Business Context and Reporting Period
Company: Kohlberg Capital Corporation (Note: Input metadata listed "BCP Investment Corp," but the filing text identifies the registrant as Kohlberg Capital Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: The Company is an internally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). It invests primarily in senior secured term loans, mezzanine debt, and selected equity securities of privately-held middle-market companies. It also holds a 100% equity interest in Katonah Debt Advisors, an asset manager of Collateralized Loan Obligation (CLO) funds.
Key Financial Metrics
| Metric | Amount (Nine Months Ended Sep 30, 2010) | Amount (Nine Months Ended Sep 30, 2009) |
|---|---|---|
| Net Investment Income | $6,706,963 | $15,689,592 |
| Net Realized Losses | $(10,752,567) | $(8,901,941) |
| Net Change in Unrealized Appreciation/Depreciation | $(3,369,715) | $25,756,017 |
| Net Increase (Decrease) in Net Assets from Operations | $(7,415,319) | $32,543,668 |
| Net Asset Value (NAV) per Share | $8.84 | $9.93 |
| Total Assets | $339,780,192 | $439,416,057 |
| Total Borrowings | $137,159,147 | $218,050,363 |
| Asset Coverage Ratio | 246% | 197% |
| Cash and Cash Equivalents | $2,225,116 | $4,140,408 |
Material Changes vs. Prior Period
- Operating Performance: The Company reported a net decrease in net assets of $7.4 million for the nine months ended September 30, 2010, compared to a net increase of $32.5 million in the prior year period. This reversal was driven by a significant decline in unrealized appreciation and increased realized losses.
- Investment Portfolio: Total investments at fair value decreased from $409.1 million to $323.5 million. This reduction was primarily due to the amortization of the secured credit facility and sales of debt securities.
- Debt Reduction: Borrowings decreased by approximately $80.9 million (from $218.1 million to $137.2 million) as the Company utilized cash flows to pay down its secured credit facility under a settlement agreement.
- Valuation Impacts: The investment in the affiliate asset manager (Katonah Debt Advisors) decreased in fair value by approximately $12.4 million during the period, contributing significantly to the net unrealized depreciation.
- Expense Increase: Total expenses increased to $15.7 million from $10.8 million year-over-year, largely due to a $4.2 million increase in professional fees related to legal proceedings, accounting restatements, and valuation services.
Guidance, Outlook, Risks, and Unusual Items
- Settlement Agreement: On September 20, 2010, the Company entered into a Forbearance and Settlement Agreement with its lenders to resolve litigation regarding its credit facility. The agreement requires the Company to repay all outstanding advances by February 28, 2011. If repaid in full by this date, the lenders have agreed to pay the Company $2 million.
- Liquidity and Capital: The Company is currently using income from collateralized assets to amortize its debt facility. Management believes it has sufficient liquid assets to meet obligations and dividend requirements for the next 12 months but notes that raising additional equity capital is difficult due to the stock trading below NAV.
- Legal Proceedings: The Company is subject to three putative class actions regarding financial statement disclosures and a formal SEC investigation into its valuation methodology. A derivative action filed in March 2010 was dismissed by the court in October 2010.
- Restatement: The Company restated financial statements for 2008 and the first two quarters of 2009 to correct errors in fair value accounting and revenue recognition for non-cash PIK investments.
- Dividends: The Company declared a quarterly dividend of $0.17 per share for the third quarter of 2010. Management intends to continue distributing quarterly dividends to maintain Regulated Investment Company (RIC) status.
Key Facts for Investor Verification
- Debt Maturity: Verify the Company's ability to repay the $137 million secured credit facility in full by the February 28, 2011 deadline to secure the $2 million settlement payment from lenders.
- Valuation Methodology: Review the ongoing SEC investigation and the Company's revised valuation procedures for illiquid investments, as these directly impact NAV and reported earnings.
- Legal Exposure: Monitor the status of the three putative class actions and the potential for further regulatory penalties or settlements.
- Dividend Sustainability: Assess whether the Company can maintain its dividend payout given the reduction in net investment income and the requirement to use cash flows for debt amortization.
- Asset Coverage: Confirm the Company maintains the required 200% asset coverage ratio under the Investment Company Act of 1940 to avoid restrictions on incurring new debt.