SLR Private Credit BDC II LLC
11/06/2024 | Press release | Distributed by Public on 11/06/2024 15:01
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
10-Q
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2024
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 814-01616
SLR Private Credit BDC II LLC
(Exact name of registrant as specified in its charter)
|
Delaware |
88-1890628 |
|
(State of Incorporation) |
(I.R.S. Employer Identification No.) |
|
500 Park Avenue New York, N.Y. |
10022 |
|
(Address of principal executive offices) |
(Zip Code) |
(212) 993-1670
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
Title of Each Class |
Trading |
Name of Each Exchange |
|
N/A |
N/A |
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
|
Non-accelerated filer |
☒ |
Smaller reporting company |
☐ |
|
Emerging growth company |
☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐ No☒
As of September 30, 2024, there was no established public market for the registrant's units. The issuer had 902,038units outstanding as of November 4, 2024.
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2024
TABLE OF CONTENTS
|
Index |
Page No. |
|
|
PART I. |
FINANCIAL INFORMATION |
|
|
Item 1. |
Financial Statements |
|
|
Consolidated Statements of Assets and Liabilities as of September 30, 2024 (unaudited) and December 31, 2023 |
3 |
|
|
Consolidated Statements of Operations for the three and nine months ended September 30, 2024 (unaudited), the three months ended September 30, 2023 (unaudited) and the period January 18, 2023* to September 30, 2023 (unaudited) |
4 |
|
|
Consolidated Statements of Changes in Unitholders' Capital for the three and nine months ended September 30, 2024 (unaudited), the three months ended September 30, 2023 (unaudited) and the period January 18, 2023* to September 30, 2023 (unaudited) |
5 |
|
|
Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 (unaudited) and the period January 18, 2023* to September 30, 2023 (unaudited) |
6 |
|
|
Consolidated Schedule of Investments as of September 30, 2024 (unaudited) |
7 |
|
|
Consolidated Schedule of Investments as of December 31, 2023 |
10 |
|
|
Notes to Consolidated Financial Statements (unaudited) |
12 |
|
|
Report of Independent Registered Public Accounting Firm |
27 |
|
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
28 |
|
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
40 |
|
Item 4. |
Controls and Procedures |
40 |
|
PART II. |
OTHER INFORMATION |
|
|
Item 1. |
Legal Proceedings |
41 |
|
Item 1A. |
Risk Factors |
41 |
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
42 |
|
Item 3. |
Defaults Upon Senior Securities |
42 |
|
Item 4. |
Mine Safety Disclosures |
42 |
|
Item 5. |
Other Information |
42 |
|
Item 6. |
Exhibits |
42 |
|
SIGNATURES |
44 |
* Commencement of operations
2
Table of Contents
PART I. FINANCIAL INFORMATION
In this Quarterly Report, "Company", "we", "us", and "our" refer to SLR Private Credit BDC II LLC unless the context states otherwise.
Item 1. Financial Statements
SLR PRIVATE CREDIT BDC II LLC
Consolidated Statements of Assets and Liabilities
(in thousands, except unit amounts)
|
September 30, |
December 31, |
|||||||
|
Assets |
||||||||
|
Investments at fair value: |
||||||||
|
Non-controlled/non-affiliated investments (cost: $37,516 and $21,560, respectively) |
$ |
38,123 |
$ |
21,654 |
||||
|
Cash |
1,205 |
323 |
||||||
|
Cash equivalents (cost: $0 and $4,960, respectively) |
- |
4,960 |
||||||
|
Interest receivable |
334 |
138 |
||||||
|
Receivable for investments sold |
20 |
- |
||||||
|
Prepaid expenses |
3 |
16 |
||||||
|
Total assets |
$ |
39,685 |
$ |
27,091 |
||||
|
Liabilities |
||||||||
|
Revolving credit facility due March 2025 (the "Subscription Facility") ($13,100 and $11,400 face amounts, respectively, reported net of unamortized debt issuance costs of $131 and $320, respectively. See note 5) |
$ |
12,969 |
$ |
11,080 |
||||
|
Revolving credit facility due December 2028 (the "SPV Facility") ($11,100 and $2,000 face amounts, respectively, reported net of unamortized debt issuance costs of $402 and $346, respectively. See note 5) |
10,698 |
1,654 |
||||||
|
Payable for cash equivalents purchased |
- |
4,960 |
||||||
|
Management fee payable (see note 3) |
384 |
138 |
||||||
|
Administration fee payable (see note 3) |
7 |
3 |
||||||
|
Interest payable (see note 5) |
311 |
85 |
||||||
|
Other liabilities and accrued expenses |
521 |
536 |
||||||
|
Total liabilities |
$ |
24,890 |
$ |
18,456 |
||||
|
Commitments and contingencies (see note 6) |
||||||||
|
Unitholders' Capital |
||||||||
|
Common Unitholders' capital (902,038 and 551,497 units, respectively, issued and outstanding) |
14,631 |
9,131 |
||||||
|
Accumulated distributable net earnings (loss) |
164 |
(496 |
) |
|||||
|
Total unitholders' capital |
$ |
14,795 |
$ |
8,635 |
||||
|
Total liabilities and unitholders' capital |
$ |
39,685 |
$ |
27,091 |
||||
|
Net asset value per unit |
$ |
16.40 |
$ |
15.66 |
See notes to consolidated financial statements.
3
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Statements of Operations (unaudited)
(in thousands, except unit amounts)
|
Three months ended |
||||||||||||||||
|
September 30, 2024 |
September 30, 2023 |
Nine months ended |
For the period |
|||||||||||||
|
Investment Income: |
||||||||||||||||
|
Interest income from non-controlled/non-affiliated investments |
$ |
1,160 |
$ |
131 |
$ |
2,997 |
$ |
174 |
||||||||
|
Other income from non-controlled/non-affiliated investments |
64 |
- |
155 |
- |
||||||||||||
|
Total investment income |
1,224 |
131 |
3,152 |
174 |
||||||||||||
|
Expenses: |
||||||||||||||||
|
Management fees (see note 3) |
$ |
107 |
$ |
47 |
$ |
308 |
$ |
58 |
||||||||
|
Administration fees (see note 3) |
7 |
1 |
18 |
1 |
||||||||||||
|
Interest and other credit facility expenses (see note 5) |
618 |
187 |
1,701 |
341 |
||||||||||||
|
Organizational expenses |
- |
- |
- |
131 |
||||||||||||
|
Other general and administrative expenses |
155 |
215 |
475 |
643 |
||||||||||||
|
Total expenses |
887 |
450 |
2,502 |
1,174 |
||||||||||||
|
Net investment income (loss) |
$ |
337 |
$ |
(319 |
) |
$ |
650 |
$ |
(1,000 |
) |
||||||
|
Realized and unrealized gain (loss) on investments and cash equivalents: |
||||||||||||||||
|
Net realized gain (loss) on non-controlled/non-affiliated investments and cash equivalents |
$ |
4 |
$ |
- |
$ |
3 |
$ |
- |
||||||||
|
Net change in unrealized gain (loss) on non-controlled/non-affiliated investments |
292 |
17 |
513 |
16 |
||||||||||||
|
Net realized and unrealized gain (loss) on non-controlled/non-affiliated investments and cash equivalents |
296 |
17 |
516 |
16 |
||||||||||||
|
Net Increase (Decrease) in Unitholders' Capital Resulting From Operations |
$ |
633 |
$ |
(302 |
) |
$ |
1,166 |
$ |
(984 |
) |
||||||
|
Net Income (Loss) Per Unit |
$ |
0.70 |
$ |
(2.42 |
) |
$ |
1.58 |
$ |
(8.04 |
) |
* Commencement of operations
See notes to consolidated financial statements.
4
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Statements of Changes in Unitholders' Capital (unaudited)
(in thousands, except unit amounts)
|
Three months ended |
||||||||||||||||
|
September 30, 2024 |
September 30, 2023 |
Nine months ended |
For the period |
|||||||||||||
|
Increase (decrease) in unitholders' capital resulting from operations: |
||||||||||||||||
|
Net investment income (loss) |
$ |
337 |
$ |
(319 |
) |
$ |
650 |
$ |
(1,000 |
) |
||||||
|
Net realized gain (loss) |
4 |
- |
3 |
- |
||||||||||||
|
Net change in unrealized gain (loss) |
292 |
17 |
513 |
16 |
||||||||||||
|
Net increase (decrease) in unitholders' capital resulting from operations |
633 |
(302 |
) |
1,166 |
(984 |
) |
||||||||||
|
Distributions to unitholders: |
||||||||||||||||
|
From distributable earnings |
(213 |
) |
- |
(506 |
) |
- |
||||||||||
|
Net distributions to unitholders |
(213 |
) |
- |
(506 |
) |
- |
||||||||||
|
Increase (decrease) in unitholders' capital resulting from capital activity: |
||||||||||||||||
|
Contributions |
- |
3,500 |
5,500 |
6,501 |
||||||||||||
|
Less offering costs |
- |
(2 |
) |
- |
(76 |
) |
||||||||||
|
Cancellation of initial units |
- |
- |
- |
(1 |
) |
|||||||||||
|
Net increase in unitholders' capital resulting from capital activity |
- |
3,498 |
5,500 |
6,424 |
||||||||||||
|
Total increase in unitholders' capital |
420 |
3,196 |
6,160 |
5,440 |
||||||||||||
|
Unitholders' capital, beginning of period |
14,375 |
2,244 |
8,635 |
- |
||||||||||||
|
Unitholders' capital, end of period |
$ |
14,795 |
$ |
5,440 |
$ |
14,795 |
$ |
5,440 |
||||||||
|
Capital unit activity (see note 7): |
||||||||||||||||
|
Units issued |
- |
217,661 |
350,541 |
337,701 |
||||||||||||
|
Units canceled |
- |
- |
- |
(40 |
) |
|||||||||||
|
Net increase from capital unit activity |
- |
217,661 |
350,541 |
337,661 |
* Commencement of operations
See notes to consolidated financial statements.
5
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
|
Nine months ended |
For the period |
|||||||
|
Cash Flows from Operating Activities: |
||||||||
|
Net increase (decrease) in unitholders' capital resulting from operations |
$ |
1,166 |
$ |
(984 |
) |
|||
|
Adjustments to reconcile net increase (decrease) in unitholders' capital resulting |
||||||||
|
Net realized (gain) loss on investments and cash equivalents |
(3 |
) |
- |
|||||
|
Net change in unrealized gain on investments |
(513 |
) |
(16 |
) |
||||
|
Deferred financing costs amortization |
298 |
157 |
||||||
|
Net accretion of discount on investments |
(126 |
) |
(5 |
) |
||||
|
(Increase) decrease in operating assets: |
||||||||
|
Purchase of investments |
(22,701 |
) |
(7,370 |
) |
||||
|
Proceeds from disposition of investments |
6,897 |
13 |
||||||
|
Capitalization of payment-in-kind income |
(23 |
) |
- |
|||||
|
Interest receivable |
(196 |
) |
(30 |
) |
||||
|
Receivable for investments sold |
(20 |
) |
- |
|||||
|
Prepaid expenses |
13 |
(40 |
) |
|||||
|
Increase (decrease) in operating liabilities: |
||||||||
|
Payable for cash equivalents purchased |
(4,960 |
) |
2,978 |
|||||
|
Management fee payable |
246 |
58 |
||||||
|
Administration fee payable |
4 |
1 |
||||||
|
Interest payable |
226 |
50 |
||||||
|
Other liabilities and accrued expenses |
(15 |
) |
204 |
|||||
|
Net Cash Used in Operating Activities |
(19,707 |
) |
(4,984 |
) |
||||
|
Cash Flows from Financing Activities: |
||||||||
|
Contributions from unitholders |
5,500 |
6,501 |
||||||
|
Cash distributions paid |
(506 |
) |
- |
|||||
|
Offering costs |
- |
(76 |
) |
|||||
|
Cancellation of units |
- |
(1 |
) |
|||||
|
Proceeds from borrowings |
23,535 |
6,907 |
||||||
|
Repayments of borrowings |
(12,900 |
) |
(1,750 |
) |
||||
|
Net Cash Provided by Financing Activities |
15,629 |
11,581 |
||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(4,078 |
) |
6,597 |
|||||
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
5,283 |
- |
||||||
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ |
1,205 |
$ |
6,597 |
||||
|
Supplemental disclosure of cash flow information: |
||||||||
|
Cash paid for interest |
$ |
1,177 |
$ |
291 |
* Commencement of operations
See notes to consolidated financial statements.
