total Average Current Current Average Portfolio Yield for Total Yield for Current Yield Including Portfolio Total Percentage of for TRS TRS Including TRS Percentage of Portfolio TRS Underlying Underlying Underlying Underlying Total Portfolio (1) (1) (2) Loans Loans Loans Loans (2) Senior Secured First Lien Debt 47.9 % 8.3 % 95.7 % 7.7 % 62.2 % 8.0 % Senior Secured Second Lien Debt 13.1 10.7 4.3 11.3 10.4 11.3 Subordinated Debt 8.6 13.9 - - 6.0 13.3 Collateralized Securities (3) 15.2 12.0 - - 10.7 12.0 Equity/Other 15.2 N/A - N/A 10.7 N/A Total 100.0 % 8.4 % 100.0 % 7.8 % 100.0 % 9.3 % ______________ (1) Does not include TRS underlying loans. (2) Excludes the effect of the amortization or accretion of loan premiums or discounts. (3) Weighted average current yield for Collateralized Securities is based on the estimation of effective yield to expected maturity for each security as calculated in accordance with ASC Topic 325-40-35, Beneficial Interests in Securitized Financial Assets (see Note 2 - Summary of Significant Accounting Policies). 57 --------------------------------------------------------------------------------The following table shows the portfolio composition by industry grouping based on fair value at June 30, 2014 (dollars in thousands): At June 30, 2014 Investments at Percentage of Fair Value Total Portfolio Diversified Investment Vehicles (1) $ 412,045 23.2 % Health Care Providers & Services 120,655 6.8 Hotels, Restaurants & Leisure 93,309 5.3 Aerospace & Defense 89,780 5.1 Automotive 88,222 5.0 Diversified Consumer Services 81,033 4.5 Food Products 80,577 4.5 Media 78,834 4.4 Publishing 77,052 4.3 Electronic Equipment, Instruments & Components 62,511 3.5 Retailers (except food & drug) 57,013 3.2 Consumer Finance 54,530 3.1 Professional Services 53,172 3.0 Commercial Services & Supplies 41,547 2.3 Marine 37,278 2.1 Oil, Gas & Consumable Fuels 34,816 2.0 Software 33,910 1.9 Biotechnology 32,863 1.9 Real Estate Management & Development 27,813 1.5 Diversified Telecommunication Services 26,726 1.5 Internet Software & Services 23,327 1.3 Commercial Banks 19,949 1.1 Capital Markets 18,834 1.1 Communications Equipment 18,740 1.1 Business Equipment & Services 17,413 1.0 Paper & Forest Products 14,961 0.8 Road & Rail 12,285 0.7 Technology - Enterprise Solutions 12,014 0.7 Textiles, Apparel & Luxury Goods 11,974 0.7 IT Services 11,171 0.6 Containers, Packaging and Glass 10,037 0.6 Steel 9,875 0.6 Chemicals 9,859 0.6 Total $ 1,774,125 100.0 % ______________ (1) Diversified Investment Vehicles consists of Collateralized Securities and equity investments in funds. 58 -------------------------------------------------------------------------------- The following table shows the portfolio composition by industry grouping, including the TRS underlying loans, based on fair value at December 31, 2013 (dollars in thousands): At December 31, 2013 Percentage Total of Total Investments at Portfolio Fair Value Including including the the value Value of TRS Percentage of value of TRS of TRS Investments at Percentage of Underlying Loans TRS Underlying Underlying Underlying Fair Value (1) Total Portfolio (1) (2) Loans Loans Loans Diversified Investment Vehicles (3) $ 168,156 24.2 % $ - - % $ 168,156 16.9 % Media 57,061 8.2 21,134 7.1 78,195 7.9 Hotels, Restaurants & Leisure 46,462 6.7 24,990 8.4 71,452 7.2 Diversified Consumer Services 29,190 4.2 30,876 10.4 60,066 6.1 Health Care Providers & Services 48,823 7.0 8,301 2.8 57,124 5.8 Oil, Gas & Consumable Fuels 32,058 4.6 23,875 8.1 55,933 5.6 Marine 28,399 4.1 12,209 4.1 40,608 4.1 Food Products 34,438 5.0 5,444 1.9 39,882 4.0 Biotechnology 5,876 0.8 33,227 11.2 39,103 3.9 Consumer Finance 28,691 4.1 9,925 3.4 38,616 3.9 Internet Software & Services 36,432 5.2 - - 36,432 3.7 Commercial Services & Supplies 19,376 2.8 15,975 5.4 35,351 3.6 Professional Services 20,110 2.9 11,943 4.0 32,053 3.2 Software 10,182 1.5 20,342 6.9 30,524 3.1 Electronic Equipment, Instruments & Components 12,862 1.9 17,343 5.9 30,205 3.0 Real Estate Management & Development 13,001 1.9 14,475 4.9 27,476 2.8 Aerospace & Defense 21,131 3.0 5,752 1.9 26,883 2.7 Commercial Banks 9,875 1.4 9,900 3.3 19,775 2.0 Paper & Forest Products 8,040 1.2 7,035 2.4 15,075 1.5 Communications Equipment 7,412 1.1 5,355 1.8 12,767 1.3 Road & Rail 12,147 1.7 - - 12,147 1.2 Textiles, Apparel & Luxury Goods 11,977 1.7 - - 11,977 1.2 IT Services 10,741 1.5 - - 10,741 1.1 Diversified Telecommunication Services 10,000 1.4 - - 10,000 1.0 Distributors - - 10,000 3.4 10,000 1.0 Chemicals 9,728 1.4 - - 9,728 1.0 Capital Markets - - 8,059 2.7 8,059 0.8 Machinery 3,608 0.5 - - 3,608 0.4 Total $ 695,776 100.0 % $ 296,160 100.0 % $ 991,936 100.0 % ______________ (1) Does not include TRS underlying loans. (2) The TRS underlying loans are held by our counterparty to the TRS, Citi. The values of the TRS underlying loans shown are based primarily on the indicative bid prices provided by an independent third-party pricing service to Citi. (3) Diversified Investment Vehicles consists of Collateralized Securities and equity investments in funds. The following table presents the fair value measurements at June 30, 2014 for Level 3 investments (dollars in thousands): 59 -------------------------------------------------------------------------------- Fair Value Percentage of Portfolio Company Type of Asset Fair Value Total Portfolio Senior Secured First ABRA, Inc. Lien Debt $ 12,498 0.7 % Senior Secured First Adventure Interactive Corp. Lien Debt 19,678 1.1 Senior Secured First American Importing Company, Inc. Lien Debt 10,878 0.6 Apidos XVI CLO, LTD. Collateralized Subordinated Notes Securities 13,519 0.8 B&M CLO 2014-1, LTD. Collateralized Subordinated Notes Securities 34,651 2.0 Senior Secured Second Boston Market Corporation Lien Debt 24,634 1.4 Carlyle GMS Finance, Inc. Equity/Other 2,371 0.1 Chicken Soup for the Soul Senior Secured First Publishing, LLC Lien Debt 29,803 1.7 Senior Secured Second CIG Financial, LLC Lien Debt 14,850 0.8 Senior Secured First Collision Holding Company, LLC Lien Debt 2,348 0.1 Senior Secured First ConvergeOne Holdings Corp. Lien Debt 19,934 1.1 Senior Secured Second CPX Interactitve Holdings, LP Lien Debt 18,487 1.0 CPX Interactive Holdings, LP - Series A Convertible Preferred Shares Equity/Other 6,000 0.3 CPX Interactive Holdings, LP - Warrants Equity/Other 1,202 0.1 Crowley Holdings, Inc. - Series A Preferred Stock Equity/Other 25,480 1.4 CVP Cascade CLO, LTD. Collateralized Subordinated Notes Securities 23,896 1.3 CVP Cascade CLO-2, LTD. Collateralized Subordinated Notes Securities 18,000 1.0 Danish CRJ LTD. Equity/Other 500 - Senior Secured First ECI Acquisition Holdings, Inc. Lien Debt 12,285 0.7 Senior Secured First Epic Health Services, Inc. Lien Debt 13,551 0.8 Senior Secured First ERG Holding Company Lien Debt 14,421 0.8 Evolution Research Group - Preferred Equity Equity/Other 421 - Senior Secured First EZE Trucking, Inc. Lien Debt 12,014 0.7 Fifth Street Senior Loan Fund I, LLC Equity/Other 19,357 1.1 Figueroa CLO 2014-1, LTD. Collateralized Subordinated Notes Securities 18,600 1.0 Garrison Funding 2013 - 1 Ltd. Collateralized Subordinated Notes Securities 15,000 0.8 Global Telecom & Technology, Senior Secured First Inc. Lien Debt 7,196 0.4 Gold, Inc. Subordinated Debt 11,974 0.7 Senior Secured First Hanna Anderson, LLC Lien Debt 14,908 0.8 HIG Integrity Nutraceuticals Equity/Other 1,636 0.1 Senior Secured Second High Ridge Brands