SIERRA INCOME CORPORATION The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this annual report on Form 10-K. Except as otherwise specified, references to "we," "us," "our," or the "Company," refers toSierra Income Corporation . "SIC Advisors " or "Adviser" refers toSIC Advisors LLC , our investment adviser.SIC Advisors is a wholly owned subsidiary ofMedley LLC . OnMarch 7, 2021 ,Medley LLC commenced a voluntary case (the "Medley Bankruptcy Case") under chapter 11 of title 11 of the United States Code in theUnited States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court "). See "Recent Developments" for more information about the chapter 11 plan confirmed by theBankruptcy Court onOctober 14, 2021 and that became effective onOctober 18, 2021 . Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• changes in laws and regulations, changes in political, economic or industry
conditions, and changes in the interest rate environment or
other conditions affecting the financial and capital markets, including
with respect to changes resulting from or in response to, or potentially
even the absence of changes as a result of, the impact of the COVID-19
pandemic;
• risks associated with possible disruptions in our operations or the economy
generally including the current economic downturn as a result of the impact
of the COVID-19 pandemic;
• the risk that, if the current period of capital markets disruption and
instability continues for an extended period of time, that our stockholders
may not receive distributions, if any, or at historical levels and that a
portion of our distribution in the future may be a return of capital;
• the effect of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• actual and potential conflicts of interest with
affiliates;
• the dependence of our future success on the general economy and its effect
on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;• the timing of cash flows, if any, from the operations of our portfolio
companies;
• the ability of
monitor and administer our investments;
• the ability of
talented professionals;
• our ability to maintain our qualification as a RIC and as a BDC;
• the effect of changes in laws or regulations affecting our operations;
• risks relating to our pending transaction with Barings BDC, Inc. pursuant
to the Merger Agreement (as described below);
• uncertainties associated with the continued impact from the COVID-19
pandemic, including: its impact on the global and
the global and
outbreak in
economic impact of that outbreak; the effect of the COVID-19 pandemic on
our business prospects and the operational and financial performance of our
portfolio companies, including our and their ability to achieve their
respective objectives; the effect of the disruptions caused by the COVID-19
pandemic on our ability to continue to effectively manage our business and
our use of borrowed money to finance a portion of our investments
Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "trend," "opportunity," "pipeline,"
"believe," "comfortable," "expect," "anticipate," "current," "intention,"
"estimate," "position," "assume," "potential," "outlook," "continue," "remain,"
"maintain," "sustain," "seek," "achieve," and similar expressions, or future or
conditional verbs such as "will," "would," "should," "could," "may," or similar
expressions. The forward-looking statements contained in this quarterly report
involve risks and uncertainties. Our actual results could differ materially from
those implied or expressed in the forward-looking statements for any reason,
including due to the factors set forth in "Risk Factors" in this quarterly
report on Form 10-Q and in Item 1A "Risk Factors" in Part 1 of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 .
We have based the forward-looking statements included in this report on
information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statements. Actual results could
differ materially from those anticipated in our forward-looking statements, and
future results could differ materially from historical performance. Although we
undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make directly to you
or through reports that we have filed or in the future may file with the SEC ,
including quarterly reports on Form 10-Q, annual reports on Form 10-K, and
current reports on Form 8-K.
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Table of Contents Recent COVID-19 Developments OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") as a pandemic, and, onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. While consumer demand for goods and services has begun to rebound, we continue to see reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both inthe United States and globally. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. We have been closely monitoring, and will continue to monitor, the COVID-19 pandemic and its impact on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. In addition, as a result of the adverse effects of the COVID-19 pandemic and the related disruption and financial distress, certain portfolio companies may seek to modify their loans from us, which could reduce the amount or extend the time for payment of principal, reduce the rate or extend the time of payment of interest, and/or increase the amount of PIK interest we receive with respect to such investment, among other things. The effects of the COVID-19 pandemic have also impeded, and may continue to impede, the ability of certain of our portfolio companies to raise additional capital and/or pursue asset sales or otherwise execute strategic transactions, which could have a material adverse effect on the valuation of our investments in such companies. Portfolio companies operating in certain industries may be more susceptible to these risks than other portfolio companies in other industries in light of the effects of the COVID-19 pandemic. Given the rapid development and fluidity of this situation, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies have taken, and continue to take, immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, and shareholder support. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which remain highly uncertain and cannot be accurately predicted, including guidance fromU.S. and international authorities. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company's portfolio companies, the Company's business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We have evaluated subsequent events fromSeptember 30, 2021 through the filing date of this quarterly report on Form 10-Q. However, as the discussion in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the Company's financial statements for the quarterly period endedSeptember 30, 2021 , the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as ofSeptember 30, 2021 , the Company valued its portfolio investments in conformity withU.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the time that followed ourSeptember 30, 2021 valuation, any valuations conducted now or in the future in conformity withU.S. GAAP could result in a lower fair value of our portfolio. The impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time. Overview We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed bySIC Advisors , which is an investment adviser registered with theSEC under the Advisers Act.SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected, and intend to qualify annually to be treated, forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. Under our Investment Advisory Agreement, we paySIC Advisors a base management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburseMedley Capital LLC for the allocable portion of overhead and other expenses incurred byMedley Capital LLC in performing its obligations under the Administration Agreement, including our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. We intend to meet our investment objective by primarily lending to, and investing in, the debt of privately ownedU.S. middle market companies, which we define as companies with annual revenue between$50 million and$1 billion . We intend to focus primarily on making investments in first lien senior secured debt, second lien secured debt, and to a lesser extent, subordinated debt, of middle market companies in a broad range of industries. We expect that the majority of our debt investments will bear interest at floating interest rates, but our portfolio may also include fixed-rate investments. We will originate transactions sourced throughSIC Advisors' existing network, and, to a lesser extent, expect to acquire debt securities through the secondary market. We may make equity investments in companies that we believe will generate appropriate risk adjusted returns, although we do not expect such investments to be a substantial portion of our portfolio. 2