6
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Schedule of Investments (unaudited)
September 30, 2024
(in thousands, except share/unit amounts)
|
Description |
Industry |
Spread |
Floor |
Interest |
Acquisition |
Maturity |
Par |
Cost |
Fair |
|||||||||||||||||||
|
Bank Debt/Senior Secured Loans - |
||||||||||||||||||||||||||||
|
AAH Topco., LLC(4) |
Diversified Consumer Services |
S+525 |
0.75 |
% |
10.20 |
% |
1/30/2024 |
12/22/2027 |
$ |
763 |
$ |
749 |
$ |
763 |
||||||||||||||
|
Accession Risk Management Group, Inc.(4) |
Insurance |
S+475 |
0.75 |
% |
9.35 |
% |
12/4/2023 |
11/1/2029 |
1,591 |
1,586 |
1,591 |
|||||||||||||||||
|
Alkeme Intermediary Holdings, LLC(4) |
Insurance |
S+575 |
1.00 |
% |
10.35 |
% |
9/20/2023 |
10/28/2026 |
2,170 |
2,123 |
2,127 |
|||||||||||||||||
|
Apex Service Partners, LLC(4) |
Diversified Consumer Services |
S+650 |
1.00 |
% |
11.36 |
% |
10/27/2023 |
10/24/2030 |
1,380 |
1,348 |
1,393 |
|||||||||||||||||
|
Ardelyx, Inc.(4)(5) |
Pharmaceuticals |
S+425 |
4.70 |
% |
9.45 |
% |
3/1/2024 |
3/1/2027 |
750 |
755 |
758 |
|||||||||||||||||
|
Cerapedics, Inc.(4) |
Biotechnology |
S+620 |
2.75 |
% |
11.31 |
% |
10/3/2023 |
1/1/2028 |
1,276 |
1,282 |
1,283 |
|||||||||||||||||
|
Crewline Buyer, Inc.(4) |
IT Services |
S+675 |
1.00 |
% |
11.35 |
% |
11/8/2023 |
11/8/2030 |
1,171 |
1,145 |
1,171 |
|||||||||||||||||
|
CVAUSA Management, LLC(4) |
Health Care Providers & Services |
S+650 |
1.00 |
% |
11.12 |
% |
5/22/2023 |
5/22/2029 |
1,175 |
1,145 |
1,175 |
|||||||||||||||||
|
Exactcare Parent, Inc.(4) |
Health Care Providers & Services |
S+550 |
1.00 |
% |
10.73 |
% |
11/3/2023 |
11/5/2029 |
740 |
722 |
740 |
|||||||||||||||||
|
Eyesouth Eye Care Holdco LLC(4) |
Health Care Providers & Services |
S+550 |
1.00 |
% |
10.80 |
% |
4/1/2024 |
10/5/2029 |
611 |
600 |
611 |
|||||||||||||||||
|
FE Advance, LLC(4) |
Diversified Financial Services |
S+650 |
1.00 |
% |
11.71 |
% |
7/30/2024 |
7/30/2027 |
1,168 |
1,146 |
1,145 |
|||||||||||||||||
|
Human Interest, Inc. |
Internet Software & Services |
S+735 |
1.00 |
% |
12.27 |
% |
9/23/2024 |
7/1/2027 |
1,032 |
1,001 |
1,032 |
|||||||||||||||||
|
Legacy Service Partners, LLC |
Diversified Consumer Services |
S+575 |
1.00 |
% |
10.50 |
% |
3/18/2024 |
1/9/2029 |
646 |
631 |
646 |
|||||||||||||||||
|
Medrina, LLC(4) |
Health Care Providers & Services |
S+600 |
1.00 |
% |
11.55 |
% |
10/20/2023 |
10/20/2029 |
551 |
539 |
551 |
|||||||||||||||||
|
MRI Software, LLC(4) |
Software |
S+475 |
1.00 |
% |
9.35 |
% |
12/19/2023 |
2/10/2027 |
1,579 |
1,577 |
1,579 |
|||||||||||||||||
|
Nexus Intermediate III, LLC |
Professional Services |
S+550 |
0.75 |
% |
10.69 |
% |
8/16/2024 |
12/6/2027 |
210 |
207 |
207 |
|||||||||||||||||
|
OIS Management Services, LLC(4) |
Health Care Providers & Services |
S+475 |
0.75 |
% |
9.35 |
% |
12/29/2023 |
11/16/2028 |
2,081 |
2,050 |
2,061 |
|||||||||||||||||
|
ONS MSO, LLC(4) |
Health Care Providers & Services |
S+575 |
1.00 |
% |
10.60 |
% |
4/26/2024 |
7/8/2026 |
1,506 |
1,493 |
1,506 |
|||||||||||||||||
|
Outset Medical, Inc.(4) |
Health Care Equipment & Supplies |
S+515 |
2.75 |
% |
10.32 |
% |
1/2/2024 |
11/1/2027 |
3,113 |
3,122 |
3,292 |
|||||||||||||||||
|
Peter C. Foy & Associates Insurance Services, LLC(4) |
Insurance |
S+650 |
0.75 |
% |
11.35 |
% |
7/19/2023 |
11/1/2028 |
374 |
368 |
374 |
|||||||||||||||||
|
Quantcast Corporation(4) |
Commercial Services & Supplies |
S+525 |
2.00 |
% |
10.27 |
% |
6/14/2024 |
6/14/2029 |
590 |
583 |
590 |
|||||||||||||||||
|
Retina Midco, Inc.(4) |
Health Care Providers & Services |
S+575 |
1.00 |
% |
10.86 |
% |
12/18/2023 |
1/31/2026 |
3,059 |
3,016 |
3,059 |
|||||||||||||||||
|
Southern Orthodontic Partners Management, LLC(4) |
Health Care Providers & Services |
S+550 |
1.00 |
% |
10.10 |
% |
5/17/2024 |
7/27/2026 |
317 |
314 |
317 |
|||||||||||||||||
|
SPR Therapeutics, Inc.(4) |
Health Care Technology |
S+515 |
4.00 |
% |
10.32 |
% |
1/30/2024 |
2/1/2029 |
399 |
399 |
411 |
|||||||||||||||||
|
The Townsend Company, LLC(4) |
Commercial Services & Supplies |
S+625 |
1.00 |
% |
11.10 |
% |
8/21/2023 |
8/15/2029 |
792 |
775 |
792 |
|||||||||||||||||
|
Ultimate Baked Goods Midco LLC(4) |
Packaged Foods & Meats |
S+550 |
1.00 |
% |
10.66 |
% |
6/13/2024 |
8/13/2027 |
1,945 |
1,936 |
1,945 |
|||||||||||||||||
|
United Digestive MSO Parent, LLC(4) |
Health Care Providers & Services |
S+650 |
1.00 |
% |
11.25 |
% |
3/30/2023 |
3/30/2029 |
700 |
683 |
700 |
|||||||||||||||||
|
UVP Management, LLC(4) |
Health Care Providers & Services |
S+625 |
1.00 |
% |
11.00 |
% |
9/18/2023 |
9/15/2025 |
1,122 |
1,107 |
1,122 |
|||||||||||||||||
|
WCI-BXC Purchaser, LLC(4) |
Distributors |
S+625 |
0.75 |
% |
11.48 |
% |
11/6/2023 |
11/6/2030 |
664 |
649 |
664 |
|||||||||||||||||
|
Western Veterinary Partners LLC(4) |
Diversified Consumer Services |
S+500 |
1.00 |
% |
9.60 |
% |
1/19/2024 |
10/29/2027 |
2,148 |
2,119 |
2,148 |
|||||||||||||||||
|
West-NR Parent, Inc.(4) |
Insurance |
S+625 |
1.00 |
% |
10.95 |
% |
8/1/2023 |
12/27/2027 |
917 |
903 |
917 |
|||||||||||||||||
|
World Insurance Associates, LLC(4) |
Insurance |
S+600 |
1.00 |
% |
10.39 |
% |
10/20/2023 |
4/3/2028 |
1,453 |
1,443 |
1,453 |
|||||||||||||||||
|
Total Bank Debt/Senior Secured Loans |
$ |
37,516 |
$ |
38,123 |
||||||||||||||||||||||||
|
Total Investments(3)- 257.7% |
$ |
37,516 |
$ |
38,123 |
||||||||||||||||||||||||
|
Liabilities in Excess of Other Assets - (157.7%) |
(23,328 |
) |
||||||||||||||||||||||||||
|
Net Assets - 100.0% |
$ |
14,795 |
(1)
Floating rate debt investments typically bear interest at a rate determined by reference to either the Secured Overnight Financing Rate ("SOFR") or the prime index rate ("PRIME" or "P"), and which typically reset monthly, quarterly or semi-annually. For each debt investment, the Company has provided the current interest rate in effect as of September 30, 2024.
See notes to consolidated financial statements.
7
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Schedule of Investments (unaudited) (continued)
September 30, 2024
(in thousands, except share/unit amounts)
(2)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the SOFR or PRIME rate. These instruments are often subject to a SOFR or PRIME rate floor.
(3)
Aggregate net unrealized appreciation for U.S. federal income tax purposes is $140; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $608and $468, respectively, based on a tax cost of $37,983. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act. All investments are Level 3 unless otherwise indicated.
(4)
Indicates an investment that is wholly or partially held by the Company through its wholly-owned financing subsidiary SLR Private Credit BDC II SPV LLC (the "SPV"). Such investments are pledged as collateral under the SPV Facility (see Note 5 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.
(5)
Indicates assets that the Company believes may not represent "qualifying assets" under Section 55(a) of the Investment Company Act of 1940, as amended (the "1940 Act"). If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of September 30, 2024, on a fair value basis, non-qualifying assets in our portfolio represented 1.9% of the total assets of the Company.
See notes to consolidated financial statements.
8
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Consolidated Schedule of Investments (unaudited) (continued)
September 30, 2024
(in thousands, except share/unit amounts)
|
Industry Classification |
Percentage of Total |
|||
|
Health Care Providers & Services |
31.1 |
% |
||
|
Insurance |
17.0 |
% |
||
|
Diversified Consumer Services |
13.0 |
% |
||
|
Health Care Equipment & Supplies |
8.6 |
% |
||
|
Packaged Foods & Meats |
5.1 |
% |
||
|
Software |
4.1 |
% |
||
|
Commercial Services & Supplies |
3.6 |
% |
||
|
Biotechnology |
3.4 |
% |
||
|
IT Services |
3.1 |
% |
||
|
Diversified Financial Services |
3.0 |
% |
||
|
Internet Software & Services |
2.7 |
% |
||
|
Pharmaceuticals |
2.0 |
% |
||
|
Distributors |
1.7 |
% |
||
|
Health Care Technology |
1.1 |
% |
||
|
Professional Services |
0.5 |
% |
||
|
Total Investments |
100.0 |
% |
See notes to consolidated financial statements.
9
Table of Contents
SLR Private Credit BDC II LLC
Consolidated Schedule of Investments
December 31, 2023
(in thousands, except share/unit amounts)
|
Description |
Industry |
Spread |
Floor |
Interest |
Acquisition |
Maturity |
Par |
Cost |
Fair |
|||||||||||||||||||
|
Bank Debt/Senior Secured Loans - |
||||||||||||||||||||||||||||
|
Accession Risk Management Group, Inc. |
Insurance |
S+550 |
0.75 |
% |
11.00 |
% |
12/4/2023 |
11/1/2029 |
$ |
1,603 |
$ |
1,597 |
$ |
1,597 |
||||||||||||||
|
Alkeme Intermediary Holdings, LLC(4) |
Insurance |
S+650 |
1.00 |
% |
11.96 |
% |
9/20/2023 |
10/28/2026 |
667 |
649 |
667 |
|||||||||||||||||
|
Apex Service Partners, LLC |
Diversified Consumer Services |
S+650(5) |
1.00 |
% |
11.87 |
% |
10/27/2023 |
10/24/2030 |
1,130 |
1,102 |
1,102 |
|||||||||||||||||
|
Cerapedics, Inc.(4) |
Biotechnology |
S+620 |
2.75 |
% |
11.55 |
% |
10/3/2023 |
1/1/2028 |
851 |
852 |
851 |
|||||||||||||||||
|
Crewline Buyer, Inc. |
IT Services |
S+675 |
1.00 |
% |
12.10 |
% |
11/8/2023 |
11/8/2030 |
1,171 |
1,142 |
1,142 |
|||||||||||||||||
|
CVAUSA Management, LLC |
Health Care Providers & Services |
S+650 |
1.00 |
% |
11.74 |
% |
5/22/2023 |
5/22/2029 |
1,184 |
1,150 |
1,184 |
|||||||||||||||||
|
Exactcare Parent, Inc. |
Health Care Providers & Services |
S+650 |
1.00 |
% |
11.89 |
% |
11/3/2023 |
11/5/2029 |
744 |
724 |
723 |
|||||||||||||||||
|
Higginbotham Insurance Agency, Inc. |
Insurance |
S+550 |
1.00 |
% |
10.96 |
% |
8/24/2023 |
11/25/2028 |
1,740 |
1,740 |
1,740 |
|||||||||||||||||
|
Medrina, LLC |
Health Care Providers & Services |
S+625 |
1.00 |
% |
11.67 |
% |
10/20/2023 |
10/20/2029 |
555 |
542 |
541 |
|||||||||||||||||
|
MRI Software, LLC(4) |
Software |
S+550 |
1.00 |
% |
10.95 |
% |
12/19/2023 |
2/10/2027 |
1,591 |
1,589 |
1,589 |
|||||||||||||||||
|
OIS Management Services, LLC(4) |
Health Care Providers & Services |
S+575 |
0.75 |
% |
11.20 |
% |
12/29/2023 |
11/16/2028 |
697 |
691 |
683 |
|||||||||||||||||
|
Peter C. Foy & Associates Insurance Services, |
Insurance |
S+650 |
0.75 |
% |
11.86 |
% |
7/19/2023 |
11/1/2028 |
377 |
370 |
370 |
|||||||||||||||||
|
Retina Midco, Inc.(4) |
Health Care Providers & Services |
S+575 |
1.00 |
% |
11.38 |
% |
12/18/2023 |
1/31/2026 |
2,308 |
2,262 |
2,261 |
|||||||||||||||||
|
The Townsend Company, LLC(4) |
Commercial Services & Supplies |
S+625 |
1.00 |
% |
11.61 |
% |
8/21/2023 |
8/15/2029 |
805 |
786 |
805 |
|||||||||||||||||
|
Toptal, LLC |
Commercial Services & Supplies |
P+250 |
7.50 |
% |
11.00 |
% |
12/28/2023 |
12/28/2026 |
1,562 |
1,562 |
1,562 |
|||||||||||||||||
|
United Digestive MSO Parent, LLC |
Health Care Providers & Services |
S+675 |
1.00 |
% |
12.25 |
% |
3/30/2023 |
3/30/2029 |
687 |
669 |
687 |
|||||||||||||||||
|
UVP Management, LLC |
Health Care Providers & Services |
S+625 |
1.00 |
% |
11.75 |
% |
9/18/2023 |
9/15/2025 |
1,023 |
1,001 |
998 |
|||||||||||||||||
|
Vertos Medical, Inc.(4) |
Health Care Equipment & Supplies |
S+515 |
4.75 |
% |
10.50 |
% |
6/14/2023 |
7/1/2028 |
397 |
394 |
397 |
|||||||||||||||||
|
WCI-BXC Purchaser, LLC |
Distributors |
S+625 |
1.00 |
% |
11.64 |
% |
11/6/2023 |
11/6/2030 |
669 |
653 |
653 |
|||||||||||||||||
|
West-NR Parent, Inc. |
Insurance |
S+625 |
1.00 |
% |
11.70 |
% |
8/1/2023 |
12/27/2027 |
916 |
899 |
916 |
|||||||||||||||||
|
World Insurance Associates, LLC |
Insurance |
S+600 |
1.00 |
% |
11.35 |
% |
10/20/2023 |
4/3/2028 |
1,189 |
1,183 |
1,183 |
|||||||||||||||||
|
Total Bank Debt/Senior Secured Loans |
$ |
21,557 |
$ |
21,651 |
||||||||||||||||||||||||
|
Warrants |
||||||||||||||||||||||||||||
|
Warrants - 0.1% |
||||||||||||||||||||||||||||
|
Vertos Medical, Inc.* |
Health Care Equipment & Supplies |
6/14/2023 |
9,646 |
$ |
3 |
$ |
3 |
|||||||||||||||||||||
|
Total Warrants |
$ |
3 |
$ |
3 |
||||||||||||||||||||||||
|
Total Investments(3)- 250.8% |
$ |
21,560 |
$ |
21,654 |
||||||||||||||||||||||||
|
Cash Equivalents - 57.4% |
||||||||||||||||||||||||||||
|
U.S. Treasury Bill (5.33% yield) |
Government |
12/29/2023 |
2/27/2024 |
$ |
5,000 |
$ |
4,960 |
$ |
4,960 |
|||||||||||||||||||
|
Total Investments & Cash |
$ |
26,520 |
$ |
26,614 |
||||||||||||||||||||||||
|
Liabilities in Excess of Other Assets |
(17,979 |
) |
||||||||||||||||||||||||||
|
Net Assets - 100.0% |
$ |
8,635 |
(1)
Floating rate debt investments typically bear interest at a rate determined by reference to either the Secured Overnight Financing Rate or the prime index rate, and which typically reset monthly, quarterly or semi-annually. For each debt investment the Company has provided the current interest rate in effect as of December 31, 2023.