Co. Lien Debt 22,163 1.2 Senior Secured First ILC Dover LP Lien Debt 14,800 0.8 InMotion Entertainment Group, Senior Secured First LLC Lien Debt 9,936 0.6 Senior Secured First IntegraMed America, Inc. Lien Debt 3,818 0.2 Senior Secured First Integrity Neutraceuticals Lien Debt 34,570 1.9 Senior Secured Second Interblock USA L.C. Lien Debt 22,508 1.3 Senior Secured First K2 Pure Solutions NoCal, L.P. Lien Debt 9,859 0.6 Senior Secured First Kahala Ireland OpCo LLC Lien Debt 14,240 0.8 Kahala Ireland OpCo LLC Equity/Other 100 - Senior Secured First Kahala US OpCo LLC Lien Debt 20,490 1.2 Kahala US OpCo LLC Equity/Other 6,196 0.3 Senior Secured First Land Holdings I, LLC Lien Debt 29,400 1.7 MBLOX Inc. - Warrants Equity/Other 721 - Senior Secured First Med-Data Incorporated Lien Debt 14,422 0.8 Collateralized MidOcean Credit CLO II, LLC Securities 33,011 1.9 Collateralized MidOcean Credit CLO III, LLC Securities 35,420 2.0 Senior Secured First National Technical Systems, Inc. Lien Debt 18,560 1.0 NewStar Arlington Senior Loan Collateralized Program LLC Subordinated Notes Securities 29,498 1.7 Senior Secured First NextCare, Inc. Lien Debt 19,176 1.1 NMFC Senior Loan Program I, LLC Equity/Other 25,000 1.4 Collateralized Ocean Trails CLO V, LTD. Securities 15,000 0.8 60 -------------------------------------------------------------------------------- Fair Value Percentage of Portfolio Company Type of Asset Fair Value Total Portfolio OFSI Fund VI, Ltd. - Collateralized Subordinated Note Securities $ 31,542 1.8 % Park Ave Holdings, LLC Equity/Other 8,415 0.5 Park Ave Re Holdings, LLC Subordinated Debt 5,158 0.3 PennantPark Credit Opportunity Fund, LP Equity/Other 10,923 0.6 Senior Secured First PeopLease Holdings, LLC Lien Debt 10,218 0.6 Collateralized Related Fee Agreements Securities 8,209 0.5 Senior Secured First Resco Products, Inc. Lien Debt 9,875 0.6 S.B. Restaurant Co., Inc. Subordinated Debt - - S.B. Restaurant Co., Inc. - Warrants Equity/Other - - S.B. Restaurant Co., Inc. - Senior Subordinate Debt Subordinated Debt - - Collateralized Silver Spring CLO, Ltd. Securities 5,560 0.3 SkyCross Inc. - Warrants Equity/Other 450 - South Grand MM CLO I, LLC Equity/Other 22,209 1.3 Tennenbaum Waterman Fund, L.P. Equity/Other 8,307 0.5 The SAVO Group, Ltd. - Warrants Equity/Other 785 - The Tennis Channel Holdings, Senior Secured First Inc. Lien Debt 15,221 0.9 THL Credit Greenway Fund II LLC Equity/Other 11,907 0.7 Vestcom Acquisition, Inc. Subordinated Debt 7,621 0.4 Senior Secured First Vestcom International, Inc. Lien Debt 8,619 0.5 Visionary Integration Professionals, LLC Subordinated Debt 10,094 0.6 Visionary Integration Professionals, LLC - Warrants Equity/Other 1,077 0.1 Senior Secured First WBL SPE I., LLC Lien Debt 4,500 0.3 WhiteHorse VIII, Ltd. CLO Collateralized Subordinated Notes Securities 30,065 1.8 World Business Lenders, LLC Equity/Other 3,359 0.2 Xplornet Communications Inc. - Warrants Equity/Other 2,623 0.1 Xplornet Communications, Inc. Subordinated Debt 10,578 0.6 Senior Secured Second Zimbra, Inc. Lien Debt 6,145 0.3 Zimbra, Inc. Subordinated Debt 2,000 0.1 Zimbra, Inc. - Warrants (Second Lien Debt) Equity/Other 248 - Zimbra, Inc. - Warrants (Third Lien Bridge Note) Equity/Other 1,324 0.1 Total Level 3 investments $ 1,036,012 58.4 % Total Level 2 investments $ 738,113 41.6 % Total Investments $ 1,774,125 100.0 % The following table presents the fair value measurements at December 31, 2013 for Level 3 investments (dollars in thousands): Fair Value Percentage of Portfolio Company Type of Asset Fair Value Total Portfolio Senior Secured First Adventure Interactive Corp. Lien Debt $ 19,575 2.9 % Senior Secured First American Importing Company, Inc. Lien Debt 10,933 1.6 Apidos XVI CLO, LTD. Collateralized Subordinated Notes Securities 13,650 2.0 Senior Secured Second Boston Market Lien Debt 24,625 3.5 Carlyle GMS Finance, Inc. Equity/Other 2,173 0.3 Catamaran CLO 2013-1 Ltd. Collateralized Subordinated Notes Securities 20,404 2.9 Crowley Holdings Preferred, LLC - Series A Preferred Shares Equity/Other 25,000 3.6 CVP Cascade CLO-1, LTD. Collateralized Subordinated Notes Securities 28,086 4.0 Senior Secured First Epic Health Services Lien Debt 13,899 2.0 Senior Secured Second Eureka Hunter Holdings, LLC Lien Debt 4,969 0.7 Senior Secured First EZE Trucking, Inc. Lien Debt 12,147 1.7FairPay Solutions Inc. Term Loan Senior Secured First A Lien Debt 2,350 0.3 FairPay Solutions Inc. Term Loan Senior Secured First B Lien Debt 7,500 1.1 Garrison Funding 2013 - 1 Ltd. Collateralized Subordinated Notes Securities 15,000 2.2 61 -------------------------------------------------------------------------------- Fair Value Percentage of Portfolio Company Type of Asset Fair Value Total Portfolio Global Telecom & Technology, Senior Secured First Inc. Lien Debt $ 7,559 1.1 % Gold, Inc. Subordinated Debt 11,977 1.7 HIG Integrity Neutraceuticals Equity/Other 850 0.1 Senior Secured First HIG Integrity Neutraceuticals Lien Debt 22,655 3.3 JMP Credit Advisors CLO II Ltd. Collateralized Subordinated Notes Securities 6,099 0.9 Senior Secured First K2 Pure Solutions NoCal, L.P. Lien Debt 9,728 1.4 Kahala Aviation Holdings, LLC Equity/Other - - Kahala Aviation Holdings, LLC Preferred Shares Equity/Other 5,271 0.8 Senior Secured First Kahala US OpCo LLC Lien Debt 15,860 2.3 Senior Secured Second MBLOX Inc. Lien Debt 7,011 1.0 MBLOX Inc. - Warrants Equity/Other 705 0.1 Collateralized MC Funding Ltd. Preferred Shares Securities 2,163 0.3 MidOcean Credit CLO II, Ltd. Collateralized Subordinated Notes Securities 20,543 3.0 Senior Secured First National Technical Systems, Inc. Lien Debt 12,375 1.8 NewStar Arlington Fund LLC Equity/Other 30,000 4.3 Senior Secured First NextCare, Inc. Lien Debt 17,272 2.5 Senior Secured First Park Ave RE Holdings, LLC Lien Debt 9,750 1.4 Park Ave RE, Inc. Equity/Other 33 - Park Ave RE, Inc. - Preferred Shares Equity/Other 3,218 0.5 PennantPark Credit Opportunities Fund, LP Equity/Other 10,550 1.5 Senior Secured First PeopLease Holdings, LLC Lien Debt 9,800 1.4 Precision Dermatology, Inc. - Warrants Equity/Other - - S.B. Restaurant Co., Inc. - Warrants Equity/Other - - S.B. Restaurant Co., Inc. - Senior Subordinated Debt Subordinated Debt 88 - S.B. Restaurant Co., Inc. Subordinated Debt 2,025 0.3 SkyCross, Inc. - Warrants Equity/Other 450 0.1 Senior Secured Second SkyCross, Inc. Lien Debt 4,979 0.7 Source Refrigeration & HVAC, Senior Secured First Inc. Lien Debt 2,735 0.4 South Grand MM CLO I, LLC Equity/Other 872 0.1 Senior Secured Second Teleflex Marine, Inc. Lien Debt 3,399 0.5 Tennenbaum Waterman Fund, L.P. Equity/Other 9,611 1.4 The SAVO Group, Ltd. Subordinated Debt 5,005 0.7 The SAVO Group, Ltd. - Warrants Equity/Other 1,302 0.2 The Tennis Channel Holdings, Senior Secured First Inc. Lien Debt 14,787 2.1 THL Credit Greenway Fund II LLC Equity/Other 9,005 1.3 Trinity Consultants Holdings, Senior Secured First Inc. Lien Debt 3,079 0.4 Varel International Energy Mezzanine Funding Corp. Subordinated Debt 11,251 1.6 Vestcom Acquisition, Inc. Subordinated Debt 7,525 1.1 Visionary Integration Professionals, LLC Subordinated Debt 9,831 1.4 Visionary Integration Professionals, LLC - Warrants Equity/Other 910 0.1 Senior Secured First WBL SPE I., LLC Lien Debt 3,750 0.5 World Business Lenders, LLC Equity/Other 3,751 0.5 Xplornet Communications, Inc. Subordinated Debt 10,000 1.4 Xplornet Communications, Inc. - Warrants Equity/Other - - Senior Secured