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The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such portfolio companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. The precise timing of our investment activity will depend on the availability of investment opportunities that are consistent with our investment objectives and strategies. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded publicU.S. companies, 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, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after such borrowing, with certain limited exceptions. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements. To be eligible for RIC tax treatment under Subchapter M forU.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year. Agreement and Plan of Merger OnSeptember 21, 2021 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") by and among Barings BDC, Inc., aMaryland corporation ("BBDC"),Mercury Acquisition Sub, Inc. , aMaryland corporation and a direct wholly owned subsidiary of BBDC ("Acquisition Sub"), the Company andBarings LLC , aDelaware limited liability company and investment adviser to BBDC ("Barings"). The Merger Agreement provides that, on the terms and subject to the conditions set forth in the Merger Agreement, Acquisition Sub will merge with and into the Company, with the Company continuing as the surviving company and as a wholly owned subsidiary of BBDC (the "First Merger") and, immediately thereafter, the Company will merge with and into BBDC, with BBDC continuing as the surviving company (together with the First Merger, the "Merger"). The boards of directors of both BBDC and the Company, including all of the respective independent directors, have approved the Merger Agreement and the transactions contemplated therein. The parties to the Merger Agreement intend the Merger to be treated as a "reorganization" within the meaning of Section 368(a) of the Code. In the First Merger, each share of the Company's common stock issued and outstanding immediately prior to the effective time of the First Merger (excluding any shares cancelled pursuant to the Merger Agreement) will be converted into the right to receive (i)$0.9783641 per share in cash, without interest, from Barings (such amount of cash, the "Cash Consideration") and (ii) 0.44973 (such ratio, as may be adjusted pursuant to the Merger Agreement, the "Exchange Ratio") of a validly issued, fully paid and non-assessable share of BBDC common stock, par value$0.001 per share (the "Share Consideration" and, together with the Cash Consideration, the "Merger Consideration"). The Merger Agreement contains representations, warranties and covenants, including, among others, covenants relating to the operation of each of the Company's and BBDC's businesses during the period prior to the closing of the Merger. The Company and BBDC have agreed to convene and hold stockholder meetings for the purpose of obtaining the approvals required of the Company's and BBDC's stockholders, respectively, and the boards of directors of the Company and BBDC have agreed to recommend that their respective stockholders approve the applicable proposals (as described below). The Merger Agreement provides that the Company shall not, and shall cause its subsidiaries and instruct its representatives not to, directly or indirectly, solicit proposals relating to alternative transactions, or, subject to certain exceptions, initiate or participate in discussions or negotiations regarding, or provide information with respect to, any proposal for an alternative transaction. However, the Company's board of directors may, subject to certain conditions, change its recommendation to the Company's stockholders or, on payment of a termination fee of$11.0 million to BBDC and the reimbursement of up to$2.0 million in expenses incurred by BBDC and Barings, terminate the Merger Agreement and enter into an Alternative Acquisition Agreement (as defined in the Merger Agreement) for a Superior Proposal (as defined in the Merger Agreement) if it determines in good faith, after consultation with its outside legal counsel, that failure to do so would be inconsistent with the directors' duties under applicable law. Consummation of the First Merger, which is currently anticipated to occur during the first quarter of fiscal year 2022, is subject to certain customary closing conditions, including (1) approval of the First Merger by the holders of at least a majority of the outstanding shares of the Company's common stock entitled to vote thereon, (2) approval of the issuance of BBDC common stock to be issued in the First Merger by a majority of the votes cast by the BBDC stockholders on the matter at the BBDC stockholders meeting, (3) approval of the issuance of BBDC's common stock in connection with the First Merger at a price below the then-current net asset value per share of BBDC common stock, if applicable, by the vote specified in Section 63(2)(A) of the 1940 Act, (4) the absence of certain legal impediments to the consummation of the First Merger, (5) effectiveness of the registration statement for the BBDC common stock to be issued as consideration in the First Merger, (6) approval for listing on theNew York Stock Exchange of the BBDC common stock to be issued as consideration in the First Merger, (7) subject to certain materiality standards, the accuracy of the representations and warranties and compliance with the covenants of each party to the Merger Agreement, and (8) required regulatory approvals (including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or early termination thereof). Barings, as party to the Merger Agreement, agreed to vote all shares of BBDC common stock over which it has voting power (other than in its fiduciary capacity) in favor of the proposals to be submitted by BBDC to its stockholders for approval relating to the Merger. In addition, the Company and BBDC will take steps necessary to provide for the repayment at closing of the Alpine Credit Facility (as defined below). The Merger Agreement also contains certain termination rights in favor of BBDC and the Company, including if the First Merger is not completed on or beforeMarch 31, 2022 or if the requisite approvals of the Company stockholders or BBDC stockholders are not obtained. Further, BBDC will enter into an amendment and restatement of its investment advisory agreement with Barings, effective as of the closing of the Merger, to raise the annualized hurdle rate thereunder from 8.0% to 8.25%. Following the closing of the Merger, BBDC will also enter into a credit support agreement with Barings, for the benefit of the combined company, to protect against net cumulative unrealized and realized losses of up to$100.0 million on the acquired Company investment portfolio over the next ten years.
Revenues
We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. OIDs and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
Expenses
Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement withSIC Advisors and our Administration Agreement withMedley Capital LLC . We bear other expenses, which include, among other things:
• corporate, organizational and offering expenses relating to offerings of
our common stock, subject to limitations included in our Investment
Advisory Agreement;
• the cost of calculating our NAV, including the related fees and cost of
any third-party valuation services;
• the cost of effecting sales and repurchases of shares of our common
stock and other securities;
• fees payable to third parties relating to, or associated with,
monitoring our financial and legal affairs, making investments, and
valuing investments, including fees and expenses associated with
performing due diligence reviews of prospective investments;• interest payable on debt, if any, incurred to finance our investments;
• transfer agent and custodial fees;
• fees and expenses associated with marketing efforts subject to
limitations included in the Investment Advisory Agreement;
• federal and state registration fees and any stock exchange listing fees;
• federal, state and local taxes;
• independent directors' fees and expenses, including travel expenses;
• costs of director and stockholder meetings, proxy statements,
stockholders' reports and notices;
• costs of fidelity bonds, directors and officers/errors and omissions
liability insurance and other types of insurance;
• direct costs, including those relating to printing of stockholder
reports and advertising or sales materials, mailing, long distance
telephone and staff subject to limitations included in the Investment
Advisory Agreement;
• fees and expenses associated with independent audits and outside legal
costs, including compliance with the Sarbanes-Oxley Act of 2002, the
1940 Act and applicable federal and state securities laws;
• brokerage commissions for our investments;
• all other expenses incurred by us or
administering our investment portfolio, including expenses incurred by
Investment Advisory Agreement; and
• the reimbursement of the compensation of our Chief Financial Officer and
Chief Compliance Officer and their respective staffs, whose compensation
is paid by
reimbursement amount is annually approved by our independent director
committee and subject to the limitations included in our Administration
Agreement.
Administrative Services
We reimburse Medley Capital LLC for the administrative expenses necessary for
its performance of services to us. However, such reimbursement is made at an
amount equal to the lower of Medley Capital LLC's actual costs or the amount
that we would be required to pay for comparable administrative services in the
same geographic location. Also, such costs will be reasonably allocated to us on
the basis of assets, revenues, time records or other reasonable methods. We will
not reimburse Medley Capital LLC for any services for which it receives a
separate fee or for rent, depreciation, utilities, capital equipment or other
administrative items allocated to a controlling person of Medley Capital LLC .
On April 23, 2021 , the Company entered into the Expense Limitation Agreement
with Medley Capital LLC , the Company's administrator, pursuant to which, Medley
Capital LLC agreed that the amount of expenses payable and reimbursable by the
Company under the Administration Agreement will be capped at $2.2 million for
the fiscal year ending December 31, 2021 . For the avoidance of doubt, other than
the cap contemplated by the Expense Limitation Agreement, the Expense Limitation
Agreement does not amend the allocation of costs and expenses that are payable
or reimbursable by the Company under the Administration Agreement. Following the
quarter ending December 31, 2021 , unless otherwise extended by the Company and
Medley Capital LLC , the Expense Limitation Agreement will terminate and the
original terms of the Administration Agreement will be in full force and effect.
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Portfolio and Investment Activity
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage
Senior secured first lien term loans $ 342,236,943 54.9 % $ 286,852,679 52.7 %
Senior secured second lien term loans 81,827,969 13.1 81,101,866 14.9
Subordinated notes 58,584,937 9.4 55,232,903 10.1
Sierra Senior Loan Strategy JV I LLC 110,050,000 17.6 85,872,235 15.8
Equity/warrants 30,911,638 5.0 35,208,470 6.5
Total $ 623,611,487 100.0 % $ 544,268,153 100.0 %
As of September 30, 2021 , our income-bearing investment portfolio, which
represented 95.1% of our total portfolio, had a weighted average yield based
upon the cost of our investment portfolio of 8.0%, and 2.4% of our
income-bearing portfolio bore interest based on fixed rates, while 97.6% of our
income-bearing portfolio bore interest at floating rates, such as LIBOR.