(2)
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the SOFR or PRIME rate. These instruments are often subject to a SOFR or PRIME rate floor.
(3)
Aggregate net unrealized depreciation for U.S. federal income tax purposes is $374; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $110and $484, respectively, based on a tax cost of $22,028. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act. These investments are generally subject to certain limitations on resale, and may be deemed to be "restricted securities" under the Securities Act. All investments are Level 3 unless otherwise indicated.
See notes to consolidated financial statements.
10
Table of Contents
SLR Private Credit BDC II LLC
Consolidated Schedule of Investments (continued)
December 31, 2023
(in thousands)
(4)
Indicates an investment that is wholly or partially held by the Company through its wholly-owned financing subsidiary SLR Private Credit BDC II SPV LLC. Such investments are pledged as collateral under the SPV Facility (see Note 5 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.
(5)
S+650spread on revolver tranche, S+500plus 2.00% PIK on term loan tranche.
* Non-income producing security.
|
Industry Classification |
Percentage of Total |
|||
|
Health Care Providers & Services |
32.7 |
% |
||
|
Insurance |
29.9 |
% |
||
|
Commercial Services & Supplies |
10.9 |
% |
||
|
Software |
7.3 |
% |
||
|
IT Services |
5.3 |
% |
||
|
Diversified Consumer Services |
5.1 |
% |
||
|
Biotechnology |
3.9 |
% |
||
|
Distributors |
3.0 |
% |
||
|
Health Care Equipment & Supplies |
1.9 |
% |
||
|
Total Investments |
100.0 |
% |
See notes to consolidated financial statements.
11
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited)
September 30, 2024
(in thousands, except unit amounts)
Note 1. Organization
SLR Private Credit BDC II LLC (the "Company", "we", "us" or "our") was formed as a limited liability company under the laws of the State of Delaware on April 18, 2022as an externally managed, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). Furthermore, as the Company is an investment company, it applies the guidance in the Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 946. In addition, for U.S. federal income tax purposes, the Company has elected to be treated, and intends to qualify annually, as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a BDC and a RIC, the Company is required to comply with certain regulatory requirements. The Company was formed primarily to provide investors with attractive long-term returns through investments made pursuant to the investment strategy of the Company described below. SLR Capital Partners, LLC (the "Adviser" or "SLR") serves as the Company's investment adviser pursuant to an investment management agreement with the Company (as amended, restated or otherwise modified from time to time, the "Investment Management Agreement"). The fiscal year end of the Company is December 31.
In connection with the Company's formation, the Company issued and sold 40 of the Company's units ("Units") to the Adviser (the "Initial Unitholder"), which were acquired for an initial capital contribution of $1 on January 18, 2023 in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"). As of September 30, 2024, the Company has closed on $66,780in capital commitments. The Company's initial drawdown occurred on March 31, 2023 with the sale and issuance of Units at an aggregate purchase price of $3,000or $25.00per Unit. Prior to the issuance of Units on March 31, 2023, the Initial Unitholder's initial seed capital was withdrawn from the Company and its Units were canceled. As of September 30, 2024, $15,400of capital commitments were drawn and $51,380were unfunded.
To seek to achieve its investment objective, the Company expects to invest in directly originated cash flow loans issued to sponsor-owned upper-middle-market companies and in niche specialty finance loans with attractive risk-return characteristics. Borrowers in the Company's cash flow strategy are expected to typically generate $25,000to $250,000or more of EBITDA (defined below), operate in non-cyclical industries, demonstrate defensive business models, and be owned by leading private equity firms. The Company's specialty finance investments will encompass asset-based lending to asset-rich companies in a variety of industries. The Company's investments in portfolio companies are referred to herein as "Portfolio Investments".
The offering period of the Company is currently expected to be for a period of approximately eighteen monthsfrom August 9, 2023 (the "Offering Period"). The Company is expected to conduct its offering pursuant to which investors will make equity capital commitments ("Commitments") pursuant to a subscription agreement entered into with the Company where the investor will agree to purchase an interest in the Company for an aggregate purchase price equal to its Commitment. Each investor will purchase Units each time the Company delivers a drawdown notice, typically tenbusiness days prior to a required funding date. The offering and sale of the Units is expected to be exempt from registration pursuant to Regulation D and Regulation S promulgated under the Securities Act, for offers and sales of securities that do not involve a public offering and for offers and sales of securities outside of the United States, respectively.
The term of the Company is expected to be seven years from the end of the Offering Period (unless terminated earlier or the Company effectuates an Exchange Listing (defined below) as set forth in the Limited Liability Company Agreement of the Company (as amended, restated or otherwise modified from time to time, the "LLC Agreement")), but may be extended by the Company's board of directors (the "Board") for up to two consecutive one-year periods upon approval of the Company's independent directors and the approval of unitholders of the Company ("Unitholders"), which approval will be obtained through a non-1940 Act vote as described in Item 11 of the Company's Form 10. The Company may be dissolved and its affairs wound up prior to the end of the term under the circumstances set forth in the LLC Agreement.
At any time prior to the end of the term, subject to any requirements of the 1940 Act and applicable law, the Board may, without the approval of the Unitholders, cause the Company (or any successor entity to the Company) to be merged with and into an affiliated entity that is regulated under the 1940 Act, whose securities are listed for trading on a national securities exchange, and that will have a total net asset value of at least $1,000,000immediately after the closing of such merger, subject to any limitations under the 1940 Act (an "Exchange Listing"). In connection with, and prior to, any such Exchange Listing, subject to any requirements of the 1940 Act and applicable law, the Board may, without the approval of Unitholders, cause the Company to complete (i) the sale, exchange or disposition of all or a portion of the assets of the Company, or (ii) a conversion of the Company into a corporation incorporated in a
12
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
state determined by the Board, either through a conversion in accordance with applicable law, a merger with or into an existing corporation or otherwise in which all Units will be converted into or exchanged for shares of common stock of the resulting corporation. If the Company is unable to effectuate an Exchange Listing prior to the end of the term, the Company will use commercially reasonable efforts to wind down or liquidate pursuant to the procedures set forth in the LLC Agreement.
Note 2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles ("GAAP") and include the accounts of the Company. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated.
Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2024.
In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for the fair presentation of consolidated financial statements have been included.
The significant accounting policies consistently followed by the Company are:
(a)
Investment transactions are accounted for on the trade date;
(b)
In accordance with GAAP and the 1940 Act, the Company's assets will generally be valued as follows:
(i)
securities or other instruments (other than as referred to in clauses (ii) and (iii) below) for which market quotes are readily available and deemed to represent fair value under GAAP will be valued based on quotes obtained from a quotation reporting system, market makers or pricing services (when deemed to represent fair value under GAAP);
(ii)
exchange-traded options, futures and options on futures will be valued at the settlement price determined by the exchange or through the use of a model such as Black-Scholes;
(iii)
short-term investments with maturities of sixty (60) days or less generally will be valued at amortized cost; and
(iv)
securities, loans or other instruments for which market quotes are not readily available or reliable under GAAP will be valued as described below:
a.
the quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of SLR responsible for the Portfolio Investment;
b.
preliminary valuation conclusions are then documented and discussed with senior management of the Adviser;
c.
the audit committee of the Board reviews the preliminary valuations of the Adviser and third-party valuation specialist, if any, that may from time to time be engaged by the Board, and responds to the valuation recommendations to reflect any comments; and
d.
the Board discusses valuations and determines the fair value of each investment in the Company's portfolio in good faith based on the input of the Adviser, the audit committee, and third-party valuation specialist, if any.
13
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
The valuation principles set forth above may be modified from time to time without notice to Unitholders, in whole or in part, as determined by the Board in its sole discretion.
The Board will also (1) periodically assess and manage valuation risks; (2) establish and apply fair value methodologies; (3) test fair value methodologies; (4) oversee and evaluate third-party pricing services, as applicable; (5) oversee the reporting required by Rule 2a-5 under the 1940 Act; and (6) maintain recordkeeping requirements under Rule 2a-5.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
Investments in all asset classes will be valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946 may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2024, there has been no change to the Company's valuation approaches or techniques and the nature of the related inputs considered in the valuation process.
ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
(c)
Gains or losses on investments are calculated by using the specific identification method.
(d)
The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized, and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income, as well as management fees and other fee income for services rendered, if any, are recorded as other income when earned.
(e)
The Company intends to comply with the applicable provisions of the Code pertaining to RICs to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.
14
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
(f)
Book and tax basis differences relating to Unitholder distributions and other permanent book and tax differences are typically reclassified among the Company's capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
(g)
Distributions to Unitholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.
(h)
In accordance with Regulation S-X and ASC Topic 810-Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies, if any. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.
(i)
The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against the U.S. dollar on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company's investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.
(j)
In accordance with ASC 835-30, the Company reports origination and other expenses related to certain debt issuances, if any, as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method.
(k)
The Company records expenses related to applicable equity offering costs as a charge to capital upon the sale of units, in accordance with ASC 946-20-25.
(l)
Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 daysor more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management's judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on management's judgment.
(m)
The Company records expenses directly related to its organization as incurred.
(n)
The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.
Recent Accounting Pronouncements
The Company's management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the accompanying consolidated financial statements.
Note 3. Agreements and Related Party Transactions
Pursuant to the Investment Management Agreement we have entered into with the Adviser, we intend to pay the Adviser certain management and incentive fees prior to and following an Exchange Listing. Prior to an Exchange Listing, the Adviser has been appointed to provide administrative and coordination services to the Company (in such capacity, the "Administrative Coordinator"). The Company will pay an administration fee to the Administrative Coordinator for such administrative and coordination services. Following an Exchange Listing, we intend to enter into a separate administration agreement with an affiliate pursuant to which
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
administrative services would be provided to the Company, as described further below. The cost of the base management fee, the incentive fee and the administration fee will ultimately be borne by our Unitholders.
Management Fees
The Company will pay the Adviser a management fee prior to an Exchange Listing (as the same may be adjusted pursuant to the LLC Agreement and the Investment Management Agreement, the "Pre-Exchange Listing Management Fee") and a management fee following an Exchange Listing (as the same may be adjusted pursuant to the LLC Agreement and the Investment Management Agreement, the "Post-Exchange Listing Management Fee" and, together with the Pre-Exchange Listing Management Fee, the "Management Fee"). The Management Fee will be payable quarterly in arrears, as follows:
•
Pre-Exchange Listing. Prior to an Exchange Listing, the Pre-Exchange Listing Management Fee will be calculated as of the close of business on the last day of each calendar quarter in an amount equal to 1.50% per annum of Invested Capital (defined as, as of any date, the sum of (i) capital contributions to the Company used to make Portfolio Investments and (ii) the total amount of credit drawn on subscription or similarly structured credit facilities).