Second Zimbra, Inc. Lien Debt 6,137 0.9 Zimbra, Inc. Subordinated Debt 2,000 0.3 Zimbra, Inc. - Warrants (Second Lien Debt) Equity/Other 447 0.1 Zimbra, Inc. - Warrants (Third Lien Bridge Note) Equity/Other 1,598 0.2 Total Level 3 investments $ 518,267 74.5 % Total Level 2 investments (1) $ 177,509 25.5 % Total Investments $ 695,776 100.0 % ______________ 62 --------------------------------------------------------------------------------(1) Does not include TRS underlying loans. The following table presents the percentage of amortized cost by loan market for investments as of June 30, 2014: Amortized Cost as of June 30, 2014 Investments per Total Portfolio Middle Market (1) 69.2 % Large Corporate (2) 4.3 Other (3) 26.5 Total 100.0 % ______________ (1) Middle market represents companies whose annual revenues are between $10 million and $1 billion. (2) Large corporate represents companies whose annual revenues are in excess of $1 billion. (3) Other represents collateralized securities and equity investments. The following table presents the percentage of amortized cost by loan market for investments including the TRS underlying loans as of December 31, 2013: Amortized Cost as of December 31, 2013 Total Portfolio Investments per including TRS Total Portfolio TRS Underlying Loans Underlying Loans Middle Market (1) 67.4 % 90.9 % 74.4 % Large Corporate (2) 2.8 9.1 4.7 Other (3) 29.8 - 20.9 Total 100.0 % 100.0 % 100.0 % ______________ (1) Middle market represents companies whose annual revenues are between $10 million and $1 billion. (2) Large corporate represents companies whose annual revenues are in excess of $1 billion. (3) Other represents collateralized securities and equity investments. 63 --------------------------------------------------------------------------------The following table presents the percentage of fair value by loan market for investments as of June 30, 2014: Fair Value as of June 30, 2014 Investments per Total Portfolio Middle Market (1) 69.1 % Large Corporate (2) 4.3 Other (3) 26.6 Total 100.0 % ______________ (1) Middle market represents companies whose annual revenues are between $10 million and $1 billion. (2) Large corporate represents companies whose annual revenues are in excess of $1 billion. (3) Other represents collateralized securities and equity investments. The following table presents the percentage of fair value by loan market for investments including the TRS underlying loans as of December 31, 2013: Fair Value as of December 31, 2013 Total Portfolio Investments per including TRS Total Portfolio TRS Underlying Loans Underlying Loans Middle Market (1) 66.7 % 91.2 % 74.0 % Large Corporate (2) 2.8 8.8 4.6 Other (3) 30.5 - 21.4 Total 100.0 % 100.0 % 100.0 % ______________ (1) Middle market represents companies whose annual revenues are between $10 million and $1 billion. (2) Large corporate represents companies whose annual revenues are in excess of $1 billion. (3) Other represents collateralized securities and equity investments. Portfolio Asset Quality Our Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Adviser grades the credit risk of all debt investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio debt investment relative to the inherent risk at the time the original debt investment was made (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. 64 -------------------------------------------------------------------------------- Loan Rating Summary Description 1 Debt investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since the time of investment are favorable. 2 Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable. All investments are initially rated a "2". 3 Performing debt investment requiring closer monitoring. Trends and risk factors show some deterioration. 4 Underperforming debt investment. Some loss of interest or dividend expected, but still expecting a positive return on investment. Trends and risk factors are negative. 5 Underperforming debt investment with expected loss of interest and some principal. The weighted average risk ratings of our investments based on amortized cost were 2.04 as of June 30, 2014 and 2.03 as of December 31, 2013. As of June 30, 2014, we had one portfolio company, which represented two portfolio investments, on non-accrual status. These investments had a total principal of $4.2 million, which represented 0.2% of our portfolio and had no fair value as of June 30, 2014. We are currently evaluating potential value recovery alternatives for these investments. As of December 31, 2013, we had one portfolio investment on non-accrual status. This investment had a principal of $4.0 million and fair value of $2.0 million as of December 31, 2013, which represented 0.6% and 0.3%, respectively, of our portfolio. RESULTS OF OPERATIONS Operating results for the three and six months ended June 30, 2014 and June 30, 2013 were as follows (dollars in thousands): For the Three Months Ended For the Six Months Ended June 30, June 30, 2014 2013 2014 2013 Total investment income $ 29,743 $ 5,176 $ 48,233 $ 9,531 Total expenses, net 12,194 4,007 18,737 6,155 Net investment income $ 17,549 $ 1,169 $ 29,496 $ 3,376 Investment Income For the three and six months ended June 30, 2014, total investment income was $29.7 million and $48.2 million, respectively, and was attributable to interest income from investments in portfolio companies. For the three and six months ended June 30, 2013, total investment income was $5.2 million and $9.5 million, respectively, and was attributable to interest income from investments in portfolio companies. The increase in total investment income was due to the higher level of investments in portfolio companies during the period ended June 30, 2014 as compared to the period ended June 30, 2013. During the six months ended June 30, 2014, the average portfolio fair value was $1.2 billion with a 9.3% weighted average current yield while the average portfolio fair value and weighted average current yield were $222.4 million and 10.0%, respectively for the same period in 2013. 65 --------------------------------------------------------------------------------Operating Expenses The composition of our operating expenses for the three and six months ended June 30, 2014 and June 30, 2013 were as follows (dollars in thousands): For the Three Months Ended June 30, For the Six Months Ended June 30, 2014 2013 2014 2013 Management fees $ 5,763 $ 1,211 $ 9,395 $ 2,037 Subordinated income incentive fees 2,642 1,100 3,420 1,829 Capital gains incentive fees 245 568 226 899 Interest and credit facility financing expenses 1,735 467 3,029 769 Professional fees 1,499 574 2,241 812 Other administrative 234 13 275 71 Insurance 57 57 115 111 Directors fees 19 17 36 33 Operating expenses before expense waivers and reimbursements from Adviser 12,194 4,007 18,737 6,561 Waiver of management and incentive fees - - - (406 ) Total operating expenses net of expense waivers and reimbursements from Adviser $ 12,194 $ 4,007 $ 18,737 $ 6,155 Interest and credit facility expenses for the three and six months ended June 30, 2014 were comprised of amortization of deferred financing costs and non-usage fees related to the Wells Fargo Credit Facility, Deutsche Bank Credit Facility and Citi Credit Facility, along with $0.8 million and $1.7 million, respectively, of interest expense on the balance drawn on the Wells Fargo Credit Facility, $0.3 million and $0.3 million, respectively, of interest