As of September 30, 2021 , the Company held loans it has made directly to 62
investee companies with aggregate principal amounts of $496.0 million . As of
December 31, 2020 , the Company held loans it has made directly to 67 investee
companies with aggregate principal amounts of $541.1 million . During the three
and nine months ended September 30, 2021 , the Company made 13 and 49 loans to
investee companies with aggregate principal amounts of $20.3 million and $63.6
million , respectively. During the three and nine months ended September 30,
2020 , the Company made 7 and 38 loans to investee companies, respectively, with
aggregate principal amounts of $21.3 million and $90.5 million , respectively
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage
Senior secured first lien term loans $ 369,385,810 52.7 % $ 315,490,601 52.3 %
Senior secured first lien notes 8,473,750 1.2 8,548,755 1.4
Senior secured second lien term loans 103,081,287 14.7 93,794,917 15.5
Subordinated notes 65,561,840 9.4 50,039,500 8.3
Sierra Senior Loan Strategy JV I LLC 110,050,000 15.7 81,788,964 13.5
Equity/warrants 44,451,252 6.3 54,323,743 9.0
Total $ 701,003,939 100.0 % $ 603,986,480 100.0 %
As of December 31, 2020 , our income-bearing investment portfolio, which
represented 87.2% of our total portfolio, had a weighted average yield based
upon the cost of our investment portfolio of approximately 8.0%, and 3.5% of our
income-bearing portfolio bore interest based on fixed rates, while 96.5% of our
income-bearing portfolio bore interest at floating rates, such as LIBOR.
The following table shows weighted average current yield to maturity based on
fair value as of
September 30, 2021 December 31, 2020
Weighted Weighted
Average Average
Percentage Current Percentage Current
of Total Yield for Total of Total Yield for Total
Investments Investments(1) Investments Investments(1)
Senior secured
first lien term
loans 52.7 % 7.3 % 52.7 % 9.3 %
Senior secured
first lien
notes - - 1.2 11.0 %
Senior secured
second lien
term loans 14.9 10.6 % 14.7 10.9 %
Subordinated
notes 10.1 12.6 % 9.4 8.8 %
Sierra Senior
Loan Strategy
JV I LLC 15.8 8.4 % 15.7 9.0 %
Equity/warrants 6.5 12.5 % 6.3 6.0 %
Total 100.0 % 8.6 % 100.0 % 9.5 %
(1) The weighted average current yield for total investments does not represent
the total return to our stockholders.
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The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage
Multi-Sector Holdings 167,759,211 26.9 % 140,242,094 25.8 %
High Tech Industries 82,503,266 13.2 83,272,129 15.3
Services: Business 47,951,702 7.7 47,539,868 8.7
Healthcare & Pharmaceuticals 60,136,811 9.6 47,482,054 8.7
Aerospace & Defense 34,821,243 5.6 32,924,326 6.0
Hotel, Gaming & Leisure 41,945,036 6.7 32,261,471 5.9
Automotive 29,358,423 4.7 27,699,361 5.1
Consumer Goods: Durable 20,325,731 3.3 23,703,479 4.4
Environmental Industries 12,020,565 1.9 20,659,123 3.8
Services: Consumer 14,628,130 2.3 14,966,608 2.7
Banking, Finance, Insurance & Real Estate 10,096,159 1.6 11,443,823 2.1
Chemicals, Plastics & Rubber 10,039,254 1.6 9,388,473 1.7
Construction & Building 15,770,141 2.5 8,936,628 1.6
Forest Products & Paper 6,395,222 1.0 8,289,049 1.5
Media: Diversified & Production 15,348,135 2.5 7,578,621 1.4
Transportation: Consumer 7,251,893 1.2 6,309,147 1.2
Containers, Packaging & Glass 5,735,094 0.9 5,746,083 1.1
Metals & Mining 3,508,618 0.6 3,957,208 0.7
Transportation: Cargo 3,899,642 0.6 3,902,018 0.7
Retail 9,794,441 1.6 2,976,544 0.5
Capital Equipment 2,452,771 0.4 2,438,224 0.4
Energy: Oil & Gas 20,175,978 3.2 1,117,122 0.2
Wholesale 1,650,966 0.3 1,392,578 0.3
Beverage & Food 43,055 0.0 42,122 0.0
Total $ 623,611,487 100.0 % $ 544,268,153 100.0 %
The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage
Multi-Sector Holdings $ 174,660,001 24.9 % $ 131,792,864 21.8 %
Services: Business 79,260,551 11.3 73,716,395 12.2
High Tech Industries 75,519,344 10.8 71,792,022 11.9
Healthcare & Pharmaceuticals 68,599,968 9.8 58,275,198 9.6
Consumer Goods: Durable 32,045,028 4.6 41,016,292 6.8
Construction & Building 42,928,750 6.1 38,356,358 6.4
Banking, Finance, Insurance & Real Estate 27,848,664 4.0 37,620,161 6.2
Aerospace & Defense 33,558,896 4.8 29,723,725 4.9
Hotel, Gaming & Leisure 36,326,705 5.2 24,013,769 4.0
Automotive 18,886,756 2.7 17,404,476 2.9
Containers, Packaging & Glass 15,206,840 2.2 15,120,424 2.5
Environmental Industries 5,041,430 0.7 10,052,691 1.7
Services: Consumer 9,700,000 1.4 9,725,000 1.6
Chemicals, Plastics & Rubber 10,060,861 1.4 9,063,498 1.5
Forest Products & Paper 6,477,887 0.9 7,770,704 1.3
Media: Diversified & Production 15,474,145 2.2 6,780,000 1.1
Transportation: Cargo 6,877,294 1.0 6,770,781 1.1
Transportation: Consumer 7,975,416 1.1 6,068,082 1.0
Metals & Mining 3,492,436 0.5 3,492,479 0.6
Energy: Oil & Gas 20,868,832 3.0 2,625,018 0.4
Wholesale 2,212,919 0.3 1,746,044 0.3
Retail 7,934,347 1.1 1,012,358 0.2
Beverage & Food 46,869 0.0 48,141 0.0
Total $ 701,003,939 100.0 % $ 603,986,480 100.0 %
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SIC Advisors regularly assesses the risk profile of our portfolio investments and rates each of them based on the categories set forth below, which we refer to asSIC Advisors' investment credit rating. Investment credit ratings are assigned to each of the investments in our portfolio that are directly held by the Company, but exclude any off-balance sheet interests of the Company: Investment Credit Rating Definition 1 Investments that are performing above expectations.
2 Investments that are performing within expectations, with risks that are
neutral or favorable compared to risks at the time of origination or
purchase. All new loans are rated '2'.
3 Investments that are performing below expectations and that require closer
monitoring, but where no loss of interest, dividend or principal is
expected. Companies rated '3' may be out of compliance with financial
covenants, however, loan payments are generally not past due.
4 Investments that are performing below expectations and for which risk has
increased materially since origination or purchase. Some loss of interest
or dividend is expected, but no loss of principal. In addition to the
borrower being generally out of compliance with debt covenants, loan
payments may be past due (but generally not more than 180 days past due).
5 Investments that are performing substantially below expectations and whose
risks have increased substantially since origination or purchase. Most or
all of the debt covenants are out of compliance and payments are
substantially delinquent. Some loss of principal is expected.
The following table shows the distribution of our investment portfolio, not
including cash and cash equivalents, on the 1 to 5 investment credit rating
scale at fair value as of
September 30, 2021 December 31, 2020
Investment Investments at Investments at
Credit Rating Fair Value Percentage Fair Value Percentage
1 $ 29,167,480 5.5 % $ 51,481,987 8.5 %
2 384,459,844 70.6 410,310,087 67.9
3 96,338,069 17.7 110,668,216 18.3
4 8,517,417 1.6 13,500,546 2.3
5 25,785,342 4.7 18,025,644 3.0
Total $ 544,268,153 100.0 % $ 603,986,480 100.0 %
The COVID-19 pandemic has impacted our investment ratings as of September 30,
2021 , causing downgrades of certain portfolio companies. As the COVID-19
pandemic continues to evolve, we are continuing to maintain close communications
with our portfolio companies to proactively assess and manage potential risks
across our investment portfolio. We have also increased oversight and analysis
of credits in vulnerable industries in an attempt to improve loan performance
and reduce credit risk.