•
Post-Exchange Listing. Following an Exchange Listing, the Post-Exchange Listing Management Fee will be an amount equal to 1.50% per annum of the average value of the Company's total assets at the end of the two most recently completed calendar quarters; provided, however, the Post-Exchange Listing Management Fee will be calculated at an annual rate of 1.00% of the average value of the Company's total assets at the end of the two most recently completed calendar quarters that exceeds the product of (i) 200% and (ii) the value of the Company's total net assets at the end of the immediately preceding calendar quarter.
The Management Fee will be appropriately adjusted for any stub period. The Adviser may arrange for the Company to direct to a placement agent any portion of the Management Fee which the Adviser is owed for purposes of paying any placement fee that the Adviser owes to such placement agent.
The Adviser will have the right, in its sole discretion, to waive or reduce, as well as recoup in a subsequent period, the Management Fee to which the Adviser is entitled in respect of all Unitholders' Units in any particular calendar quarter. Any such Management Fee may be recouped by the Adviser in a future calendar quarter within three years of the date of the applicable waiver of the Management Fee and any such recoupment would be conditioned on the Company's expense ratio at the time of recoupment, but after giving effect to the recoupment, being equal to or less than the expense ratio at the time of the waiver. The Adviser does not have a current intention to waive any Management Fees.
Incentive Fee
Distributions. Prior to an Exchange Listing, the Company will make distributions out of two categories: Current Proceeds and Disposition Proceeds (collectively referred to as "Investment Proceeds"). "Disposition Proceeds" means all amounts received by the Company upon the disposition of an investment, including full or partial repayments or amortization of principal (but excluding Current Proceeds). "Current Proceeds" means all proceeds from investments, including interest income, fee income, prepayment fees and exit fees, other than Disposition Proceeds, less Company expenses. The Adviser will apportion each Unitholder's pro rata share of Investment Proceeds between Disposition Proceeds and Current Proceeds.
Pre-Exchange Listing Incentive Fee. Prior to an Exchange Listing, and subject to availability, the Company will cause distributable cash to be distributed to Unitholders and to be paid to the Adviser as an incentive fee (the "Pre-Exchange Listing Incentive Fee"). Amounts of Investment Proceeds apportioned to Unitholders will be divided between and distributed to Unitholders, on the one hand, and the Adviser, on the other hand, in the following amounts and order of priority:
(i) Disposition Proceeds apportioned to Unitholders shall be divided between and distributed to Unitholders, on the one hand, and paid to the Adviser as a Pre-Exchange Listing Incentive Fee, on the other hand, in the following amounts and order of priority:
(A) First, Return of Capital Contributions: 100% to such Unitholder until such Unitholder has received cumulative distributions of Investment Proceeds pursuant to this clause (A) equal to such Unitholder's total capital contributions to the Company (including amounts contributed to pay Pre-Exchange Listing Management Fees, Pre-Exchange Listing Administration Fees (defined below), Organizational Expenses (defined below) and other Company expenses);
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
(B) Second, Unitholder Preferred Return: 100% of all remaining Disposition Proceeds to Unitholders until they have each received cumulative distributions of Investment Proceeds, without duplication, pursuant to this clause (B) and clause (D) below and clauses (ii)(A) and (ii)(C) below equal to 6% per annum, compounded annually, on Unitholders' capital contributions to the Company (including amounts contributed to pay Pre-Exchange Listing Management Fees, Pre-Exchange Listing Administration Fees, Organizational Expenses and other Company expenses), determined on the basis of all capital contributions made by such Unitholder and considering all distributions (including the subject distribution) under this "-Pre-Exchange Listing Incentive Fee" made to such Unitholder (computed from the dates that such capital contributions were due (or, if actually made later, the date on which such capital contributions were actually made) until the date that the Company, in its sole discretion, designates distributable cash as available for distribution or, if no such designation is made, the occurrence of an Event of Dissolution, as defined in the LLC Agreement) (the "Preferred Return");
(C) Third, Adviser Catch Up: 100% of all remaining Disposition Proceeds to the Adviser as a Pre-Exchange Listing Incentive Fee, until the Adviser has received payments of Investment Proceeds with respect to Unitholders pursuant to this clause (C) and clause (ii)(B) below equal to 10% of the total amounts due to Unitholders and earned by the Adviser pursuant to clause (B) above and this clause (C) and clauses (ii)(A) and (ii)(B) below; and
(D) Fourth, 90%/10%: 90% of all remaining Disposition Proceeds to Unitholders and 10% of all remaining Disposition Proceeds to the Adviser as a Pre-Exchange Listing Incentive Fee.
In no event will the Adviser receive amounts of Pre-Exchange Listing Incentive Fees under clauses (i)(C) and (i)(D) above in excess of the percentage of the Disposition Proceeds actually distributed to Unitholders pursuant to clauses (i)(B), (i)(C) and (i)(D) above.
In no event will the Adviser receive amounts attributable to Disposition Proceeds that, as of any distribution or payment date, exceed 20% of cumulative realized capital gains net of all cumulative realized capital losses and unrealized capital depreciation.
(ii) Current Proceeds apportioned to Unitholders shall be divided between and distributed to Unitholders, on the one hand, and paid to the Adviser as a Pre-Exchange Listing Incentive Fee, on the other hand, in the following amounts and order of priority:
(A) First, Unitholder Preferred Return: 100% of all Current Proceeds to Unitholders until Unitholders have received cumulative distributions of Investment Proceeds, without duplication, pursuant to this clause (A) and clause (C) below and pursuant to clauses (i)(B) and clause (i)(D) above equal to the Preferred Return;
(B) Second, Adviser Catch Up: 100% of all remaining Current Proceeds to the Adviser as a Pre-Exchange Listing Incentive Fee until the Adviser has received payments of Investment Proceeds with respect to Unitholders pursuant to this clause (B) and clause (i)(C) above equal to 10% of the total amounts due to Unitholders and earned by the Adviser pursuant to clause (A) above and this clause (B) and pursuant to clauses (i)(B) and clause (i)(C) above; and
(C) Third, 90%/10%: 90% of all remaining Current Proceeds to Unitholders and 10% of all remaining Current Proceeds to the Adviser as a Pre-Exchange Listing Incentive Fee.
In no event will the Adviser receive amounts of Pre-Exchange Listing Incentive Fees under clauses (ii)(B) and (ii)(C) above in excess of the percentage of the Current Proceeds actually distributed to Unitholders pursuant to clauses (ii)(A), (ii)(B) and (ii)(C) above.
Post-Exchange Listing Incentive Fee. Following an Exchange Listing, the Company will pay an incentive fee to the Adviser consisting of two parts, as follows (the "Post-Exchange Listing Incentive Fee" and, together with the Pre-Exchange Listing Incentive Fee, the "Incentive Fee"):
(i)
Pre-Incentive Fee Net Investment Income. One part will be calculated and payable quarterly in arrears based on the net investment income for the immediately preceding calendar quarter.
a.
For this purpose, Pre-Incentive Fee Net Investment Income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued by the Company during the calendar quarter, minus the Company's operating expenses for the quarter (including the Post-Exchange Listing Management Fees, expenses payable under an administration
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the Post-Exchange Listing Incentive Fee).
b.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of the Company's net assets at the end of the immediately preceding calendar quarter, will be compared to a "hurdle rate" of 1.75% per quarter (7.00% annualized). The Company's Pre-Incentive Fee Net Investment Income used to calculate this part of the Post-Exchange Listing Incentive Fee is also included in the amount of its gross assets used to calculate the 1.50% Post-Exchange Listing Management Fee.
c.
The Company will pay the Adviser a Post-Exchange Listing Incentive Fee with respect to the Company's Pre-Incentive Fee Net Investment Income in each calendar quarter as follows:
i.
noPost-Exchange Listing Incentive Fee in any calendar quarter in which the Company's Pre-Incentive Fee Net Investment Income does not exceed the quarterly hurdle rate of 1.75%;
ii.
100% of the Company's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter (8.75% annualized); this portion of the Pre-Incentive Fee Net Investment Income (which exceeds the hurdle but is less than 2.1875%) is referred to herein as the "catch-up." The "catch-up" is meant to provide the Adviser with 20% of the Company's Pre-Incentive Fee Net Investment Income as if a hurdle did not apply if this Pre-Incentive Fee Net Investment Income exceeds 2.1875% in any calendar quarter; and
iii.
20% of the amount of the Company's Pre-Incentive Fee Net Investment Income, if any, that exceeds 2.1875% in any calendar quarter (8.75% annualized) payable to the Adviser (once the hurdle is reached and the catch-up is achieved, 20% of all Pre-Incentive Fee Net Investment Income thereafter is allocated to the Adviser).
These calculations will be appropriately pro-rated for any period of less than three months.
(ii) Capital Gains Fee. The second part of the Post-Exchange Listing Incentive Fee, the "Capital Gains Fee", will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement as set forth below), commencing as of the end of the first fiscal year following an Exchange Listing, and will equal 20.0% of the Company's realized capital gains, if any, on a cumulative basis through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation as of each fiscal year end, less the amount of any previously paid capital gain Post-Exchange Listing Incentive Fees, with respect to the Company; provided that the Post-Exchange Listing Incentive Fee determined as of the end of the fiscal year in which an Exchange Listing is completed will be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses and unrealized capital depreciation. In the event that the Investment Management Agreement will terminate as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying a Capital Gains Fee.
Administration Fees and Expenses
Pre-Exchange Listing Administration Fees. The Company will pay SLR, in its capacity as the Administrative Coordinator, a fee (the "Pre-Exchange Listing Administration Fee" or "Administration Fee" ), calculated as of the close of business in New York, New York on the last day of each calendar quarter (the "Administration Fee Calculation Date"), in an amount equal to 0.08% per annum of the average Cost Basis (defined as, as of any date, the aggregate accreted and amortized cost of all Portfolio Investments, including (i) any amounts reinvested in Portfolio Investments and (ii) the cost of Portfolio Investments acquired using leverage), as measured on the last day of the preceding quarter and the last day of the current quarter for the period ended and payable quarterly in arrears after such Administration Fee Calculation Date. The Pre-Exchange Listing Administration Fee will not offset any fees paid to the Adviser. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine,
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
non-investment-related administrative services for the Company, (ii) the coordination of various third-party services needed or required by the Company and (iii) certain Unitholder servicing functions.
The Pre-Exchange Listing Administration Fee will be appropriately adjusted for any stub period.
The Administrative Coordinator will have the right, in its sole discretion, to waive, as well as recoup in a subsequent period, the Pre-Exchange Listing Administration Fee to which it is entitled in respect of all Unitholders' Units in any particular calendar quarter. Any such Pre-Exchange Listing Administration Fee may be recouped by the Administrative Coordinator in a future calendar quarter within three years of the date of the applicable waiver of the Pre-Exchange Listing Administration Fee and any such recoupment would be conditioned on the Company's expense ratio at the time of recoupment, but after giving effect to the recoupment, being equal to or less than the expense ratio at the time of the waiver. The Adviser does not have a current intention to waive any Pre-Exchange Listing Administrative Fee.
Post-Exchange Listing Administration Expenses. In connection with an Exchange Listing, and subject to Board approval, the Company intends to enter into an administration agreement with SLR Capital Management, LLC ("SCM") pursuant to which SCM will provide administrative services to the Company. For providing these services, facilities and personnel, the Company will reimburse SCM for the Company's allocable portion of overhead and other expenses incurred by SCM in performing its obligations under the administration agreement (together with the Pre-Exchange Listing Administration Fee, the "Administration Expenses").
For the three and nine months ended September 30, 2024, the Company incurred $107and $308, respectively, in Management Fees, $7and $18, respectively, in Administration Fees and $0and $0, respectively, in Incentive Fees. For the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023, the Company incurred $47and $58, respectively, in Management Fees, $1and $1, respectively, in Administration Fees and $0and $0, respectively, in Incentive Fees.
In addition, prior to an Exchange Listing, the aggregate amount of certain operating expenses relating to Unitholders investing directly in the Company will not exceed the following limits in any fiscal year: (A) if the Company has less than or equal to $400,000in Commitments, an amount equal to the sum of (x) the product of the Commitments and 0.0025and (y) $1,250, or (B) if the Company has greater than $400,000in Commitments, $2,250(such figure, the "Operating Expense Cap"). Any amount in excess of the Operating Expense Cap for any fiscal year will be paid by the Adviser. For the avoidance of doubt, (i) the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder, (ii) the Company will not bear the costs of any third-party valuation agent engaged solely for purposes of valuing the Company's Portfolio Investments at each quarter end and (iii) the Operating Expense Cap will no longer apply upon the effectuation of an Exchange Listing.
The Adviser or Administrative Coordinator and/or their affiliates have advanced organizational and offering expenses to the Company, which include organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company (the "Organizational Expenses"). The Adviser or Administrative Coordinator (or such affiliate) will be reimbursed by the Company for such advanced costs and expenses in an amount not to exceed $500. The Company will be responsible for and pay (or reimburse) the Organizational Expenses subject to the cap described in the preceding sentence. Accordingly, in 2023, $76of offering expenses were charged to capital and $131of organizational costs were expensed.
Note 4. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1.Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
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Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
Level 2.Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets;
c)
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
d)
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's and, if applicable, an independent third-party valuation firm's own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).
Gains and losses for assets and liabilities categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications involving Level 3 assets and liabilities are reported as transfers in/out of Level 3 as of the end of the quarter in which the reclassifications occur. Within the fair value hierarchy tables below, cash and cash equivalents are excluded but could be classified as Level 1.