expense on the balance drawn on the Deutsche Bank Credit Facility, and $0.1 million and $0.1 million, respectively, of interest expense on the balance drawn on the Citi Credit Facility. We entered into the Deutsche Bank Credit Facility and Citi Credit Facility during the six month period ended June 30, 2014 and thus did not have interest and credit facility expenses during the comparable period in 2013. The interest expense on the balance drawn on the Wells Fargo Credit Facility was based on an average daily debt outstanding of $144.0 million at a weighted average annualized cost of 2.41% for the six months ended June 30, 2014. The interest expense on the balance drawn on the Deutsche Bank Credit Facility was based on an average daily debt outstanding of $11.2 million at a weighted average annualized cost of 4.50% for the six months ended June 30, 2014. The interest expense on the balance drawn on the Citi Credit Facility was based on an average daily debt outstanding of $7.5 million at a weighted average annualized cost of 2.85% for the six months ended June 30, 2014. For the three and six months ended June 30, 2014, we incurred $5.8 million and $9.4 million, respectively, of management fees, of which the Adviser did not waive any such fees. For the three and six months ended June 30, 2014, we incurred $2.9 million and $3.6 million, respectively, of incentive fees, of which the Adviser did not waive any such fees. Interest and credit facility expenses for the three and six months ended June 30, 2013 were comprised of amortization of deferred financing costs and non-usage fees related to our Wells Fargo Credit Facility along with $0.1 million and $0.3 million, respectively, of interest expense on the balance drawn on the Wells Fargo Credit Facility. The interest expense on the balance drawn on the Wells Fargo Credit Facility was based on an average debt outstanding of $26.9 million at a weighted average annualized cost of 2.51% for the six months ended June 30, 2013. For the three and six months ended June 30, 2013 , we incurred $1.2 million and $2.0 million, respectively, of management fees, of which the Adviser did not waive any such fees. For the three and six months ended June 30, 2013, we incurred $1.7 million and $2.7 million, respectively, of incentive fees, of which the Adviser waived $0.0 million and $0.4 million, respectively. 66 -------------------------------------------------------------------------------- For the Three Months Ended June For the Six Months Ended June 30, 30, 2014 2013 2014 2013 Net realized gain from investments $ 2,320 $ 739 $ 5,796 $ 1,734 Net realized gain from total return swap 9,107 2,874 14,558 4,669 Net unrealized appreciation (depreciation) on investments (1,093 ) 2,100 (4,665 ) 2,758 Net unrealized appreciation (depreciation) on total return swap (3,278 ) 30 (3,179 ) 2,314 Net realized and unrealized gain on investments and total return swap $ 7,056 $ 5,743 $ 12,510 $ 11,475 Net Realized Gain and Net Change in Unrealized Appreciation (Depreciation) on Investments Net realized gain and change in unrealized appreciation (depreciation) on investments resulted in a net gain of $1.2 million and $1.1 million, respectively, for the three and six months ended June 30, 2014 compared to a net gain of $2.8 million and $4.5 million, respectively, for the same periods in 2013. We look at net realized gains and change in unrealized appreciation (depreciation) together as movement in unrealized appreciation or depreciation can be the result of realizations. The net gain for the three months ended June 30, 2014 was primarily driven by the $2.6 unrealized appreciation on an equity investment in a portfolio company that was exceeding expectations partially offset by smaller scale unrealized depreciation on investments across the portfolio. The net gain for the six months ended June 30, 2014 was driven by the $2.6 million unrealized appreciation of the equity investment along with the net short-term gain of $1.0 million on the sale of one investment. These gains were partially offset by an unrealized depreciation of $(2.1) million on the two portfolio investments in non-accrual status. In total, we sold $250.5 million and $404.0 million, respectively, of assets during the three and six month periods ended June 30, 2014. The net gain for the three months ended June 30, 2013 was primarily driven by the unrealized appreciation of $1.5 million on a collateralized security investment that was exceeding performance expectations along with smaller scale net realized gains and unrealized appreciation across the remainder of the portfolio. Similar to the three months ended June 30, 2013, the net gain for the six months ended on the same date was driven by the $1.5 million unrealized appreciation on the collateralized security investment along with smaller scale net realized gains and unrealized appreciation across the remainder of the portfolio. Total asset sales for the three and six months ended June 30, 2013 were $64.5 million and $135.2 million, respectively. Net Realized Gain and Net Change in Unrealized Appreciation on Total Return Swap Net realized gain and change in unrealized appreciation on the total return swap resulted in a net gain of $5.8 million and $11.4 million, respectively, for the three and six months ended June 30, 2014 compared to a net gain of $2.9 million and $7.0 million, respectively, for the same period in 2013. We look at net realized gains and change in unrealized appreciation (depreciation) together as movement in unrealized appreciation or depreciation can be the result of realizations. The net gain for the three months ended June 30, 2014 was primarily driven by interest income of $5.9 million earned on the loans held under the TRS which had an average total notional value of $354.6 million for the period from April 1, 2014 through the termination of the TRS on June 27, 2014. The interest income was partially offset by $(1.2) million of interest expense on the TRS. The net gain for the six months ended June 30, 2014 was driven by interest income of $11.4 million earned on the loans held under the TRS which had an average total notional value of $348.1 million for the period from January 1, 2014 through the termination of the TRS on June 27, 2014 and this was partially offset by $(2.2) million of interest expense on the TRS. In addition, at the termination of the TRS the transfer of the portfolio of loans underlying the TRS to CB Funding was treated as a sale transaction with the portfolio being sold at its fair value on that date. As a result of the termination, the $4.0 million of unrealized gain on the TRS at the termination date was realized which resulted in an offsetting unrealized loss and realized gain on the TRS. 67 -------------------------------------------------------------------------------- The net gain for the three months ended June 30, 2013 was primarily driven by $3.2 million in interest income earned on the loans held under the TRS which had an average total notional value of $159.9 million for the three month period. This was partially offset by $(0.5) million in interest expense. The net gain for the six months ended June 30, 2013 was driven by a $2.3 million change in unrealized appreciation across our loans held under the TRS due to overall increases in market prices. In addition, we had $5.3 million in interest income earned on the loans held under the TRS which had an average