--------------------------------------------------------------------------------Results of Operations
The following table shows operating results for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Total investment income
11,118,981 6,854,087 28,035,650 43,674,215
Income Tax Expense - - 1,938,320 -
Net investment
income/(loss) 1,477,875 6,081,232 9,529,103 (7,862,631 )
Net realized gain/(loss)
from investments 7,049,324 (52,474,635 ) 2,946,800 (60,522,923 )
Net change in unrealized
appreciation/(depreciation)
on investments (17,453,978 ) 79,481,063 17,672,537 (9,038,042 )
Change in provision for
deferred taxes on
unrealized gain on
investments 1,198,269 (749,289 ) (625,852 ) (802,137 )
Loss on extinguishment of
debt - (217,950 ) - (217,950 )
Net increase/(decrease) in
net assets resulting from
operations $ (7,728,510 ) $ 32,120,421 $ 29,522,588 $ (78,443,683 )
Investment Income
Total investment income decreased $338,463 , or 2.6%, to $12,596,856 for the
three months ended September 30, 2021 , compared to $12,935,319 for the three
months ended September 30, 2020 . Total investment income consisted primarily of
portfolio interest and dividends, which decreased $328,850 , or 2.6%,
to $12,408,169 for the three months ended September 30, 2021 , compared
to $12,737,019 for the three months ended September 30, 2020 . This decrease was
primarily attributable to a decrease in the size of the underlying portfolio,
primarily as a result of principal repayments and the sale of portfolio
investments.
Total investment income increased $3,691,489 , or 10.3%, to $39,503,073 for the
nine months ended September 30, 2021 , compared to $35,811,584 for the nine
months ended September 30, 2020 . Total investment income consisted primarily of
portfolio interest and dividends, which increased $4,728,719 , or 14.0%,
to $38,531,971 for the nine months ended September 30, 2021 , compared
to $33,803,252 for the nine months ended September 30, 2020 . This increase was
primarily attributable to an increase in dividend income from certain portfolio
investments.
As of September 30, 2021 , certain investments in eleven portfolio companies were
on non-accrual status with a combined cost of $88,988,561 , or 14.3% of the cost
of the Company's portfolio, and a combined fair value of $32,989,921 or 6.1% of
the fair value of the Company's portfolio. As of September 30, 2020 , certain
investments in fourteen portfolio companies were on non-accrual status with a
combined cost of $107,750,374 , or 14.8% of the cost of the Company's portfolio,
and a combined fair value of $50,838,081 or 8.5% of the fair value of the
Company's portfolio.
Fee income increased $2,078 , or 1.1%, to $189,707 for the three months ended
September 30, 2021 , compared to $187,629 for the three months ended September
30, 2020 , primarily due to an increase in fees associated with loan
amendments. Fee income increased $333,927 , or 53.7%, to $956,189 for the nine
months ended September 30, 2021 , compared to $622,262 for the nine months ended
September 30, 2020 , primarily due to an increase in fees associated with loan
originations and loan amendments.
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Table of Contents Operating Expenses
The following table shows operating expenses for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Base management fees $ 2,780,151 $ 3,021,491 $ 8,871,911 $ 9,217,687
Interest and financing
expenses 816,620 2,106,105 3,901,402 9,848,708
General and
administrative expenses 3,997,792 1,680,990 7,848,361 11,959,187
Administrator expenses 442,320 431,598 1,668,219 1,822,255
Offering costs 21,381 30,816 26,537 35,973
Professional fees 3,060,717 (416,913 ) 5,719,220 10,790,405
Total expenses $ 11,118,981 $ 6,854,087 $ 28,035,650 $ 43,674,215
Total expenses increased $4,264,894 , or 62.2%, to $11,118,981 for the three
months ended September 30, 2021 , as compared to $6,854,087 for the three months
ended September 30, 2020 , primarily due to an increase in general and
administrative expenses relating to legal fees and professional fees related to
investment banking and advisory fees in connection with the proposed mergers
contemplated by the Merger Agreement. Total expenses decreased $15,638,565 , or
35.8%, to $28,035,650 for the nine months ended September 30, 2021 , as compared
to $43,674,215 for the nine months ended September 30, 2020 , primarily due to a
decrease in interest and financing expenses and a decrease in general and
administrative expenses and professional fees related to the one-time expense of
deferred transaction costs.
Base management fees decreased $241,340 , or 8.0%, to $2,780,151 for the three
months ended September 30, 2021 , as compared to $3,021,491 for the three months
ended September 30, 2020 , primarily due to a decrease in our gross assets. Base
management fees decreased $345,776 , or 3.8%, to $8,871,911 for the nine months
ended September 30, 2021 , as compared to $9,217,687 for the nine months ended
September 30, 2020 , primarily due to a decrease in our gross assets.
Interest and financing expenses decreased $1,289,485 , or 61.2%, to $816,620 for
the three months ended September 30, 2021 , as compared to $2,106,105 for the
three months ended September 30, 2020 , primarily due to the wind-down and
termination of the ING Credit Facility (as defined below) from May 2020 through
July 2020 , as well as the repayment of $101,000,000 of the outstanding balance
of its Alpine Credit Facility. Interest and financing expenses decreased
$5,947,306 , or 60.4% to $3,901,402 for the nine months ended September 30, 2021 ,
as compared to $9,848,708 for the nine months ended September 30, 2020 ,
primarily due to the wind-down and termination of the ING Credit Facility (as
defined below) from May 2020 through July 2020 , as well as the repayment of
$101,000,000 of the outstanding balance of its Alpine Credit Facility.
General and administrative expenses increased $2,316,802 , or 137.8%,
to $3,997,792 for the three months ended September 30, 2021 , as compared
to $1,680,990 for the three months ended September 30, 2020 , primarily due to an
increase in legal fees in connection with the proposed mergers contemplated by
the Merger Agreement. General and administrative expenses decreased $4,110,826 ,
or 34.4%, to $7,848,361 for the nine months ended September 30, 2021 , as
compared to $11,959,187 for the nine months ended September 30, 2020 , primarily
due to a decrease in expenses related to the expensing of previously deferred
transaction costs related to the termination of the previously contemplated
mergers of the Company, MDLY, and Medley Capital Corporation .
Professional fees increased $3,477,630 or 834.1% to $3,060,717 for the three
months ended September 30, 2021 , as compared to $(416,913) for the three months
ended September 30, 2020 , primarily due to an increase in investment banking and
advisory fees in connection with the proposed mergers contemplated by the Merger
Agreement. Professional fees decreased $5,071,185 or 47.0% to $5,719,220 for the
nine months ended September 30, 2021 , as compared to $10,790,405 for the nine
months ended September 30, 2020 , primarily due to a decrease in expenses related
to the expensing of previously deferred transaction costs related to the
termination of the previously contemplated mergers of the Company, MDLY, and
Medley Capital Corporation .