The following tables present the balances of assets measured at fair value on a recurring basis, as of September 30, 2024 and December 31, 2023:
Fair Value Measurements
As of September 30, 2024
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Assets: |
||||||||||||||||
|
Bank Debt/Senior Secured Loans |
$ |
- |
$ |
- |
$ |
38,123 |
$ |
38,123 |
||||||||
|
Total Investments |
$ |
- |
$ |
- |
$ |
38,123 |
$ |
38,123 |
||||||||
|
Fair Value Measurements |
||||||||||||||||
|
As of December 31, 2023 |
||||||||||||||||
|
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
|
Assets: |
||||||||||||||||
|
Bank Debt/Senior Secured Loans |
$ |
- |
$ |
- |
$ |
21,651 |
$ |
21,651 |
||||||||
|
Warrants |
- |
- |
3 |
3 |
||||||||||||
|
Total Investments |
$ |
- |
$ |
- |
$ |
21,654 |
$ |
21,654 |
20
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
While the Company has not made an election to apply the fair value option of accounting to any of its debt obligations, if the Company's debt obligations were carried at fair value at September 30, 2024, the fair value of the SPV Facility and the Subscription Facility would be $11,100and $13,100, respectively. All debt obligations would be considered Level 3 liabilities and would be valued with market yield as the unobservable input.
While the Company has not made an election to apply the fair value option of accounting to any of its debt obligations, if the Company's debt obligations were carried at fair value at December 31, 2023, the fair value of the SPV Facility and the Subscription Facility would be $2,000and $11,400, respectively. All debt obligations would be considered Level 3 liabilities and would be valued with market yield as the unobservable input.
The following tables provide a summary of the changes in fair value of Level 3 assets for the three and nine months ended September 30, 2024, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at September 30, 2024:
|
Bank Debt/Senior |
Warrants |
Total |
||||||||||
|
Fair value, June 30, 2024 |
$ |
34,886 |
$ |
3 |
$ |
34,889 |
||||||
|
Total gains or losses included in earnings: |
||||||||||||
|
Net realized gain |
- |
4 |
4 |
|||||||||
|
Net change in unrealized gain |
293 |
- |
293 |
|||||||||
|
Purchase of investment securities* |
6,246 |
- |
6,246 |
|||||||||
|
Proceeds from dispositions of investment securities |
(3,302 |
) |
(7 |
) |
(3,309 |
) |
||||||
|
Transfers into Level 3 |
- |
- |
- |
|||||||||
|
Transfers out of Level 3 |
- |
- |
- |
|||||||||
|
Fair value, September 30, 2024 |
$ |
38,123 |
$ |
- |
$ |
38,123 |
||||||
|
Unrealized gains for the period relating to those Level 3 |
||||||||||||
|
Net change in unrealized gain |
$ |
295 |
$ |
- |
$ |
295 |
||||||
|
Bank Debt/Senior |
Warrants |
Total |
||||||||||
|
Fair value, December 31, 2023 |
$ |
21,651 |
$ |
3 |
$ |
21,654 |
||||||
|
Total gains or losses included in earnings: |
||||||||||||
|
Net realized gain |
- |
4 |
4 |
|||||||||
|
Net change in unrealized gain |
513 |
- |
513 |
|||||||||
|
Purchase of investment securities* |
22,850 |
- |
22,850 |
|||||||||
|
Proceeds from dispositions of investment securities |
(6,891 |
) |
(7 |
) |
(6,898 |
) |
||||||
|
Transfers into Level 3 |
- |
- |
- |
|||||||||
|
Transfers out of Level 3 |
- |
- |
- |
|||||||||
|
Fair value, September 30, 2024 |
$ |
38,123 |
$ |
- |
$ |
38,123 |
||||||
|
Unrealized gains for the period relating to those Level 3 |
||||||||||||
|
Net change in unrealized gain |
$ |
516 |
$ |
- |
$ |
516 |
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
The following table provides a summary of the changes in fair value of Level 3 assets for the period January 18, 2023 (commencement of operations) to December 31, 2023, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at December 31, 2023:
|
Bank Debt/Senior |
Warrants |
Total |
||||||||||
|
Fair value, January 18, 2023 |
$ |
- |
$ |
- |
$ |
- |
||||||
|
Total gains or losses included in earnings: |
||||||||||||
|
Net realized loss |
- |
- |
- |
|||||||||
|
Net change in unrealized gain (loss) |
94 |
- |
94 |
|||||||||
|
Purchase of investment securities* |
21,623 |
3 |
21,626 |
|||||||||
|
Proceeds from dispositions of investment securities |
(66 |
) |
- |
(66 |
) |
|||||||
|
Transfers into Level 3 |
- |
- |
- |
|||||||||
|
Transfers out of Level 3 |
- |
- |
- |
|||||||||
|
Fair value, December 31, 2023 |
$ |
21,651 |
$ |
3 |
$ |
21,654 |
||||||
|
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period: |
||||||||||||
|
Net change in unrealized gain (loss) |
$ |
94 |
$ |
- |
$ |
94 |
* Includes PIK capitalization and accretion of discount
Quantitative Information about Level 3 Fair Value Measurements
The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.
Significant unobservable quantitative inputs typically used in the fair value measurement of the Company's Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization ("EBITDA") multiples of similar companies, and comparable market transactions for equity securities.
22
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
Quantitative information about the Company's Level 3 asset fair value measurements as of September 30, 2024 and December 31, 2023 is summarized in the tables below:
|
Asset or |
Fair Value at |
Principal Valuation |
Unobservable Input |
Range (Weighted |
||||||||
|
Bank Debt / Senior Secured Loans |
Asset |
$ |
38,123 |
Income Approach |
Market Yield |
9.5% - 14.5% |
||||||
|
Asset or |
Fair Value at |
Principal Valuation |
Unobservable Input |
Range (Weighted |
||||||||
|
Bank Debt / Senior Secured Loans |
Asset |
$ |
21,651 |
Income Approach |
Market Yield |
11.1% - 17.6% |
||||||
|
Warrants |
Asset |
$ |
3 |
Market Approach |
Volatility |
18.9% - 18.9% |
Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company's investments. Weighted averages in the above tables are calculated based on fair value of the underlying assets.
Note 5. Debt
SPV Facility-On December 12, 2023, the Company, through its wholly-owned subsidiary, SLR Private Credit BDC II SPV LLC, entered into the $25,000SPV Facility with Citibank, N.A. acting as administrative agent. Effective with an amendment on July 10, 2024, the stated interest rate on the SPV Facility is Term SOFR plus 2.70% with no SOFR floor requirement, and the final maturity date is December 12, 2028. The fee on undrawn commitments is currently 0.50%. The SPV Facility is secured by all of the assets held by the SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV Facility also includes usual and customary events of default for credit facilities of this nature. As of September 30, 2024, there were $11,100of borrowings outstanding under the SPV Facility.
Subscription Facility-On March 20, 2023, the Company established the $25,000Subscription Facility due March 20, 2025 with ING Capital LLC, as administrative agent and lender. The stated interest rate on the Subscription Facility is SOFR plus 2.75-3.00%. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. As of September 30, 2024, there were $13,100of borrowings outstanding under the Subscription Facility.
The average annualized interest cost for borrowings for the nine months ended September 30, 2024 and the period March 20, 2023 (commencement of the Subscription Facility) to December 31, 2023 was 8.28% and 8.42%, respectively. These costs are exclusive of other credit facility expenses such as unused fees. The maximum amount borrowed on the credit facilities during the nine months ended September 30, 2024 and the period March 20, 2023 (commencement of the Subscription Facility) to December 31, 2023 was $24,200and $13,400, respectively.
23
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SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
Note 6. Commitments and Contingencies
The Company had unfunded debt commitments to various revolving and delayed-draw term loans. The total amount of these unfunded commitments as of September 30, 2024 and December 31, 2023 was $14,786and $19,793, respectively, comprised of the following:
|
September 30, |
December 31, |
|||||||
|
Arcutis Biotherapeutics, Inc. |
$ |
3,171 |
$ |
- |
||||
|
Plastic Management, LLC |
2,186 |
- |
||||||
|
Southern Orthodontics Partners Management, LLC |
1,486 |
- |
||||||
|
Cerapedics, Inc. |
1,064 |
1,489 |
||||||
|
AAH Topco, LLC |
1,036 |
1,802 |
||||||
|
Western Veterinary Partners LLC |
884 |
- |
||||||
|
CVAUSA Management, LLC |
741 |
741 |
||||||
|
Legacy Service Partners, LLC |
588 |
1,237 |
||||||
|
World Insurance Associates, LLC |
579 |
852 |
||||||
|
SPR Therapeutics, Inc. |
499 |
- |
||||||
|
Quantcast Corporation |
418 |
- |
||||||
|
West-NR Parent, Inc. |
387 |
395 |
||||||
|
FE Advance, LLC |
270 |
- |
||||||
|
The Townsend Company, LLC |
263 |
261 |
||||||
|
United Digestive MSO Parent, LLC |
255 |
273 |
||||||
|
OIS Management Services, LLC |
224 |
1,362 |
||||||
|
Medrina, LLC |
190 |
190 |
||||||
|
Alkeme Intermediary Holdings, LLC |
131 |
668 |
||||||
|
Crewline Buyer, Inc. |
122 |
122 |
||||||
|
Exactcare Parent, Inc. |
81 |
81 |
||||||
|
WCI-BXC Purchaser, LLC |
76 |
77 |
||||||
|
MRI Software LLC |
67 |
67 |
||||||
|
Apex Service Partners, LLC |
41 |
277 |
||||||
|
Nexus Intermediate III, LLC |
27 |
- |
||||||
|
AMF Levered II, LLC |
- |
3,133 |
||||||
|
Outset Medical, Inc. |
- |
3,113 |
||||||
|
Human Interest, Inc. |
- |
1,032 |
||||||
|
Retina Midco, Inc. |
- |
769 |
||||||
|
Ardelyx, Inc. |
- |
750 |
||||||
|
Peter C. Foy & Associates Insurance Services, LLC |
- |
378 |
||||||
|
Toptal, LLC |
- |
352 |
||||||
|
Vertos Medical, Inc. |
- |
198 |
||||||
|
UVP Management, LLC |
- |
174 |
||||||
|
Total Commitments |
$ |
14,786 |
$ |
19,793 |
The credit agreements governing the above loan commitments contain customary lending provisions and/or are subject to the respective portfolio company's achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of September 30, 2024 and December 31, 2023, the Company had sufficient cash available and/or liquid securities available to fund its commitments and had reviewed them for any appropriate fair value adjustment.
In the normal course of our business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial
24
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statement of Assets and Liabilities. As of September 30, 2024, we held no such contracts.
From time to time, the Company may become a party to certain legal proceedings incidental to the normal course of its business. As of September 30, 2024 and December 31, 2023, management is not aware of any material pending or threatened litigation that would require accounting recognition or financial statement disclosure.
Note 7. Unitholders' Capital
Transactions in Unitholders' capital were as follows:
|
Three months ended |
Three months ended |
|||||
|
Units at beginning of period |
902,038 |
120,000 |
||||
|
Units issued |
- |
217,661 |
||||
|
Units issued and outstanding at end of period |
902,038 |
337,661 |
||||
|
Nine months ended |
For the |
|||||
|
Units at beginning of period |
551,497 |
- |
||||
|
Units issued |
350,541 |
337,701 |
||||
|
Units canceled |
- |
(40 |
) |
|||
|
Units issued and outstanding at end of period |
902,038 |
337,661 |
* Commencement of operations
25
Table of Contents
SLR PRIVATE CREDIT BDC II LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2024
(in thousands, except unit amounts)
Note 8. Financial Highlights
The following is a schedule of financial highlights for the nine months ended September 30, 2024 and for the period January 18, 2023 (commencement of operations) to September 30, 2023:
|
Nine months ended |
For the period |
|||||||
|
Per Share Data: (a) |
||||||||
|
Net asset value per Unit, beginning of period |
$ |
15.66 |
$ |
- |
||||
|
Net investment income (loss) |
0.88 |
(8.17 |
) |
|||||
|
Net realized and unrealized gain (loss) |
0.55** |
0.13 |
||||||
|
Net increase (decrease) in Unitholders' capital resulting from operations |
1.43 |
(8.04 |
) |
|||||
|
Distributions to Unitholders: |
||||||||
|
From distributable earnings |
(0.69 |
) |
- |
|||||
|
Issuance of Units |
- |
24.77** |
||||||
|
Offering costs |
- |
(0.62 |
) |
|||||
|
Net asset value per Unit, end of period |
$ |
16.40 |
$ |
16.11 |
||||
|
Total Return (b)(c) |
9.13 |
% |
(35.56 |
%) |
||||
|
Unitholders' capital, end of period |
$ |
14,795 |
$ |
5,440 |
||||
|
Units outstanding, end of period |
902,038 |
337,661 |
||||||
|
Ratios to average net assets of Unitholders' Capital (c): |
||||||||
|
Net investment income (loss) |
5.57 |
% |
(40.58 |
%) |
||||
|
Operating expenses |
6.87 |
% |
33.82 |
% |
||||
|
Interest and other credit facility expenses |
14.58 |
% |
13.85 |
% |
||||
|
Total expenses |
21.45 |
% |
47.67 |
% |
||||
|
Average debt outstanding |
$ |
19,670 |
$ |
1,231 |
||||
|
Portfolio turnover ratio |
22.8 |
% |
0.5 |
% |
(a)
Calculated using the average Units outstanding method. Weighted average Units outstanding for the nine months ended September 30, 2024 and for the period March 31, 2023 (date of first sale of Units to Unitholders) through September 30, 2023 were 738,165and 122,366, respectively.