total notional value of $128.3 million for the six month period. This was partially offset by $(0.9) million in interest expense. Please see Note 6 - Total Return Swap - for more information about the TRS. At June 30, 2014, the receivable and realized gain on the total return swap on the consolidated statements of assets and liabilities and consolidated statements of operations consisted of the following (dollars in thousands): Net Receivable Net Realized Gains Interest and other income from TRS portfolio $ 4,138 $ 11,366 TRS interest expense - (2,187 ) Gains on TRS asset sales - 5,379 Net realized gain from TRS $ 4,138 $ 14,558 At June 30, 2013, the receivable and realized gain on the total return swap on the consolidated statements of assets and liabilities and consolidated statements of operations consisted of the following (dollars in thousands): Net Receivable Net Realized Gains Interest and other income from TRS portfolio $ 2,505 $ 5,345 TRS interest expense (430 ) (926 ) Gains on TRS asset sales 9 250 Net realized gain from TRS $ 2,084 $ 4,669 Cash Flows for the Six Months Ended June 30, 2014 For the six months ended June 30, 2014, net cash used in operating activities was $892.8 million. The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and sales of portfolio investments, among other factors. The increase in cash flows used in operating activities for the six months ended June 30, 2014 was primarily due to $1.5 billion for purchases of investments partially offset by cash provided by operating activities of $404.0 million for sales and repayments of investments, $103.0 million from an increase in unsettled trades payable, and $42.0 million from a net increase in net assets from operations. The purchase and sales activity is driven by the increase in investment activity resulting from the continuous equity capital raising and growing capital base. Net cash provided by financing activities of $963.5 million during the six months ended June 30, 2014 was primarily related to net proceeds from the issuance of common stock of $646.8 million and net proceeds from the Wells Fargo Credit Facility, the Deutsche Bank Credit Facility, and the Citi Credit Facility of $342.6 million, partially offset by payments of stockholder distributions of $19.7 million. Consistent with the increase in investment activity, the proceeds from the issuance of common stock are the result of our increasing equity raise capabilities. Cash Flows for the Six Months Ended June 30, 2013 For the six months ended June 30, 2013, net cash used in operating activities was $166.6 million. The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions and sales of portfolio investments, among other factors. The increase in cash flows used in operating activities for the six months ended June 30, 2013 was primarily due to $302.8 million for purchases of investments partially offset by $135.2 million for repayments of investments and $14.9 million from a net increase in net investment income. The purchase and sales activity is driven by the increase in investment activity resulting from the continuous equity capital raising and growing capital base. Net cash provided by financing activities of $161.7 million during the six months ended June 30, 2013 was primarily related to net proceeds from the issuance of common stock of $180.3 million and proceeds from the Wells Fargo Credit Facility of $18.0 million. These inflows were partially offset by principal repayments on debt of $29.7 million and payments of stockholder distributions of $5.6 million. Consistent with the increase in investment activity, the proceeds from the issuance of common stock are the result of our increasing equity raise capabilities. 68 --------------------------------------------------------------------------------Liquidity and Capital Resources We generate cash from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments, as well as proceeds from sales of our investments. The Registration Statement offering for sale up to $1.5 billion of shares of our common stock (150.0 million shares at an initial offering price of $10.00 per share) (the "Offering"), was declared effective on January 27, 2011. As of June 30, 2014, we had issued 130.6 million shares of our common stock for gross proceeds of $1.4 billion including shares issued to the Sponsor and shares issued under the DRIP. Our principal demands for funds in both the short-term and long-term are for portfolio investments, either directly or indirectly through investment interests, such as the TRS, for the payment of operating expenses, distributions to our investors, repurchases under our share repurchase program, and for the payment of principal and interest on our outstanding indebtedness. Generally, capital needs for investment activities will be met through net proceeds received from the sale of common stock through our public offering. We may also from time to time enter into other agreements with third parties whereby third parties will contribute to specific investment opportunities. Items other than investment acquisitions are expected to be met from a combination of the proceeds from the sale of common stock, cash flows from operations, and, during our IPO, reimbursements from the Adviser. We have entered into the Expense Support Agreement with our Adviser, whereby the Adviser may pay the Expense Support Payment for any period beginning on the effective date of the Registration Statement, until we and the Adviser mutually agree otherwise. The purpose of the Expense Support Agreement was to reduce our offering and operating expenses until we had achieved economies of scale sufficient to ensure that we were able to bear a reasonable level of expense in relation to our investment income. The Expense Support Payment for any month shall be paid to us by the Adviser in cash and/or offsets against amounts due from us to the Adviser. Operating expenses subject to this agreement include expenses as defined by U.S. GAAP, including, without limitation, advisory fees payable and interest on indebtedness for such period, if any. As of June 30, 2014, the Adviser had made cumulative payments to the Company for $1.0 million of expenses pursuant to the Expense Support Agreement. During the six months ended June 30, 2014, the Adviser made no payments to the Company for expenses pursuant to the Expense Support Agreement. See Note 4 - Related Party Transactions and Arrangements - Expense Support Agreement - in our consolidated financial statements included in this report for additional information on this arrangement, including Expense Payments made by our Adviser pursuant to the terms of this agreement and the ability of the Adviser to be reimbursed for Expense Payments made to us. Other potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from private offerings, proceeds from the sale of investments and undistributed funds from operations. However, our ability to incur additional debt will be dependent on a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions that may be imposed by lenders. Our ability to raise proceeds in our public offering will be dependent on a number of factors as well, including general market conditions for BDCs and market perceptions about us. In January 2011, we entered into an agreement to obtain a revolving line of credit in the amount of $10.0 million with Main Street. The line of credit bore a variable interest rate based on