Net Realized Gains/Losses on Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized. For the three and nine months endedSeptember 30, 2021 , we recognized net realized gain on investments of$7,049,324 and$2,946,800 primarily due to the sale of investments. For the three and nine months endedSeptember 30, 2020 , we recognized net realized loss on investments of$52,474,635 and$60,522,923 primarily due to the sale of investments.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation/depreciation on investments reflects the
net change in the fair value of our investments including the provision for
deferred taxes. For the three and nine months ended
For the three and nine months endedSeptember 30, 2020 , we recorded a net change in unrealized appreciation, net of tax, of$78,731,774 and a net change in unrealized depreciation, net of tax, of$9,840,179 , respectively. The unrealized appreciation for the three months endedSeptember 30, 2020 resulted from positive market and credit-related adjustments.
Changes in Net Assets from Operations
For the three and nine months endedSeptember 30, 2021 , we recorded a net decrease in net assets resulting from operations of$7,728,510 and net increase in net assets resulting from operations of$29,522,588 , respectively. Based on 102,210,752 and 102,452,267 weighted average common shares outstanding for the three and nine months endedSeptember 30, 2021 , our per share net decrease in net assets resulting from operations was$0.08 and our per share net increase in net assets resulting from operations was$0.29 , respectively. For the three and nine months endedSeptember 30, 2020 , we recorded a net increase in net assets resulting from operations of$32,120,421 and a net decrease in in net assets resulting from operations of$78,443,683 Based on 102,742,489 and 102,771,213 weighted average common shares outstanding for the three and nine months endedSeptember 30, 2020 , our per share net increase in net assets resulting from operations was$0.31 and our per share net decrease in net assets resulting from operations was$0.76 .
Financial Condition, Liquidity and Capital Resources
As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital, including increasing debt, and funding from operational cash flow.
Our liquidity and capital resources historically have been generated primarily from the net proceeds of our public offering of common stock and use of our credit facilities. We also generate liquidity from the scheduled and early repayment of our investments.
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As ofSeptember 30, 2021 andDecember 31, 2020 , we had$74.9 million and$65.3 million , respectively, in cash and cash equivalents. In the future, we may generate cash from cash flows from operations, including interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is to make investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes. In order to satisfy the Code requirements applicable to us as a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements under the 1940 Act are met) at the time of the borrowing or issuance of preferred stock. This requirement limits the amount that we may borrow. The following table shows our net borrowings as ofSeptember 30, 2021 andDecember 31, 2020 : September 30, 2021 December 31, 2020 Total Balance Unused Total Balance Unused Commitment Outstanding Commitment Commitment Outstanding Commitment Alpine Credit Facility 79,000,000 79,000,000 - 180,000,000 145,000,000 35,000,000 Total before deferred financing costs 79,000,000 79,000,000 - 180,000,000 145,000,000 35,000,000 Unamortized deferred financing costs - - - - (659,266 ) - Total borrowings outstanding, net of deferred financing costs$ 79,000,000 $ 79,000,000 $ -$ 180,000,000 $ 144,340,734 $ 35,000,000 ING Credit Facility OnAugust 12, 2016 , the Company amended its existing senior secured syndicated revolving credit facility (the "ING Credit Facility" as amended from time to time as described below) pursuant to a Senior Secured Revolving Credit Agreement (the "Revolving Credit Agreement" as amended from time to time as described below) with certain lenders party thereto from time to time andING Capital LLC , as administrative agent. The ING Credit Facility was secured by substantially all of the Company's assets, subject to certain exclusions as further set forth in an Amended and Restated Guarantee, Pledge and Security Agreement (the "Security Agreement") entered into in connection with the Revolving Credit Agreement, among the Company, the subsidiary guarantors party thereto,ING Capital LLC , as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto andING Capital LLC , as Collateral Agent. The ING Credit Facility also included usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. OnMay 15, 2020 , the Company entered into Amendment No. 4 to the Revolving Credit Agreement to among other things, (i) shorten the maturity date fromMarch 31, 2021 toSeptember 30, 2020 , (ii) accelerate the amortization of the Revolving Credit Agreement, and (iii) provide for the prepayment of the outstanding loans under the Revolving Credit Agreement in an aggregate principal amount of not less than$20 million . OnJuly 22, 2020 , the Company paid all remaining outstanding obligations under the Revolving Credit Agreement. OnJuly 31, 2020 (the "Termination Date"), the Company terminated the commitments on the Credit Agreement. The Company was also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee was (i) 1.50% if the used portion of the aggregate commitments is less than or equal to 40%, (ii) 0.75% if the used portion of the aggregate commitments is greater than 40% and less than or equal to 65% or (iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that the Company may use the proceeds of theING Credit Facility for general corporate purposes, including making investments in accordance with the Company's investment objective and strategy. Borrowings under the Revolving Credit Agreement were subject to, among other things, a minimum borrowing base. Substantially all of the Company's assets were pledged as collateral under the Revolving Credit Agreement. The ING Credit Facility required the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company's business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also included default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could have accelerated repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company's liquidity, financial condition and results of operations. In connection with the security interest established under the Security Agreement, the Company,ING Capital LLC , in its capacity as collateral agent, andState Street Bank and Trust Company , in its capacity as the Company's custodian, entered into a control agreement dated as ofDecember 4, 2013 , in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral. As a result of the termination of the Revolving Credit Agreement, the Security Agreement was terminated effective as of the Termination Date.
Alpine Credit Facility
OnSeptember 29, 2017 , the Company's wholly-owned, special purpose financing subsidiary, Alpine, amended its existing revolving credit facility (the "Alpine Credit Facility") pursuant to an Amended and Restated Loan Agreement (the "Loan Agreement") withJPMorgan Chase Bank, National Association ("JPMorgan"), as administrative agent and lender, the Financing Providers from time to time party thereto,SIC Advisors , as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto. The Loan Agreement was amended to, among other things, (i) extend the reinvestment period untilDecember 29, 2020 , (ii) extend the scheduled termination date untilMarch 29, 2022 , (iii) decrease the applicable margin for advances to 2.85% per annum and (iv) increase the compliance condition for net advances to 55% of net asset value. Alpine's obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in a significant portion of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company. OnNovember 18, 2020 , Alpine entered into Amendment No.1 to the Loan Agreement to, among other things, (i) extend the reinvestment period fromDecember 29, 2020 toMay 18, 2021 , (ii) increase the applicable margin for advances from 2.85% to 3.10% per annum, (iii) reduce the amount of maximum borrowings in an aggregate principal amount from$300,000,000 to$180,000,000 on a committed basis, (iv) require the Company to maintain a minimum a cash balance of$20,000,000 in Alpine, and (v) decrease the compliance condition for net advances from 55% to 52.5% of net asset value. The maturity date under the Loan Agreement did not change and therefore any amounts borrowed, as well as all accrued and unpaid interest thereunder, will be due and payable onMarch 29, 2022 . In connection with the Amendment, the Company repaid$35,000,000 of the outstanding balance under the Loan Agreement onNovember 18, 2020 , reducing the outstanding balance from$180,000,000 to$145,000,000 . The Alpine Credit Facility ended its reinvestment period onMay 18, 2021 and has entered its amortization period. As ofSeptember 30, 2021 andDecember 31, 2020 , Alpine's borrowings under the Alpine Credit Facility totaled$79,000,000 and$145,000,000 , respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities. 8
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The Alpine Credit Facility provided for borrowings in an aggregate principal amount up to$180,000,000 on a committed basis. Borrowings outstanding under the Alpine Credit Facility are subject to compliance with a NAV coverage ratio with respect to the current value of Alpine's portfolio and various portfolio criteria must be satisfied. Pricing under the Alpine Credit Facility for each one month calculation period is based on LIBOR for an interest period of one month, plus a spread of 3.10% per annum. If LIBOR is unavailable, pricing will be determined at the greater of the prime rate offered by JPMorgan or the federal funds effective rate plus 50 basis points, plus a spread of 3.10% per annum. Interest is payable monthly in arrears. Borrowings of Alpine are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act, applicable to BDCs. Pursuant to a Sale and Contribution Agreement entered into between the Company and Alpine (the "Sale Agreement") in connection with the Alpine Credit Facility, the Company may sell loans or contribute cash or loans to Alpine from time to time and will retain a residual interest in any assets contributed through its ownership of Alpine or will receive fair market value for any assets sold to Alpine. In certain circumstances the Company may be required to repurchase certain loans sold to Alpine. In addition to the acquisition of loans pursuant to the Sale Agreement, Alpine may purchase additional assets from various sources. Alpine has appointedSIC Advisors to manage its portfolio of assets pursuant to the terms of a Portfolio Management Agreement betweenSIC Advisors and Alpine. As ofSeptember 30, 2021 the carrying amount of the Company's borrowings under the Alpine Credit Facility approximated the fair value of the Company's debt obligation. The fair value of the Company's debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the Alpine Credit Facility is estimated based upon market interest rates of the Company's borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As ofSeptember 30, 2021 and 2020, the Alpine Credit Facility would be deemed to be Level 3, as defined in Note 4. Contractual Obligations
The following table shows our payment obligations for repayment of debt, which
total our contractual obligations at
Payment Due By Period
Less than More than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Alpine Credit Facility $ 79,000,000 $ 79,000,000 $ - $ - $ -
Total Contractual Obligations
- $ - $ -
We have entered into certain contracts under which we have material future commitments.