(b)
Calculated as the change in net asset value ("NAV") per Unit during the period plus distributions declared per Unit, divided by the beginning NAV per Unit. Total return does not include a sales load. The beginning NAV per Unit was determined to be as of the date of the first sale of Units to Unitholders as management considers this to be the most meaningful disclosure for investors.
(c)
Not annualized for periods less than one year. Average net assets are calculated for the nine months ended September 30, 2024 and for the period March 31, 2023 (date of first sale of Units to Unitholders) through September 30, 2023.
* Commencement of operations
** Includes the impact of the different Unit amounts used in calculating per Unit data as a result of calculating certain per Unit data
based upon the weighted average Units outstanding during the period and certain per Unit data based on the Units outstanding as
of a period end.
Note 9. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued. There have been no subsequent events that require recognition or disclosure in these consolidated financial statements.
26
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Unitholders and Board of Directors
SLR Private Credit BDC II LLC:
Results of Review of Interim Financial Information
We have reviewed the consolidated statement of assets and liabilities of SLR Private Credit BDC II LLC (and subsidiary) (the Company), including the consolidated schedule of investments, as of September 30, 2024, the related consolidated statements of operations and changes in unitholders' capital for the three-month and nine-month periods ended September 30, 2024 and the three-month period ended September 30, 2023 and for the period January 18, 2023 (commencement of operations) to September 30, 2023, the related consolidated statements of cash flows for the nine-month period ended September 30, 2024 and for the period January 18, 2023 to September 30, 2023, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2023, and the related consolidated statements of operations, changes in unitholders' capital, and cash flows for the period January 18, 2023 to December 31, 2023 (not presented herein); and in our report dated February 27, 2024, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2023, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
|
/s/ KPMG LLP |
New York, New York
November 6, 2024
27
Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.
Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
•
our future operating results, including our ability to achieve objectives;
•
our business prospects and the prospects of our portfolio companies;
•
the impact of investments that we expect to make;
•
our contractual arrangements and relationships with third parties;
•
the dependence of our future success on the general economy and its impact on the industries in which we invest;
•
the impact of any protracted decline in the liquidity of credit markets on our business;
•
the ability of our portfolio companies to achieve their objectives;
•
the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
•
market conditions and our ability to access alternative debt markets and additional debt and equity capital;
•
our expected financings and investments;
•
the adequacy of our cash resources and working capital;
•
the timing of cash flows, if any, from the operations of our portfolio companies;
•
the ability of SLR Capital Partners, LLC (the "Adviser" or "SLR") to locate suitable investments for us and to monitor and administer our investments;
•
the ability of the Adviser to attract and retain highly talented professionals;
•
the ability of the Adviser to adequately allocate investment opportunities among the Company and the Adviser's other advisory clients;
•
any conflicts of interest posed by the structure of the management fee and incentive fee to be paid to the Adviser;
•
changes in political, economic or industry conditions, relations between the United States, Russia, Ukraine and other nations, the interest rate environment, certain regional bank failures or conditions affecting the financial and capital markets;
•
the escalating conflict in the Middle East;
•
changes in the general economy, a slowing economy, rising inflation, risk of recession and risks in respect of a failure to increase the U.S. debt ceiling; and
•
our ability to anticipate and identify evolving market expectations with respect to environmental, social and governance matters, including the environmental impacts of our portfolio companies' supply chains and operations.
These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
•
an economic downturn could impair our portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
•
a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;
•
interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;
28
Table of Contents
•
currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and
•
the risks, uncertainties and other factors we identify in Item 1A. Risk Factors contained in our Annual Report on Form 10-K for the period ended December 31, 2023, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (the "SEC").
We generally use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in "Risk Factors" and elsewhere in this report.
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. 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 in the future may file with the SEC, including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
SLR Private Credit BDC II LLC (the "Company," "we," "us" or "our") was formed as a limited liability company under the laws of the State of Delaware on April 18, 2022 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"), and has elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As a BDC and a RIC, we are required to comply with certain regulatory requirements, such as the requirement to invest at least 70% of our assets in "qualifying assets," source of income limitations, RIC asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.
The Adviser serves as the Company's investment adviser pursuant to an investment management agreement with the Company (as amended, restated or otherwise modified from time to time, the "Investment Management Agreement"). Subject to the overall supervision of the Company's Board of Directors (the "Board"), the Adviser is responsible for managing the Company's business and activities, including sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring the Company's investments, and monitoring the Company's portfolio companies on an ongoing basis through a team of investment professionals.
At any time prior to the end of the Company's term, subject to any requirements of the 1940 Act and applicable law, the Board may, without the approval of the holders of the Company's units ("Units"), cause the Company (or any successor entity to the Company) to be merged with and into an affiliated entity that is regulated under the 1940 Act, whose securities are listed for trading on a national securities exchange, and that will have a total net asset value of at least $1 billion immediately after the closing of such merger, subject to any limitations under the 1940 Act (an "Exchange Listing"). Prior to an Exchange Listing, the Adviser has also been appointed to provide administrative and coordination services to the Company (in such capacity, the "Administrative Coordinator"). The Administrative Coordinator supervises or provides the Company's administrative services, including operational trade support, net asset value calculations, financial reporting, fund accounting and registrar and transfer agent services. The Administrative Coordinator also provides assistance to the Adviser in connection with communicating with investors and other persons with respect to the Company.
The Company is organized for investors who may invest through one or more investment funds created by one or more financial institutions unaffiliated with the Company (collectively, the "Access Fund"). Certain other investors may also invest directly in the Company. For those investors who invest through the Access Fund, we expect the Access Fund will issue a pro rata interest to each investor in the Access Fund (the "Access Fund LPs") that, with respect to each Access Fund LP's investment in the Access Fund, corresponds to such Access Fund LP's pro rata share of the Units issued by the Company to the Access Fund. To purchase an interest in the Access Fund, each Access Fund LP will be required to represent that it is an "accredited investor" within the meaning of Rule 501(a) of Regulation D (an "Accredited Investor") promulgated under the Securities Act of 1933, as amended (the "Securities Act"). To purchase Units, investors must be Accredited Investors and "qualified purchasers" for purposes of Section 3(c)(7) of the 1940 Act, or "knowledgeable employees" or companies owned exclusively by "knowledgeable employees" for purposes of the rules promulgated under the 1940 Act. Any sale of Units outside of the United States will be conducted in accordance with Regulation S under the Securities Act. We expect the Access Fund will pass its voting rights in respect of any Units of the Company held by the Access Fund through to the Access Fund LPs.
29
Table of Contents
The Company's principal focus is to invest in first lien senior secured floating rate loans primarily to upper-middle-market leveraged companies with EBITDA between approximately $25 million and $250 million that have significant free cash flow and are in non-cyclical industries in which the Adviser has significant experience ("Sponsor Finance"). Sponsor Finance loans are generally expected to have a five-to-six-year final maturity and are often repaid within three years. In addition to Sponsor Finance loans, the Company intends to invest a significant portion of its assets in Specialty Finance (defined below) loans. The Company's specialty finance investments will encompass asset-based lending ("ABL") to asset-rich middle-market companies in a variety of industries, as well as to commercial finance companies, and life science lending ("Life Science Finance" and, together with ABL, "Specialty Finance"). ABL loans are secured by certain of the borrower's assets as collateral and requires the lender to have highly specialized experience in collateral valuation and liquidation. The ABL loans are generally expected to have a five-year final maturity with a four to five year average duration. The ABL loans are often repaid within two years. The Life Science Finance loans generally are expected to have an initial interest-only period and then straight-line amortization with a four to five year final maturity. The Company expects to primarily invest in non-investment grade debt instruments. Securities rated below investment grade are often referred to as "leveraged loans," "high yield" or "junk" securities and may be considered "high risk" compared to debt instruments that are rated investment grade. The Company also expects that some of its investments will contain delayed-draw term loan type features (which is a legally binding commitment by the Company to fund additional term loans to a borrower in the future) and/or other types of unfunded commitments. The Company will seek to be a primary lender for portfolio companies by leveraging the significant capital base at SLR for co-investment opportunities where appropriate. The Company believes many financial sponsors and individual corporate management teams are looking for a single lender to provide the entire debt financing to streamline and simplify the debt negotiation process. The Company expects to co-invest with other vehicles managed by SLR including: (i) SLR Investment Corp. (Nasdaq: SLRC), a publicly traded BDC ("SLRC"), (ii) SCP Private Credit Income BDC LLC, a private BDC ("PCI BDC"), (iii) SLR HC BDC LLC, a private BDC ("HC BDC" and, together with SLRC and PCI BDC, the "SLR BDCs"), and (iv) various private funds and separately managed accounts (together with the SLR BDCs, the "SLR Funds"). The Company and the SLR Funds are under common control with SLR.
SLR has received an Order (defined below) that permits the Company to participate in negotiated co-investment transactions with certain affiliates. If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity's investment strategy, on an alternating basis. Thus, there can be no assurance that the Company will be able to co-invest with such other funds, including as a result of legal restrictions and contractual restrictions, and, as a result, the Company may not be able to meet its investment objective. The Company believes the potential scale resulting from co-investments with vehicles managed by SLR will provide the Company a significant advantage to source loans over other lenders that do not have the capital base to provide the entire debt financing. The Company's investments in portfolio companies are referred to herein as "Portfolio Investments".
The Adviser believes the broad experience of its senior investment team is likely to enable the Adviser to successfully identify, assess and structure customized senior secured floating rate loans and to manage potential risks and returns at all stages of the economic cycle. As a private BDC, the Company is not subject to many of the regulatory limitations that govern traditional lending institutions, such as banks. This lack of regulation allows the Company to be more flexible than regulated lending institutions in selecting and structuring investments, adjusting investment criteria, transaction structures and, in some cases, the types of securities in which the Company is expected to invest. The Adviser believes financial sponsors and management teams see this flexibility as a benefit, making it an attractive financing partner. The Adviser believes that this approach is likely to enable it to procure attractive investment opportunities throughout the economic cycle so that it can make investments consistent with its stated investment objective even during turbulent periods in the capital markets.
Moreover, the Company may opportunistically seek to acquire investments in the secondary market, typically sourced on a proprietary basis (i.e., not as a participant in auctions or similar processes), in certain volatile periods at attractive entry points. In analyzing such investments, the Company will employ the same analytical process it uses for its primary investments as well as any prior knowledge of the target company.
Under normal circumstances, the Company will invest at least 80% of its total assets (defined for purposes of this policy as net assets plus borrowings for investment purposes) after the Company's portfolio is fully ramped-up in private credit investments (which the Company defines as loans, bonds, preferred stock and other credit instruments that are issued in private offerings or issued by private companies). If the Company changes this 80% test, the Company will provide unitholders of the Company ("Unitholders") with at least 60 days' prior notice of such change.
30
Table of Contents
The Adviser will seek to create a predominantly floating rate investment portfolio for the Company. For the avoidance of doubt, any investment guidelines discussed in this Quarterly Report on Form 10-Q apply to a fully ramped-up portfolio of investments (i.e., after the Company has invested substantially all of the capital available to the Company in accordance with the Company's investment strategy) and are based on total available capital, including unfunded equity commitments from our Unitholders and total expected leverage, as reasonably determined by the Adviser. There is no guarantee that the Adviser will achieve any investment guidelines discussed in this Quarterly Report on Form 10-Q, or that even if achieved, an investment in the Company will result in gains to an investor. The Company will not be required to take any action (including unwinding or liquidating any position) in the event that such guideline is exceeded subsequent to the investment date, whether as a result of changes in the market value of the Company's portfolio or otherwise.
The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and the Company may from time to time take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.
Recent Developments
None.
Revenues
The Company generates revenue primarily in the form of interest income from the securities it holds and capital gains, if any, on investment securities that it may sell. Our debt investments typically bear interest at a floating rate usually determined on the basis of a benchmark Secured Overnight Financing Rate ("SOFR"), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly. We may also generate revenue in the form of commitment, origination, structuring fees, and fees for providing managerial assistance.
The Company's principal focus is to invest in Sponsor Finance loans which will encompass first lien senior secured floating rate loans primarily to upper-middle-market leveraged companies with EBITDA between approximately $25 million and $250 million that have significant free cash flow and are in non-cyclical industries in which the Adviser has significant experience. In addition to Sponsor Finance loans, the Company intends to invest a significant portion of its assets in Specialty Finance loans. The Company's Specialty Finance investments will encompass ABL to asset-rich middle-market companies in a variety of industries, as well as to commercial finance companies, and Life Science Finance. ABL loans are secured by certain of the borrower's assets as collateral and require the lender to have highly specialized experience in collateral valuation and liquidation. The Company will seek to leverage the significant capital base of the SLR platform to co-invest alongside other SLR managed investment vehicles enabling the Company to participate in larger, more attractive upper-middle-market financings and have more control over structuring through greater ownership of a financing tranche.
