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: June 30, 2009
Business Overview: An internally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC). The Company 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, L.L.C., an asset manager of Collateralized Loan Obligation (CLO) funds.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Investment Income | $13,504,115 | $16,434,930 |
| Net Realized Losses | $(5,132,892) | $(621,993) |
| Net Unrealized Depreciation | $(13,847,518) | $(8,320,400) |
| Net Increase (Decrease) in Equity from Operations | $(5,476,295) | $7,492,537 |
| Net Asset Value (NAV) per Share | $11.09 | $13.14 |
| Total Assets | $477,693,317 | $522,872,311 |
| Total Borrowings | $233,806,661 | $261,691,148 |
| Asset Coverage Ratio | 203% | 221% |
| Cash and Cash Equivalents | $184,929 | $14,291,881 |
Material Changes vs. Prior Period
- Operating Results: The Company reported a net decrease in stockholders' equity of approximately $5.5 million for the six months ended June 30, 2009, compared to a net increase of approximately $7.5 million in the same period in 2008. This reversal was driven by significant unrealized depreciation on investments.
- Investment Portfolio Valuation: Total investments at fair value decreased from $514.2 million at December 31, 2008, to $462.8 million at June 30, 2009. This decline was primarily due to a $11.9 million decrease in the value of debt securities and a $5.6 million decrease in CLO fund securities managed by non-affiliates.
- Debt Reduction: Borrowings decreased by approximately $27.9 million to $233.8 million, reflecting the amortization of the secured revolving credit facility.
- Dividend Income: Dividends from CLO fund securities managed by non-affiliates dropped significantly from $3.75 million in the prior year period to $0.82 million, reflecting market conditions and covenant breaches in certain funds.
Guidance, Outlook, Risks, and Unusual Items
- Debt Facility Dispute: On June 9, 2009, the agent for the Company's secured revolving credit facility (LFSA) notified the Company of an alleged breach of covenant regarding loan rating calculations, asserting a "Termination Event." The agent demanded interest be paid at a higher default rate (Prime + 0.75%). The Company disputes the breach and is negotiating an amendment. No acceleration of debt has occurred to date.
- Amortization Period: The credit facility is in an amortization period through September 29, 2010. The Company is using cash flows from collateralized assets to pay down principal and interest. There is a risk that assets may need to be sold at a loss to repay remaining borrowings at maturity.
- Unusual Loss: The Company recognized a loss of approximately $2.2 million related to the cessation of operations of PKSIL LLC, a distressed debt investment platform subsidiary, during the quarter.
- Valuation Policy Change: Effective July 23, 2009, the Board terminated its engagement with third-party valuation provider Duff & Phelps, LLC, to perform valuations internally, expecting cost savings of approximately $360,000 annually.
- Dividend Policy: The Company declared a dividend of $0.24 per share for the second quarter of 2009. Management intends to continue distributing quarterly dividends to maintain Regulated Investment Company (RIC) status.
Key Facts for Investor Verification
- Debt Covenant Status: Verify the resolution of the alleged breach of the Loan Funding and Servicing Agreement (LFSA) and whether the higher default interest rate will be sustained or if a new facility agreement is reached.
- Liquidity Position: Assess the Company's ability to fund operations and dividends given the restricted cash position ($1.35 million) and the requirement to use collateral cash flows for debt amortization.
- CLO Fund Performance: Review the specific performance and covenant compliance of the CLO funds in which the Company holds subordinated securities, as these contributed significantly to unrealized losses.
- Asset Coverage Ratio: Monitor the asset coverage ratio (currently 203%) to ensure it remains above the 200% regulatory minimum required for BDCs.
- Valuation Methodology: Confirm the impact of the shift to internal valuation procedures on the fair value of Level III assets, which comprise the majority of the portfolio.