the London Interbank Offered Rate ("LIBOR") plus 3.50%. On July 24, 2012, we used working capital and certain proceeds from the total return swap of our subsidiary, 405 Sub, to repay all of the obligations under our credit facility with Main Street. We were not required to pay any prepayment penalty in connection with such repayment. Total Return Swap On July 13, 2012, we, through a wholly-owned subsidiary, 405 Sub, entered into a TRS with Citi, which was subsequently amended on October 17, 2012, December 7, 2012, May 10, 2013, July 18, 2013, October 15, 2013 and May 6, 2014, to increase the aggregate market value of the portfolio of loans selected by 405 Sub. On June 27, 2014, we terminated the amended and restated TRS with Citi. On June 27, 2014, we terminated the TRS and CB Funding entered into a Merger Agreement with Loan Funding, an affiliate of Citi formed for the purpose of holding the loans underlying the TRS. Pursuant to the terms of the Merger Agreement, CB Funding acquired such loans through the merger of Loan Funding with and into CB Funding (the "Merger") for approximately $389.0 million. We recorded such loans at a cost equal to the respective fair values as of June 27, 2014 and as a result, the $4.0 million of unrealized gain on the TRS at the termination date was realized which resulted in an offsetting unrealized loss and realized gain on the TRS. The $4.0 million gain equates to fair value of the loans underlying the TRS as of June 27, 2014 less the respective costs of such assets as purchased through the TRS. 69 -------------------------------------------------------------------------------- Previously, the Adviser has not recognized incentive fees based on the returns or capital gains of the TRS and therefore will not receive any additional fees as a direct result of the Merger or termination of the TRS. However, such loans are now included in our portfolio of investments and subject to any fees applicable under the Investment Advisory Agreement. A total return swap is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the total return swap, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. The TRS effectively added leverage to our portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. The TRS enabled us, through our ownership of 405 Sub, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest type payment to Citi. The obligations of 405 Sub under the TRS were non-recourse to us and our exposure to the TRS was limited to the amount that we contributed to 405 Sub in connection with the TRS. Generally, that amount was the amount that 405 Sub was required to post as cash collateral for each loan (which in most instances is approximately 25% of the market value of a loan at the time that such loan was purchased). As amended, the TRS provided that 405 Sub could have selected a portfolio of loans with a maximum aggregate market value (determined at the time such loans become subject to the TRS) of $450.0 million. 405 Sub paid interest to Citi for each loan at a rate equal to one-month or three-month LIBOR, depending on the terms of the underlying loan, plus 1.20% per annum. Upon the termination or repayment of any loan selected by 405 Sub under the Agreement, 405 Sub would deduct the appreciation of such loan's value from any interest owed to Citi or pay the depreciation amount to Citi in addition to remaining interest payments. See Note 6 - Total Return Swap - in our consolidated financial statements included in this report for additional disclosure on the TRS with Citi. Wells Fargo Credit Facility On July 24, 2012, we, through a newly-formed, wholly-owned special purpose financing subsidiary, Funding I, entered into a revolving credit facility with Wells Fargo and U.S. Bank, as collateral agent, account bank and collateral custodian. The Wells Fargo Credit Facility, which was subsequently amended on April 26, 2013, September 9, 2013, and June 30, 2014, provides for borrowings in an aggregate principal amount of up to $300.0 million on a committed basis, with a term of 60 months. We may contribute cash or loans to Funding I from time to time to retain a residual interest in any assets contributed through its ownership of Funding I or will receive fair market value for any loans sold to Funding I. Funding I may purchase additional loans from various sources. Funding I has appointed us as servicer to manage its portfolio of loans. Funding I's obligations under the Wells Fargo Credit Facility are secured by a first priority security interest in substantially all of the assets of Funding I, including its portfolio of loans. The obligations of Funding I under the Wells Fargo Credit Facility are non-recourse to us. The Wells Fargo Credit Facility will be priced at one month maturity LIBOR, with no LIBOR floor, plus a spread ranging between 1.75% and 2.50% per annum, depending on the composition of the portfolio of loans owned by Funding I for the relevant period. Interest is payable quarterly in arrears. Funding I will be subject to a non-usage fee to the extent the aggregate principal amount available under the Wells Fargo Credit Facility has not been borrowed. The non-usage fee per annum for the first six months is 0.50%; thereafter, the non-usage fee per annum is 0.50% for the first 20% of the unused balance and 2.0% for the portion of the unused balance that exceeds 20%. Any amounts borrowed under the Wells Fargo Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable in April 2018. Borrowings under the Wells Fargo Credit Facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Funding I varies depending upon the types of loans in Funding I's portfolio. As of December 31, 2013, we were in compliance with regards to the Wells Fargo Credit Facility covenants. The Wells Fargo Credit Facility may be prepaid in whole or in part, subject to customary breakage costs. In the event that the Wells Fargo Credit Facility is terminated prior to the first anniversary, an additional amount is payable to Wells Fargo equal to 2.00% of the maximum amount of the Wells Fargo Credit Facility. 70 -------------------------------------------------------------------------------- The Wells Fargo Credit Facility contains customary default provisions for facilities of this type pursuant to which Wells Fargo may terminate our rights, obligations, power and authority, in our capacity as servicer of the portfolio assets under the Wells Fargo Credit Facility, including, but not limited to, non-performance of Wells Fargo Credit Facility obligations, insolvency, defaults of certain financial covenants and other events with respect to us that may be adverse to Wells Fargo and the secured parties under the Wells Fargo Credit Facility. In connection with the Wells Fargo Credit Facility, Funding I has made certain representations and warranties, is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities and is subject to certain customary events of default. Upon the occurrence and during the continuation of an event of default, Wells Fargo may declare the outstanding advances and all other obligations under the Wells Fargo Credit Facility immediately due and payable. During the continuation of an event of default, Funding I must pay interest at a default rate. Borrowings of Funding I will be considered our borrowings for purposes of complying with the asset coverage requirements under the 1940 Act, applicable to BDCs. Our cash is deposited in either commercial bank accounts or custody accounts and may be deposited in short-term, highly liquid investments that we believe provide appropriate safety of principal. As of June 30, 2014, we had $174.7 million outstanding under the Wells Fargo Credit Facility. See Note 5 - Borrowings - in our consolidated financial statements included in this report for additional disclosure on the Wells Fargo Credit Facility. Deutsche Bank Credit Facility On February 21, 2014, we, through 2L Funding I, entered into the Deutsche Bank Credit Facility with Deutsche Bank as lender and as administrative agent and U.S. Bank as collateral agent and collateral custodian. The Deutsche Bank Credit Facility provides for borrowings in an aggregate principal amount of up to $60.0 million with a term of 36 months. The Deutsche Bank Credit Facility will be priced at LIBOR plus 4.25%, with no LIBOR floor. The undrawn rate is 0.75%. 