Investment Advisory Agreement OnApril 5, 2012 , we entered into the Investment Advisory Agreement withSIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as ofApril 17, 2012 , the date that we met the minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date, with one-year renewals subject to approval by our board of directors, a majority of whom must be independent directors. Most recently, onApril 15, 2021 , the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term, which will expire onApril 17, 2022 .SIC Advisors serves as our investment adviser in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance. Administration Agreement OnApril 5, 2012 , we entered into the Administration Agreement withMedley Capital LLC with an initial term of two years, pursuant to whichMedley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. The Administration Agreement became effective as ofApril 17, 2012 , the date that we met the minimum offering requirement. Pursuant to its terms, and unless earlier terminated as described below, the Administration Agreement will remain in effect from year-to-year if approved annually by a majority of our directorswho are not "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Company orMedley Capital LLC , and either the holders of a majority of our outstanding voting securities or our board of directors. Most recently, onApril 15, 2021 , the board of directors approved the renewal of the Administration Agreement for an additional one-year term, which will expire onApril 17, 2022 .Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburseMedley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC .
Commitment Letter
As previously reported, onMarch 7, 2021 ,Medley LLC , the parent of the Company's investment adviser and administrator, commenced a voluntary case (the "Chapter 11 Case") under chapter 11 of title 11 of the United States Code in theBankruptcy Court . The Chapter 11 Case is captioned In reMedley LLC , No, 21-10526 (KBO) (Bankr. D. Del.Mar. 7, 2021 ). In connection with the Chapter 11 Case, onAugust 11, 2021 the Company entered into a commitment letter (the "Commitment Letter") among the Company,Medley LLC ,Medley Capital LLC , andSIC Advisors , pursuant to which the Company has agreed to contribute$2.1 million , subject to certain conditions, to an employee compensation and retention plan (the "Compensation Plan") to be established byMedley Capital LLC . The Compensation Plan is an element of a Term Sheet datedJuly 21, 2021 (the "Term Sheet") filed byMedley LLC with theBankruptcy Court as Docket No. 276 in the Chapter 11 Case. Pursuant to the Commitment Letter, the Company's contribution is to be made in three equal installments of$700,000 inSeptember 2021 ,December 2021 , andJanuary 2022 , and the contributions are to be used solely to fund payments to employees ofMedley Capital LLC under the Compensation Plan. To the extent any such employee forfeits a compensation payment to which he or she would otherwise be entitled or is obligated to return a payment received, the Company is entitled to recoup the amount in its sole discretion. The Company's obligations under the Commitment Letter are subject to review and approval of definitive documents relating to the Compensation Plan, conditionally approved by theBankruptcy Court for purposes of solicitation of votes, in form and substance consistent with the Compensation Plan included as an exhibit to the Term Sheet. The Company may terminate the Commitment Letter by written notice toMedley LLC ,Medley Capital LLC , andSIC Advisors upon the occurrence of certain events, including, but not limited to, the entry by theBankruptcy Court of an order materially inconsistent with the Term Sheet; the failure by theBankruptcy Court to have entered an appropriate order byNovember 30, 2021 ; or the failure bySIC Advisors to comply with any covenant or agreement in the Investment Advisory Agreement datedApril 5, 2012 betweenSIC Advisors and the Company. If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
Off-Balance Sheet Arrangements
OnMarch 27, 2015 , the Company and GALIC entered into a limited liability company operating agreement to co-manage Sierra JV. All portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV's board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control Sierra JV. As the Company does not operationally control Sierra JV, it does not consolidate the operations of Sierra JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the fair value of its investment in Sierra JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4). 9
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As ofSeptember 30, 2021 andDecember 31, 2020 , Sierra JV had total capital commitments of$124.6 million , with the Company providing$110.1 million and GALIC providing$14.5 million . As ofSeptember 30, 2021 andDecember 31, 2020 , approximately$124.5 million was funded relating to these commitments of which$110.1 million was from the Company. The Company does not have the right to withdraw any of their respective capital commitment, unless in connection with a transfer of its membership interests. The Company may transfer full membership interests as long as it is approved by all members and transferred in a transaction exempt from the registration requirements of the Securities Act or applicable state securities laws.
Sierra JV entered into a Senior Secured Revolving Credit Facility Agreement, as
amended (the "JV Facility") with Deutsche Bank, AG,
On
On
OnOctober 28, 2019 , the JV Facility reinvestment period was further extended fromOctober 28, 2019 toMarch 31, 2020 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.50% per annum to LIBOR (with a 0.00% floor) + 2.75% per annum. OnMarch 31, 2020 , the total commitment under the JV Facility was reduced to$240.0 million from$250.0 million and the reinvestment period was extended fromMarch 31, 2020 toApril 30, 2020 . OnApril 30, 2020 , the total commitment under the JV Facility was reduced to$200.0 million from$240.0 million , the reinvestment period was extended fromApril 30, 2020 toJuly 31, 2020 and the maturity date was extended toJuly 31, 2023 . OnJuly 29, 2020 , the total commitment under the JV Facility was reduced to$175.0 million from$200.0 million , the reinvestment period was extended fromJuly 31, 2020 toApril 30, 2021 and the maturity date was extended toApril 30, 2024 . Additionally, the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.75% per annum to LIBOR (with a 0.50% floor) + 3.25% per annum.