Expenses
The Company (directly or indirectly) bears:
(i)
all of its fees, costs, expenses and liabilities, all of its investment-related fees, costs, expenses and liabilities (including with respect to amounts incurred prior to the Company's initial closing) and all of its other operating fees, costs, expenses and liabilities, including all fees, due diligence costs and other fees, costs, expenses and liabilities related to the identification, sourcing, evaluation, pursuit, acquisition, holding, appraisals, asset management, restructuring and disposing of investments, including all reasonable travel-related fees, costs, expenses and liabilities (such as lodging and meals), all fees, costs, expenses and liabilities of legal counsel and financial and other advisers incurred in connection therewith, all fees, costs, expenses and liabilities of information technology services relating to the ongoing management of investments, and all other investment-related fees, costs, expenses and liabilities (to the extent not reimbursed by the relevant portfolio company);
(ii)
all fees, costs, expenses and liabilities related to any audits or agreed upon procedures, tax forms and return preparations and filings, custodian fees and expenses, fund accounting, administrator services, financial statement preparation and reporting, web services for the benefit of Unitholders, delivery costs and expenses in connection with reporting obligations and communications and compliance services;
(iii)
all fees, costs, expenses and liabilities relating to insurance policies (including director and officer liability insurance) maintained by or for the Company, including in respect of Portfolio Investments and/or personnel of the Adviser, the Adviser in its capacity as Administrative Coordinator and their affiliates;
(iv)
other administrative fees, costs and liabilities;
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(v)
all fees, costs, expenses and liabilities of brokers, transaction finders and other intermediaries, including brokerage commissions and spreads, and all other transaction-related fees, costs, expenses and liabilities, including reverse break-up fees;
(vi)
all fees, costs, expenses and liabilities relating to derivatives and hedging transactions;
(vii)
all principal amounts of, and interest expense on, borrowings and guarantees, and all other fees, costs, expenses and liabilities arising out of borrowings and guarantees, including the arranging and maintenance thereof, whether incurred by the Company or incurred or facilitated by a special purpose vehicle that makes Portfolio Investments;
(viii)
management fees and incentive fees;
(ix)
administration expenses;
(x)
all fees, costs, expenses and liabilities incurred through the use or engagement of service providers;
(xi)
all taxes, fees, penalties and other governmental charges levied against the Company and all fees, costs, expenses, penalties and liabilities related to tax compliance;
(xii)
all fees, costs, expenses and liabilities of the Company's legal counsel related to extraordinary matters, including expenses for any dispute resolution (including litigation and regulatory-related legal expenses);
(xiii)
all fees, costs, expenses and liabilities relating to legal, governance and regulatory compliance and filings, including securities law filings relating to Portfolio Investments;
(xiv)
all fees, costs, expenses and liabilities related to the Company's indemnification or contribution obligations;
(xv)
all fees, costs, expenses and liabilities for subscription services (to the extent such subscription is required by a placement agent);
(xvi)
any required regulatory filings and related legal fees;
(xvii)
all fees, costs, expenses and liabilities related to liquidating the Company;
(xviii)
transfer agent services;
(xix)
any other fees, costs, expenses and liabilities not specifically assumed by the Adviser or the Administrative Coordinator;
(xx)
all fees, costs, expenses and liabilities of the Company's independent directors, including resources retained by the independent directors, or on their behalf, while representing and/or acting on behalf of all Unitholders; and
(xxi)
all fees, costs, expenses and liabilities related to an Exchange Listing (including any transactions effectuated in connection therewith) or other business combination.
In addition, prior to an Exchange Listing, the aggregate amount of the operating expenses relating to Unitholders investing directly in the Company set forth in clauses (ii)-(iv) and the operating expenses included in clauses (xiii) and (xvi) related to U.S. regulatory bodies above borne by the Company (directly or indirectly) will not exceed the following limits in any fiscal year: (A) if the Company has less than or equal to $400 million in capital commitments ("Commitments"), an amount equal to the sum of (x) the product of the Commitments and 0.0025 and (y) $1.25 million, or (B) if the Company has greater than $400 million in Commitments, $2.25 million (such figure, the "Operating Expense Cap"). Any amount in excess of the Operating Expense Cap for any fiscal year will be paid by the Adviser. Solely by way of example, if Commitments equal $350 million, the Operating Expense Cap will be equal to $2.125 million. For the avoidance of doubt, (i) the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder or in connection with (xxi) above, (ii) the Company will not bear the costs of any third-party valuation agent engaged solely for purposes of valuing the Portfolio Investments at each quarter end and (iii) the Operating Expense Cap will no longer apply upon the effectuation of an Exchange Listing.
The Adviser or Administrative Coordinator and/or their affiliates may advance to the Company organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company (the "Organizational Expenses"). The Adviser or Administrative Coordinator (or such affiliate) will be reimbursed by the Company for such advanced expenses in an amount not to exceed $0.5 million. The Company will be responsible for and pay (or reimburse) the Organizational Expenses subject to the cap described in the preceding sentence.
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Accordingly, $0.1 million of offering expenses were charged to capital and $0.1 million of organizational costs were expensed in 2023.
Portfolio and Investment Activity
During the three months ended September 30, 2024, we invested $6.2 million across 14 portfolio companies. This compares to investing $5.6 million across 7 portfolio companies during the three months ended September 30, 2023. Investments sold or prepaid during the three months ended September 30, 2024 totaled $3.3 million. Investments sold or prepaid during the three months ended September 30, 2023 were de minimis.
At September 30, 2024, our portfolio consisted of 32 portfolio companies and was invested 100% directly in senior secured loans, versus 9 portfolio companies invested >99.9% directly in senior secured loans and <0.1% in warrants at September 30, 2023, in each case measured at fair value.
At September 30, 2024 and September 30, 2023, 100% of our income producing investment portfolio was floating rate, measured at fair value.
Critical Accounting Policies
The preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP") requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods covered by such consolidated financial statements. Actual results could materially differ from those estimates, which the Company evaluates on an ongoing basis. The Company has identified the following items as critical accounting policies. The Company will disclose these and any other critical accounting policies in the notes to its future consolidated financial statements.
Valuation of Portfolio Investments
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act addressing fair valuation of fund investments. The rule sets forth requirements for good faith determinations of fair value, as well as for the performance of fair value determinations, including related oversight and reporting obligations. The rule also defines "readily available market quotations" for purposes of the definition of "value" under the 1940 Act, and the SEC noted that this definition will apply in all contexts under the 1940 Act. The Company complies with the Rule 2a-5 valuation requirements.
The Company conducts the valuation of its assets, pursuant to which the Company's net asset value (the "NAV") is determined, at all times consistent with GAAP and the 1940 Act. The Board will (1) periodically assess and manage valuation risks; (2) establish and apply fair value methodologies; (3) test fair value methodologies; (4) oversee and evaluate third-party pricing services, as applicable; (5) oversee the reporting required by Rule 2a-5 under the 1940 Act; and (6) maintain recordkeeping requirements under Rule 2a-5.
It is anticipated that in respect of many of the Company's assets, readily available market quotations will not be obtainable and that such assets will be valued at fair value. A market quotation is readily available for a security only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the Company can access at the measurement date, provided that a quotation will not be readily available if it is not reliable. If the Company anticipates using a market quotation for a security, it will also monitor for circumstances that may necessitate the use of fair value, such as significant events that may cause concern over the reliability of a market quotation.
For purposes of calculating the NAV, the Company's assets will generally be valued as described in Note 2(b) to the Company's consolidated financial statements.
Hedging
We may, but are not required to, enter into interest rate, foreign exchange or other derivative agreements to hedge interest rate, currency, credit or other risks, but we do not generally intend to enter into any such derivative agreements for speculative purposes. Any derivative agreements entered into for speculative purposes are not expected to be material to the Company's business or results of operations. These hedging activities, which will be in compliance with applicable legal and regulatory requirements, may include
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the use of futures, options and forward contracts. We will bear the costs incurred in connection with entering into, administering and settling any such derivative contracts. There can be no assurance any hedging strategy we employ will be successful.
Leverage
The Company is required to comply with the asset coverage requirements of the 1940 Act. The Company expects to employ leverage and otherwise expects to incur indebtedness with respect to its portfolio both on a recourse and non-recourse basis (including and potentially through guarantees, derivatives, forward commitments and reverse repurchase agreements), but will not exceed the maximum amount permitted by the 1940 Act. The Company is generally permitted, under specified conditions, to issue senior securities in amounts such that the Company's asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after such issuance. In connection with the organization of the Company, the Adviser, as the initial Unitholder, has authorized the Company to adopt the 150% asset coverage ratio. In connection with their subscriptions for Units, our Unitholders are required to acknowledge the Company's ability to operate with an asset coverage ratio that may be as low as 150%. The Company (either directly or through a wholly-owned subsidiary) is permitted to borrow under a commitment-based subscription credit facility and/or a revolving credit facility that is secured by the Company's assets and, as a result, the Company will be exposed to the risks of leverage, which may be considered a speculative investment technique. See "Financial Condition, Liquidity and Capital Resources - Debt" below for more information regarding the Company's commitment-based subscription credit facility. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to the Adviser, will be borne by our Unitholders. As of September 30, 2024, the Company had $24.2 million of senior securities, for an asset coverage ratio of 161.1%.
Subsidiaries
We expect that any wholly-owned subsidiaries through which we make investments will be organized as corporations or limited liability companies and will not be registered under the 1940 Act. Such subsidiaries may be formed to obtain favorable tax benefits or to obtain financing on favorable terms due to their bankruptcy-remote characteristics. The Board has oversight responsibility for the Company's investment activities, including the Company's investment in subsidiaries, and the Company's role as sole stockholder of any subsidiary. To the extent applicable to the investment activities of a subsidiary, the subsidiary would follow the same compliance policies and procedures as the Company. The Company would "look through" any such subsidiary to determine compliance with its investment policies, and would generally expect to consolidate any such wholly-owned subsidiary for purposes of the Company's financial statements and compliance with the 1940 Act. Furthermore, the Company intends to comply with the current requirements under the Code and U.S. Treasury regulations for income derived from the Company's investment in the subsidiary to be treated as "qualifying income" from which a RIC must derive at least 90% of its annual gross income. As of September 30, 2024, the Company held investments through one wholly-owned financing subsidiary, SLR Private Credit BDC II SPV LLC.
Taxation as a Regulated Investment Company
The Company has elected to be treated as a RIC under Subchapter M of the Code and intends to qualify for taxation as a RIC annually thereafter. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it timely distributes to Unitholders as dividends. In order to qualify for taxation as a RIC, the Company is required, among other things, to be diversified at each quarter end and to timely distribute to its Unitholders at least 90% of investment company taxable income, as defined by the Code, for each year. There is no guarantee the Company will be able to maintain its status as a RIC. Depending on the level of taxable income earned in a given tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company will accrue an estimated excise tax, if any, on estimated excess taxable income.
Results of Operations
Results are shown below for the three and nine months ended September 30, 2024, the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023:
Investment Income
For the three and nine months ended September 30, 2024, gross investment income totaled $1.2 million and $3.2 million, respectively. For the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023, gross investment income totaled $0.1 million and $0.2 million, respectively. The increase in gross investment income for the year over year period was primarily due to an increase in the size of the income-producing portfolio.
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Expenses
Expenses totaled $0.9 million and $2.5 million, respectively, for the three and nine months ended September 30, 2024 of which $0.1 million and $0.3 million, respectively, were management fees and administration fees and $0.6 million and $1.7 million, respectively, were interest and other credit facility expenses. Administrative services, organization and other general and administrative expenses totaled $0.2 million and $0.5 million, respectively, for the three and nine months ended September 30, 2024. Expenses totaled $0.5 million and $1.2 million, respectively, for the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023, of which $48 thousand and $59 thousand, respectively, were management fees and administration fees and $0.2 million and $0.3 million, respectively, were interest and other credit facility expenses. Administrative services, organization and other general and administrative expenses totaled $0.2 million and $0.8 million, respectively, for the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023. Expenses generally consist of management fees, administration fees, performance-based incentive fees, administrative services fees, insurance, legal expenses, directors' expenses, audit and tax expenses and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The comparative increase in expenses is generally due to increased borrowing to fund a larger portfolio, along with growth in fees deriving from the larger amount of capital drawn year over year, partially offset by the absence of non-recurring organizational and other start-up costs in the most recent periods.
Net Investment Income (Loss)
The Company's net investment income totaled $0.3 million and $0.7 million, or $0.37 and $0.88 per average Unit, respectively, for the three and nine months ended September 30, 2024. The Company's net investment loss totaled $0.3 million and $1.0 million, or $2.55 and $8.17 per average unit, respectively, for the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023.
Net Realized Gain (Loss)
The Company's investment sales and prepayments for the three and nine months ended September 30, 2024 were $3.3 million and $6.9 million, respectively. Net realized gain over the same periods was $4 thousand and $3 thousand, respectively. The realized gain for these periods was primarily due to the exit of our investment in Vertos Medical, Inc. The Company's investment sales and prepayments for the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023 were de minimis. Net realized loss over the same periods was de minimis.
Net Change in Unrealized Gain (Loss)
For the three and nine months ended September 30, 2024, net change in unrealized gain on the Company's assets totaled $0.3 million and $0.5 million, respectively. Net unrealized gain for the three months ended September 30, 2024 was primarily due to appreciation on our investments in Outset Medical, Inc., Western Veterinary Partners, LLC and Human Interest, Inc., among others, partially offset by depreciation on our investment in Alkeme Intermediary Holdings, LLC, among others. Net unrealized gain for the nine months ended September 30, 2024 was primarily due to appreciation on our investments in Outset Medical, Inc., Apex Service Partners, LLC and Retina Midco, Inc., among others, partially offset by depreciation on our investment in Alkeme Intermediary Holdings, LLC, among others. For the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023, net change in unrealized gain on the Company's assets totaled $17 thousand and $16 thousand, respectively. Net unrealized gain for both measurement periods was primarily due to appreciation on our investment in United Digestive MSO Parent, LLC.
Net Increase (Decrease) in Unitholders' Capital Resulting From Operations
For the three and nine months ended September 30, 2024, the Company had a net increase in Unitholders' capital resulting from operations of $0.6 million and $1.2 million, respectively. For the same periods, net income per average Unit was $0.70 and $1.58, respectively. For the three months ended September 30, 2023 and the period January 18, 2023 (commencement of operations) to September 30, 2023, the Company had a net decrease in Unitholders' capital resulting from operations of $0.3 million and $1.0 million, respectively. For the same periods, loss per average unit was $2.42 and $8.04, respectively.