2L Funding Sub I will be subject to a minimum utilization of 50% of the loan amount in the first 12-months and 65% of the loan amount thereafter, measured quarterly. If the utilized portion of the loan amount is less than the foregoing thresholds, such shortfalls shall bear interest at LIBOR plus 4.25%. The Deutsche Bank Credit Facility provides for monthly interest payments for each drawn loan. Any amounts borrowed under the Deutsche Bank Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, in January 2017. 2L Funding I paid a structuring fee and incurred certain other customary costs and expenses in connection with obtaining the Deutsche Bank Credit Facility. Borrowings under the Deutsche Bank Credit Facility are subject to compliance with a borrowing base. The Deutsche Bank Credit Facility may be prepaid in whole or in part, subject to a prepayment fee. The Deutsche Bank Credit Facility contains customary default provisions including, but not limited to, non-payment of principal, interest or other obligations under the Deutsche Bank Credit Facility, insolvency, defaults of certain financial covenants and other events with respect to us that may be adverse to Deutsche Bank and the secured parties under the facility. In connection with the Deutsche Bank Credit Facility, 2L Funding I has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. Upon the occurrence and during the continuation of an event of default, subject, in certain instances, to applicable cure periods, Deutsche Bank may declare the outstanding advances and all other obligations under the Deutsche Bank Credit Facility immediately due and payable. During the continuation of an event of default, 2L Funding I must pay interest at a default rate. Borrowings of 2L Funding I will be considered our borrowings for purposes of complying with the asset coverage requirements under the 1940 Act applicable to business development companies. As of June 30, 2014, we had $30.0 million outstanding under the Deutsche Bank Credit Facility. See Note 5 - Borrowings - in our consolidated financial statements included in this report for additional disclosure on the Deutsche Bank Credit Facility. 71 --------------------------------------------------------------------------------Citi Credit Facility On June 27, 2014, we, through a wholly-owned, special purpose financing subsidiary, BDCA-CB Funding, LLC, entered into the Citi Credit Facility as administrative agent and U.S. Bank as collateral agent, account bank and collateral custodian. The Citi Credit Facility provides for borrowings over a twenty four month period in an aggregate principal amount of up to $400 million on a committed basis, subject to the administrative agent's right to approve the assets acquired by CB Funding and pledged as collateral under the Citi Credit Facility. The Citi Credit Facility will be priced at LIBOR, with no LIBOR floor, plus a spread of 1.70% per annum for the first twenty four months and 2.00% per annum thereafter. Interest is payable quarterly in arrears. CB Funding will be subject to a non-usage fee to the extent the aggregate principal amount available under the Citi Credit Facility has not been borrowed. Any amounts borrowed under the Citi Credit Facility along with any accrued and unpaid interest thereunder will mature, and will be due and payable, in three years. CB Funding paid a structuring fee and incurred certain other customary costs and expenses in connection with obtaining the Citi Credit Facility. In connection with the Citi Credit Facility, on June 27, 2014, CB Funding entered into a Merger Agreement with Loan Funding, an affiliate of Citi formed for the purpose of holding loans underlying a TRS with CB Funding. Pursuant to the terms of the Merger Agreement, CB Funding acquired such loans through the merger of Loan Funding with and into CB Funding. Pursuant to the Merger Agreement, CB Funding paid approximately $389.0 million for the assets held by Loan Funding. Borrowings of CB Funding will be considered our borrowings for purposes of complying with the asset coverage requirements under the 1940 Act applicable to business development companies. As of June 30, 2014, we had $270.6 million outstanding under the Citi Credit Facility. See Note 5 - Borrowings - in our consolidated financial statements included in this report for additional disclosure on the Citi Credit Facility. Distributions We have declared and paid cash distributions to our stockholders on a monthly basis since we commenced operations. As of June 30, 2014, the annualized yield for distributions declared was 7.75% based on our then current public offering price of $11.20 per share. From time to time, we may also pay interim distributions at the discretion of our board of directors. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our IPO. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. The table below shows the components of the distributions we have declared and/or paid during the six months ended June 30, 2014 and June 30, 2013 (dollars in thousands). As of June 30, 2014, we had $9.1 million of distributions accrued and unpaid. For the Six Months Ended June 30, 2014 2013 Distributions declared $ 42,047 $ 9,928 Distributions paid $ 37,510 $ 8,662 Portion of distributions paid in cash $ 19,670 $ 5,648 Portion of distributions paid in DRIP shares $ 17,840 $ 3,014 On March 1, 2012, the price for newly-issued shares under the DRIP issued to stockholders was changed from 95% to 90% of the offering price that the shares are sold as of the date the distribution is made. The DRIP purchase price based on the current offering price of $11.20 per share is $10.08. On March 29, 2012, we declared a special common stock distribution equal to $0.05 per share. The distribution was paid to stockholders of record on May 1, 2012. 