The JV Facility ended its reinvestment period on
The JV Facility is secured substantially by all of Sierra JV's assets, subject to certain exclusions set forth in the JV Facility. As ofSeptember 30, 2021 andDecember 31, 2020 , there was$96.1 million and$124.7 million outstanding under the JV Facility, respectively. The Company has determined that Sierra JV is an investment company under ASC 946, however in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its interest in Sierra JV. Distributions We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certainU.S. federal excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending onOctober 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid noU.S. federal income tax. While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4%U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement. We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated forU.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. OnJuly 31, 2020 , our board of directors temporarily suspended the monthly distributions on the shares of the Company's common stock. OnOctober 22, 2020 , our board of directors determined to reinstate the monthly distributions on the shares of the Company's common stock. Any distributions to our stockholders paid by the Company is subject to our board of directors' discretion and applicable legal restrictions and take into account our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from declaring a distribution. Any distributions to our stockholders will be declared out of assets legally available for distribution. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. From the commencement of our offering throughSeptember 30, 2016 , a portion of our distributions were comprised in part of expense support payments made bySIC Advisors that were subject to repayment by us within three years of the date of such support payment. Our distributions may exceed our earnings, which we refer to as a return of capital. As a result, a portion of the distributions we make may represent a return of capital. Our use of the term "return of capital" merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term "return of capital" and "return on capital." 10
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The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2021 and 2020. Stockholders of record as of each respective record date were entitled to receive the distribution. Record Date Payment Date Amount per share January 30, 2020 January 31, 2020 $ 0.03500 February 27, 2020 February 28, 2020 0.03500 March 30, 2020 March 31, 2020 0.03500 October 29, 2020 October 30, 2020 0.01000 November 27, 2020 November 30, 2020 0.01000 December 30, 2020 December 31, 2020 0.01000 January 28, 2021 January 29, 2021 0.01000 February 25, 2021 February 26, 2021 0.01000 March 30, 2021 March 31, 2021 0.01000 April 29, 2021 April 30, 2021 0.01000 May 28, 2021 May 31, 2021 0.01000 June 29, 2021 June 30, 2021 0.01000 July 29, 2021 July 30, 2021 0.01000 August 30, 2021 August 31, 2021 0.01000 September 29, 2021 September 30, 2021 0.01000 We have adopted an "opt in" DRIP, pursuant to which, prior to the suspension of the DRIP (as described below), common stockholders could have elected to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declared a cash distribution, stockholders that had "opted in" to our DRIP would have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholderswho received distributions in the form of shares of common stock would be subject to the same federal, state and local tax consequences as if they received cash distributions. OnSeptember 21, 2021 , the Company's board of directors approved the suspension of the DRIP pursuant to the Merger Agreement. As a result, beginning with the Company's first distribution following theSeptember 2021 distribution, any distributions declared by the Company will be paid in cash to all stockholders unless and until the DRIP is reinstated. Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.
Related Party Transactions
We have entered into an Investment Advisory Agreement and Incentive Fee Waiver Agreement withSIC Advisors (as described and for periods set forth in "Management Fee"). Members of our senior management also serve as executive officers of other investment managers affiliated withSIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours. We have entered into an Administration Agreement withMedley Capital LLC , pursuant to whichMedley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations.Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburseMedley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC .Medley Capital LLC is an affiliate ofSIC Advisors . We have entered into the Commitment Letter withMedley LLC ,Medley Capital LLC , andSIC Advisors , pursuant to which the Company has agreed to contribute$2.1 million , subject to certain conditions, to the Compensation Plan to be established byMedley Capital LLC . We have entered into a license agreement withSIC Advisors under whichSIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name "Sierra" for specified purposes in our business. Under the license agreement, we will have a right to use the "Sierra" name, subject to certain conditions, for so long asSIC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the "Sierra" name. In addition, we entered into the Expense Limitation Agreement withMedley Capital LLC (as described and for the period set forth in "Administrative Services").
Management Fee
We pay
The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of:
• An incentive fee on net investment income ("subordinated incentive fee
on income") is calculated and payable quarterly in arrears and is based
upon pre-incentive fee net investment income for the immediately
preceding quarter. No subordinated incentive fee on income is payable in
any calendar quarter in which pre-incentive fee net investment income
does not exceed a quarterly return to stockholders of 1.75% per quarter
on our net assets at the end of the immediately preceding fiscal
quarter, or the preferred quarterly return. All pre-incentive fee net
investment income, if any, that exceeds the preferred quarterly return,
but is less than or equal to 2.1875% of net assets at the end of theimmediately preceding fiscal quarter in any quarter, will be payable to
on income as the catch up. It is intended to provide an incentive fee of
20% on pre-incentive fee net investment income when pre-incentive fee
net investment income exceeds 2.1875% of net assets at the end of the
immediately preceding quarter in any quarter. For any quarter in which
our pre-incentive fee net investment income exceeds 2.1875% of netassets at the end of the immediately preceding quarter, the subordinated
incentive fee on income shall equal 20% of the amount of pre-incentive
fee net investment income, because the preferred return and catch up
will have been achieved.
• A capital gains incentive fee will be earned on realized investments and
shall be payable in arrears as of the end of each calendar year during
which the Investment Advisory Agreement is in effect. If the Investment
Advisory Agreement is terminated, the fee will become payable as of the
effective date of such termination. The capital gains incentive fee is
based on our realized capital gains on a cumulative basis frominception, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, which we refer to as "net
realized capital gains." The capital gains incentive fee equals 20% ofnet realized capital gains, less the aggregate amount of any previously
paid capital gains incentive fee.
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OnApril 23, 2021 , the Company entered into the Incentive Fee Waiver Agreement withSIC Advisors , pursuant to whichSIC Advisors agreed to waive (i) 50% of any incentive fee on income payable toSIC Advisors for any fiscal quarter during the period beginning with the fiscal quarter endingSeptember 30, 2021 and the fiscal quarter endingJune 30, 2022 , and (ii) 50% of any incentive fee on capital gains payable toSIC Advisors for the fiscal year endingDecember 31, 2021 . For the avoidance of doubt, the Incentive Fee Waiver Agreement does not amend the calculation of the incentive fees as set forth in the Investment Advisory Agreement. Other than the waiver contemplated by the Incentive Fee Waiver Agreement, the terms of the Investment Advisory Agreement will remain in full force and effect. Following (i) the fiscal quarter endingJune 30, 2022 with respect to the waiver granted bySIC Advisors on any incentive fee payable on income, and (ii) the fiscal year endingDecember 31, 2021 with respect to the waiver granted bySIC Advisors on any incentive fee payable on capital gains, unless otherwise extended by the Company andSIC Advisors , the Incentive Fee Waiver Agreement will terminate and the original terms of the Investment Advisory Agreement will be in full force and effect. Under the terms of the Investment Advisory Agreement,SIC Advisors bears all organizational and offering expenses on our behalf. SinceJune 2, 2014 , the date that we raised$300 million in gross proceeds in connection with the sale of shares of our common stock,SIC Advisors was no longer obligated to bear, pay or otherwise be responsible for any ongoing organizational and offering expenses on our behalf, and we were responsible for paying or otherwise incurring all such organizational and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we had agreed to reimburseSIC Advisors for any such organizational and offering expenses incurred bySIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which was initially scheduled to terminate two years from the initial offering date, unless extended. OnJuly 2, 2018 , the Company's board of directors determined to terminate the Company's offering effective as ofJuly 31, 2018 . Pursuant to the Investment Advisory Agreement,SIC Advisors implements the Company's business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company's board of directors.SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the Investment Advisory Agreement, the Company has agreed to paySIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee. Critical Accounting Policies This discussion of our expected operating plans is based upon our expected consolidated financial statements, which will be prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future consolidated financial statements. Valuation of Investments We apply fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, we have categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as identified below and discussed in Note 4.
• Level 1 - Quoted prices are available in active markets for identical
investments as of the reporting date. Publicly listed equities and
publicly listed derivatives will be included in Level 1. In addition,
securities sold, but not yet purchased and call options will be included
in Level 1. We will not adjust the quoted price for these investments,
even in situations where we hold a large position and a sale could
reasonably affect the quoted price.
• Level 2 - Pricing inputs are other than quoted prices in active markets,
which are either directly or indirectly observable as of the reporting
date, and fair value is determined through the use of models or other
valuation methodologies. In certain cases, debt and equity securities
are valued on the basis of prices from an orderly transaction between
market participants provided by reputable dealers or pricing services.
In determining the value of a particular investment, pricing services
may use certain information with respect to transactions in such
investments, quotations from dealers, pricing matrices, market
transactions in comparable investments, and various relationships
between investments. Investments which are generally expected to beincluded in this category include corporate bonds and loans, convertible
debt indexed to publicly listed securities, and certain over-the-counter
derivatives.
• Level 3 - Pricing inputs are unobservable for the investment and include
situations where there is little, if any, market activity for the
investment. The inputs into the determination of fair value require
significant judgment or estimation. Investments that are expected to be
included in this category are our private portfolio companies.
Fair value is a market-based measure considered from the perspective of the
market participant who holds the financial instrument rather than an entity
specific measure. Therefore, when market assumptions are not readily available,
our own assumptions are set to reflect those that management believes market
participants would use in pricing the financial instrument at the measurement
date.
Investments for which market quotations are readily available are valued at such
market quotations, which are generally obtained from an independent pricing
service or multiple broker-dealers or market makers. We weight the use of
third-party broker quotes, if any, in determining fair value based on our
understanding of the level of actual transactions used by the broker to develop
the quote and whether the quote was an indicative price or binding offer.
However, debt investments with remaining maturities within 60 days that are not
credit impaired are valued at cost plus accreted discount, or minus amortized
premium, which approximates fair value. Investments for which market quotations
are not readily available are valued at fair value as determined by our board of
directors based upon input from management and third party valuation firms.
Because these investments are illiquid and because there may not be any directly
comparable companies whose financial instruments have observable market values,
these loans are valued using a fundamental valuation methodology, consistent
with traditional asset pricing standards, that is objective and consistently
applied across all loans and through time.
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We use third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, we use a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of our loans are determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, we use a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower's capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company's assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
• our quarterly valuation process begins with each portfolio investment
being initially valued by the valuation professionals;
• conclusions are then documented and discussed with senior management;
and
an independent valuation firm engaged by our board of directors prepares
an independent valuation report for approximately one third of the
portfolio investments each quarter on a rotating quarterly basis on non
• fiscal year-end quarters, such that each of these investments will be
valued by an independent valuation firm at least twice per annum when
combined with the fiscal year-end review of all the investments by
independent valuation firms.
In addition, all of our investments are subject to the following valuation process:
• management reviews preliminary valuations and their own independent
assessment;
• the audit committee of our board of directors reviews the preliminary
valuations of senior management and independent valuation firms; and
• our board of directors discusses valuations and determines the fair
value of each investment in our portfolio in good faith based on the
input of SIC Advisors , the respective independent valuation firms and
the audit committee.
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 our
investments may differ significantly from the values that would have been used
had a readily available market value existed for such investments, and the
differences could be material. In addition, changes in the market environment
(including the impact of COVID-19 on the financial market), portfolio company
performance, and other events may occur over the lives of the investments that
may cause the gains or losses ultimately realized on these investments to be
materially different than the valuations currently assigned.
Our investments in subordinated notes are carried at fair value, which is based
on a discounted cash flow model. The discounted cash flow model models both the
underlying collateral ("assets") and the liabilities of the CLO capital
structure. The discounted cash flow model uses a set of assumptions including
projected default rates, recovery rates, reinvestment rates and prepayment rates
in order to arrive at estimated cash flows of the assets. The discounted cash
flow model distributes the asset cash flows to the liability structure based on
the payment priorities and discounts them back using appropriate market discount
rates based on discount rates for comparable CLOs. The assumptions are based on
available market data as well as management estimates. Additional data is used
to validate the results from the discounted cash flow method, such as analysis
of relevant data observed in the CLO market, review of quotes, where available,
recent acquisitions and observable transactions in the subordinated notes, among
other factors.
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Table of Contents Revenue Recognition We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts, or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure net 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. 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. Payment-in-Kind Interest We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain RIC tax treatment, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-levelU.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Recent Developments OnOctober 19, 2021 , our board of directors declared a series of monthly distributions for October, November andDecember 2021 in the amount of$0.01 per share. Stockholders of record as of each respective monthly record date will be entitled to receive the distribution. Below are the details for each respective distribution:
Record Date Payment Date Amount per share
0.01
November 29, 2021 November 30, 2021 0.01
December 30, 2021 December 31, 2021 0.01
On March 7, 2021 (the "Petition Date"), Medley LLC (the "Debtor") commenced a
voluntary case (the "Medley Bankruptcy Case") under chapter 11 of title 11 of
the United States Code in the Bankruptcy Court . The Debtor is the sole member
of the investment adviser, SIC Advisors , and the administrator, Medley Capital
LLC , of the Company. Following the commencement of the Medley Bankruptcy Case,
the Debtor continued to manage its business as a debtor in possession under the
Bankruptcy Code. The Debtor, Medley Capital LLC and the Official Committee of
Unsecured Creditors appointed in the Medley Bankruptcy Case reached agreement on
the terms of a chapter 11 plan, which was filed with the Bankruptcy Court on
August 13, 2021 , and ultimately confirmed by the Bankruptcy Court on October 14,
2021 (as supplemented and modified, the Modified Third Amended
Combined Disclosure Statement Chapter 11 Plan of Medley LLC , the "Plan"). The
Plan became effective on October 18, 2021 (the "Effective Date").
The Plan provides for a limited restructuring in chapter 11 to enable the Debtor
to maximize the value of its remaining contracts (the "Remaining Contracts")
over a short run-off period, until the Remaining Contracts are terminated,
subject to an end date of March 31, 2022 (the "Run-Off End Date"). The Remaining
Contracts consist of investment management agreements between the
Debtor's subsidiary advisers and third-party clients, including the Company's
investment advisory agreement and related agreements with SIC Advisors and its
administration agreement and related agreements with Medley Capital LLC . The
Debtor does not have its own employees, and in order to provide for the
continued performance of the Debtor's subsidiaries under the Remaining
Contracts, the
Plan establishes a compensation plan for Medley Capital LLC's employees (the
"Non-Debtor Compensation Plan"). The Non-Debtor Compensation Plan is designed to
retain certain key Medley Capital LLC employees to service the
Remaining Contracts, including the Company's investment advisory agreement with
SIC Advisors and pursuant to the Non-Debtor Compensation Plan, the Company
has agreed to contribute $2.1 million of a total cost of $5.7 million to fund
the Non-Debtor Compensation Plan. The Company's obligations under the Non-Debtor
Compensation Plan expire on January 31, 2022 , while Medley Capital's obligations
under the Non-Debtor Compensation Plan expire on the Run-Off End Date. The Plan
also contemplates that SIC Advisors LLC will continue to honor its obligations
under the Company's investment advisory agreement until the termination thereof.
Accordingly, the Company's arrangements with SIC Advisors and Medley Capital LLC
are expected to remain in place until the closing of the Merger.
The Plan further provides for a liquidating trust established for the benefit of
creditors holding allowed claims against the Debtor. On the Effective Date, the
Debtor's assets, including all cash on hand and all causes of action retained by
the estate under the Plan were transferred to the liquidating trust, and the
Plan provides for the subsequent transfer of the proceeds received by the Debtor
under the Remaining Contracts once the wind-down is complete.
In the event the proposed merger contemplated by the Merger Agreement is not
consummated for any reason on or before the Run-Off End Date, the Company's
board of directors would expect to consider alternatives, including another
merger transaction, the Company's liquidation or the replacement of SIC Advisors
as its investment adviser, based on, among other things, then-current market
circumstances, the performance of the Company's portfolio and the financial
position of the Company. The Company also might seek a modification to the Plan
that would extend the Run-Off End Date so that SIC Advisors may continue to
serve as the Company's investment adviser beyond March 31, 2022 .
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