72 -------------------------------------------------------------------------------- On December 20, 2012, we announced that, pursuant to the authorization of our board of directors, we declared a special cash distribution equal to $0.0925 per share, to be paid to stockholders of record at the close of business on December 17, 2012, payable on December 27, 2012. This special cash distribution was paid exclusive of, and in addition to, our monthly distribution. We may fund our cash distributions to stockholders from any sources of funds available to us including expense payments from our Adviser that are subject to reimbursement to it as well as offering proceeds and borrowings. We have not established limits on the amount of funds we may use from available sources to make distributions. Prior to June 30, 2012, a substantial portion of our distributions resulted from Expense Support Payments made by our Adviser that are subject to reimbursement by us within three years from the date such payment obligations were incurred. The purpose of this arrangement could be to avoid such distributions being characterized as returns of capital for GAAP or tax purposes. Despite this, we may still have distributions which could be characterized as a return of capital for tax purposes. However, during the year ended December 31, 2012, no portion of our distributions was characterized as a return of capital for tax purposes. You should understand that any such distributions were not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or our Adviser continues to make such reimbursements. You should also understand that our future reimbursements of such Expense Support Payments will reduce the distributions that you would otherwise receive. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all. The Adviser has no obligation to make Expense Support Payments in future periods. For the fiscal year ended December 31, 2012, if Expense Support Payments of $0.3 million were not made by our Adviser, approximately 4% percent of the distribution rate would have been a return of capital. No Expense Support Payments were made by our Adviser during the fiscal year ended December 31, 2013 or the six months ended June 30, 2014. We consider our entire managed investment portfolio to include the investments in our portfolio included in our Consolidated Schedule of Investments as well as assets held in our TRS portfolio, which are considered off-balance sheet. Our Adviser selects and underwrites all of these investments and we measure our performance based on our entire managed portfolio. Our net investment income also does not include the interest income and expense related to the TRS portfolio. In accordance with U.S. GAAP, interest income and expense related to the TRS are accounted for as a component of "Net realized gain from total return swap." The following table sets forth the computation of adjusted net investment income (loss) for our entire managed portfolio by adding the interest income from the TRS, the short-term realized gains, and the theoretical incentive fees on unrealized capital gains to the net investment income for the six months ended June 30, 2014 and 2013 (dollars in thousands): For the Six Months Ended June 30, 2014 2013 Net investment income $ 29,496 $ 3,376 TRS net investment income (1) 9,179 4,419 Operating gains (short-term) (2) 5,886 1,732 Incentive fees on unrealized gains (3) 626 748 Adjusted net investment income $ 45,187 $ 10,275 ______________ (1) TRS net investment income includes the interest income and expense related to the TRS portfolio. See Note 6 - Total Return Swap - for more information about the TRS. (2) Operating gains include short-term realized gains that result primarily from active portfolio management activities. As a RIC, short-term capital gains represent operating income available for distribution and are considered ordinary income. (3) Incentive fees on unrealized gains are the U.S. GAAP-required theoretical incentive fees accrued based upon unrealized portfolio appreciation. These fees reduce net investment income but are not contractually due to the Adviser. See Note 4 - Related Party Transactions and Agreements - for additional details on the theoretical capital gains incentive fees. 73 --------------------------------------------------------------------------------The following table sets forth the distributions made during the six months ended June 30, 2014 and 2013 (dollars in thousands): For the Six Months Ended June 30, 2014 2013 Monthly distributions $ 42,047 $ 9,928 Total distributions $ 42,047 $ 9,928 Election as a RIC We have elected to be treated as a RIC under Subchapter M of the Code commencing with our taxable year ended December, 31 2011, and intend to maintain our qualification as a RIC thereafter. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders from our tax earnings and profits. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to maintain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our "investment company taxable income," which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the annual distribution requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S federal excise, state, local and foreign taxes. We will be subject to a 4% nondeductible U.S. Federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to 98% of net ordinary income each calendar year and 98.2% of capital gain net income for the one year period ending on October 31 of such calendar year, if any, and any recognized and undistributed income from prior years for which we paid no federal income taxes. We will generally endeavor each year to avoid any federal excise taxes. Inflation The impact of inflation on our portfolio depends on the type of securities we hold. When inflation occurs, the value of our equity securities may fall in the short term. However in the long term, a company's revenue and earnings and, therefore, the value of the equity investment, should at least increase at the same pace as inflation. The effect of inflation on debt securities is more immediate and direct as inflation may decrease the value of fixed rate debt securities. However, not all debt securities are affected equally, the longer the term of the debt security, the more volatile the value of the investment. The process through which we will value the investments in our portfolio on a quarterly basis, market quotations and our multi-step valuation process as described in our significant accounting policies, will take the effect of inflation into account. Related-Party Transactions and Agreements We have entered into agreements with affiliates of our Adviser, whereby we pay certain fees or reimbursements to our Adviser or its affiliates in connection with asset and service fees, reimbursement of operating costs and offering related costs. See Note 4 - Related Party Transactions and Arrangements - for a discussion of the various related-party transactions, agreements and fees. Contractual Obligations The following table shows our payment obligations for repayment of debt and other contractual obligations at June 30, 2014 (dollars in thousands): Payment Due by Period Less than 1 More than 5 Total year 1 - 3 years 3- 5 years years Wells Fargo Credit Facility (1) $ 174,687 $ - $ - $ 174,687 $ - Deutsche Bank Credit Facility (2) $ 30,000 $ - $ 30,000 $ - $ - Citi Credit Facility (3) $ 270,625 $ - $ 270,625 $ - $ - Total contractual obligations $ 475,312 $ - $ 300,625 $ 174,687 $ - ______________ 74 --------------------------------------------------------------------------------(1) As of June 30, 2014, we had $125.3 million of unused borrowing capacity under the Wells Fargo Credit Facility, subject to borrowing base limits. (2) As of June 30, 2014, we had $30.0 million of unused borrowing capacity under the Deutsche Bank Credit Facility, subject to borrowing base limits. (3) As of June 30, 2014, we had $129.4 million of unused borrowing capacity under the Citi Credit Facility, subject to borrowing base limits. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. We previously had the TRS as discussed in Note 6 - Total Return Swap - but it was terminated on June 27, 2014. |