Financial Condition, Liquidity and Capital Resources
Our primary uses of cash are for (i) investments in portfolio companies and other investments to comply with certain portfolio RIC diversification requirements, (ii) the cost of operations (including paying the Adviser), (iii) debt service of any borrowings, and (iv) cash distributions to our Unitholders.
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Equity
During the period January 18, 2023 (commencement of operations) to September 30, 2024, on a net basis, the Company sold and issued 902,038 Units at an average price of $17.07 per Unit, for net proceeds of $15.4 million. All of our outstanding Units were issued and sold in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act. Unfunded equity capital commitments totaled $51.4 million at September 30, 2024.
Debt
SPV Facility-On December 12, 2023, the Company, through its wholly-owned subsidiary, SLR Private Credit BDC II SPV LLC (the "SPV"), entered into a $25 million revolving credit facility with Citibank, N.A. acting as administrative agent (the "SPV Facility"). Effective with an amendment on July 10, 2024, the stated interest rate on the SPV Facility is Term SOFR plus 2.70% with no SOFR floor requirement, and the final maturity date is December 12, 2028. The fee on undrawn commitments is currently 0.50%. The SPV Facility is secured by all of the assets held by the SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV Facility also includes usual and customary events of default for credit facilities of this nature. As of September 30, 2024, there were $11.1 million of borrowings outstanding under the SPV Facility.
Subscription Facility-On March 20, 2023, the Company established a $25 million revolving credit facility with ING Capital LLC as administrative agent and lender (the "Subscription Facility"). The stated interest rate on the Subscription Facility is SOFR plus 2.75-3.00%, and the current stated maturity date is March 20, 2025. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. As of September 30, 2024, there were $13.1 million of borrowings outstanding under the Subscription Facility.
Cash Equivalents
We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose are excluded for purposes of computing the asset base upon which the management fee is determined. We held no cash equivalents as of September 30, 2024.
Contractual Obligations
We have entered into certain contracts under which we have material future commitments. We have entered into the Investment Management Agreement with the Adviser in accordance with the 1940 Act. Pursuant to the Investment Management Agreement we have entered into with the Adviser, we intend to pay the Adviser certain management and incentive fees prior to and following an Exchange Listing. Prior to an Exchange Listing, we intend to pay the Adviser, in its capacity as Administrative Coordinator, the Pre-Exchange Listing Administration Fee (as defined in Note 3) for administrative and coordination services. Following an Exchange Listing, the Company intends to enter into a separate administration agreement with an affiliate pursuant to which administrative services would be provided to the Company, as described further below. The Pre-Exchange Listing Administration Fee will not offset any fees paid to the Adviser. Under the Investment Management Agreement, prior to an Exchange Listing, the Administrative Coordinator may engage or delegate certain administrative functions to third parties or affiliates on behalf of the Company. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine, non-investment-related administrative services for the Company, (ii) the coordination of various third-party services needed or required by the Company, and (iii) certain Unitholder servicing functions.
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A summary of our significant contractual payment obligations is as follows as of September 30, 2024:
|
Payments due by Period as of September 30, 2024 |
||||||||||||||||||||
|
Total |
Less than |
1-3 years |
3-5 years |
More than |
||||||||||||||||
|
Credit facilities (1) |
$ |
24.2 |
$ |
13.1 |
$ |
- |
$ |
11.1 |
$ |
- |
(1)
At September 30, 2024, we had a total of $25.8 million of unused borrowing capacity under our credit facilities, subject to borrowing base limits.
If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under the Investment Management Agreement. Any new investment advisory agreement would also be subject to approval by our Unitholders.
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Off-Balance Sheet Arrangements
From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company's liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments at September 30, 2024 and December 31, 2023:
|
September 30, |
December 31, |
|||||||
|
(in millions) |
||||||||
|
Arcutis Biotherapeutics, Inc. |
$ |
3.2 |
$ |
- |
||||
|
Plastic Management, LLC |
2.2 |
- |
||||||
|
Southern Orthodontics Partners Management, LLC |
1.5 |
- |
||||||
|
Cerapedics, Inc. |
1.1 |
1.5 |
||||||
|
AAH Topco, LLC |
1.0 |
1.8 |
||||||
|
Western Veterinary Partners LLC |
0.9 |
- |
||||||
|
CVAUSA Management, LLC |
0.7 |
0.7 |
||||||
|
Legacy Service Partners, LLC |
0.6 |
1.2 |
||||||
|
World Insurance Associates, LLC |
0.6 |
0.8 |
||||||
|
SPR Therapeutics, Inc. |
0.5 |
- |
||||||
|
Quantcast Corporation |
0.4 |
- |
||||||
|
West-NR Parent, Inc. |
0.4 |
0.4 |
||||||
|
FE Advance, LLC |
0.3 |
- |
||||||
|
The Townsend Company, LLC |
0.3 |
0.3 |
||||||
|
United Digestive MSO Parent, LLC |
0.2 |
0.3 |
||||||
|
OIS Management Services, LLC |
0.2 |
1.4 |
||||||
|
Medrina, LLC |
0.2 |
0.2 |
||||||
|
Alkeme Intermediary Holdings, LLC |
0.1 |
0.7 |
||||||
|
Crewline Buyer, Inc. |
0.1 |
0.1 |
||||||
|
Exactcare Parent, Inc. |
0.1 |
0.1 |
||||||
|
WCI-BXC Purchaser, LLC |
0.1 |
0.1 |
||||||
|
MRI Software LLC |
0.1 |
0.1 |
||||||
|
Apex Service Partners, LLC |
- |
0.3 |
||||||
|
Nexus Intermediate III, LLC |
- |
- |
||||||
|
AMF Levered II, LLC |
- |
3.1 |
||||||
|
Outset Medical, Inc. |
- |
3.1 |
||||||
|
Human Interest, Inc. |
- |
1.0 |
||||||
|
Retina Midco, Inc. |
- |
0.8 |
||||||
|
Ardelyx, Inc. |
- |
0.7 |
||||||
|
Peter C. Foy & Associates Insurance Services, LLC |
- |
0.4 |
||||||
|
Toptal, LLC |
- |
0.3 |
||||||
|
Vertos Medical, Inc. |
- |
0.2 |
||||||
|
UVP Management, LLC |
- |
0.2 |
||||||
|
Total Commitments |
$ |
14.8 |
$ |
19.8 |
The credit agreements governing the above loan commitments contain customary lending provisions and/or are subject to the respective portfolio company's achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of September 30, 2024 and December 31, 2023, the Company had sufficient cash available and/or liquid securities available to fund its commitments and had reviewed them for any appropriate fair value adjustment.
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Distributions
Tax characteristics of all distributions will be reported to Unitholders on Form 1099 after the end of the calendar year. Future quarterly distributions, if any, will be determined by our Board. We expect that our distributions to Unitholders will generally be from accumulated net investment income, net realized capital gains or non-taxable return of capital, if any, as applicable.
We have elected to be treated as a RIC under Subchapter M of the Code and intend to qualify for taxation as a RIC annually thereafter. To maintain our RIC tax treatment, we must distribute 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, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facilities may limit our ability to declare distributions if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a RIC. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind income, which represents contractual income added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC.
With respect to the distributions to Unitholders, income from origination, structuring and closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly distributed to Unitholders.
Related Parties
We have entered into the Investment Management Agreement with the Adviser pursuant to which we pay management fees, administrative coordinator fees and incentive fees to the Adviser. The Board held a virtual meeting on August 2, 2022 to consider and approve the Investment Management Agreement and related matters. In reliance on certain exemptive relief provided by the SEC, the Board ratified the approval of the Investment Management Agreement at its next in-person meeting held on November 6, 2023. Subject to certain restrictions, the Investment Management Agreement will remain in effect for a period of two years from January 27, 2023, the date it first became effective, and will remain in effect from year to year thereafter if approved annually by a majority of the Board, including a majority of independent directors, or by the holders of a majority of our outstanding voting securities until terminated by the Company, or by the Adviser, upon 60 days' prior written notice.
Mr. Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, and Mr. Bruce J. Spohler, our Co-Chief Executive Officer, Chief Operating Officer and board member, are managing members and senior investment professionals of, and have financial and controlling interests in, the Adviser. In addition, Mr. Shiraz Y. Kajee, our Chief Financial Officer and Treasurer, serves as the Chief Financial Officer for the Adviser, and Mr. Guy F. Talarico, our Chief Compliance Officer and Secretary, serves as Partner, General Counsel and Chief Compliance Officer for the Adviser. The Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole or in part, with ours. For example, the Adviser presently serves as investment adviser to SLR Investment Corp., a publicly traded BDC, which focuses on investing in senior secured loans, including financing leases and, to a lesser extent, unsecured loans and equity securities, SCP Private Credit Income BDC LLC, an unlisted BDC that focuses on investing primarily in senior secured loans, including non-traditional asset-based loans and first lien loans, and SLR HC BDC LLC, an unlisted BDC whose principal focus is to invest directly and indirectly in senior secured loans and other debt instruments typically to middle-market companies within the healthcare industry. In addition, Mr. Gross, our Chairman, Co-Chief Executive Officer and President, Mr. Spohler, our Co-Chief Executive Officer, Chief Operating Officer and board member, Mr. Kajee, our Chief Financial Officer and Treasurer, and Mr. Talarico, our Chief Compliance Officer and Secretary, serve in similar capacities for SLR Investment Corp., SCP Private Credit Income BDC LLC and SLR HC BDC LLC. The Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Adviser or its affiliates may determine that we
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should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Adviser's allocation procedures. On June 13, 2017, the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company's investment objective, positions, policies, strategies and restrictions, as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the "Order"). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity's investment strategy, on an alternating basis. Although the Adviser's investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its Unitholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers and directors and members of the Adviser. In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware Limited Liability Company Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. Uncertainty with respect to rising interest rates, inflationary pressures, risks in respect of a failure to increase the U.S. debt ceiling or a downgrade in the U.S. credit rating, the war between Ukraine and Russia, certain regional bank failures, an inflationary environment, the ongoing war in the Middle East and health epidemics and pandemics introduced significant volatility in the financial markets, and the effects of this volatility have materially impacted and could continue to materially impact our market risks. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In a low interest rate environment, including a reduction of SOFR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. Conversely, in a rising interest rate environment, such difference could potentially increase thereby increasing our net investment income. During the nine months ended September 30, 2024, certain investments in our investment portfolio had floating interest rates. These floating rate investments were primarily based on floating SOFR and typically have durations of one to three months after which they reset to current market interest rates. Additionally, some of these investments have floors. The Company also has revolving credit facilities that are generally based on floating SOFR. Assuming no changes to our balance sheet as of September 30, 2024 and no new defaults by portfolio companies, a hypothetical one percent decrease in SOFR on our comprehensive floating rate assets and liabilities would decrease our net investment income by approximately thirteen cents per average Unit over the next twelve months. Assuming no changes to our balance sheet as of September 30, 2024 and no new defaults by portfolio companies, a hypothetical one percent increase in SOFR on our comprehensive floating rate assets and liabilities would increase our net investment income by approximately fourteen cents per average Unit over the next twelve months. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options, swaps and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in any benefits of certain changes in interest rates with respect to our portfolio of investments. At September 30, 2024, we had no interest rate hedging instruments outstanding on our balance sheet.
|
Increase (Decrease) in SOFR |
(1.00 |
%) |
1.00 |
% |
||||
|
Increase (Decrease) in Net Investment Income Per Unit Per Year |
$ |
(0.13 |
) |
$ |
0.14 |
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2024 (the end of the period covered by this report), our management, including our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Based on that evaluation, our management, including our Co-Chief Executive Officers and Chief Financial Officer, concluded, as of September 30, 2024, that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can
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provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b) Changes in Internal Control Over Financial Reporting
Management has not identified any change in the Company's internal control over financial reporting that occurred during the third quarter of 2024 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our consolidated subsidiary are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us or our consolidated subsidiary. From time to time, we and our consolidated subsidiary may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in "Risk Factors" in the February 27, 2024 filing of our Annual Report on Form 10-K, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Other than the risk factor below, there have been no material changes during the nine months ended September 30, 2024 to the risk factors discussed in "Risk Factors" in the February 27, 2024 filing of our Annual Report on Form 10-K.
General Economic and Market Risk. The value of the Company's investments could be affected by factors affecting the economy and securities markets generally, such as real or perceived adverse economic conditions, supply and demand for particular instruments, changes in the general outlook for certain markets or corporate earnings, interest rates, announcements of political information or adverse investor sentiment generally. The market values of the Company's investments may decline for a number of reasons, including increases in defaults resulting from changes in overall economic conditions and widening of credit spreads. Unfavorable market conditions may also increase funding costs, limit access to the capital markets or result in credit terms changing or credit becoming unavailable. These events could have an adverse effect on the Company's investments and the Company's overall performance.
Various social and political circumstances in the U.S. and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics) may also contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide. Such events, including rising trade tensions between the United States and China, other uncertainties regarding actual and potential shifts in U.S. and foreign, trade, economic and other policies with other countries, the large-scale invasion of Ukraine by Russia that began in February 2022 and resulting sanctions or other restrictive actions that the United States and other countries have imposed against Russia, the COVID-19 pandemic, certain regional bank failures, an inflationary environment and the ongoing war in the Middle East, could adversely affect our business, financial condition or results of operations. These market and economic disruptions could negatively impact the operating results of the Portfolio Investments.
Additionally, the Federal Reserve raised the federal funds rate in 2022 and 2023. While the Federal Reserve cut its benchmark rate in the third quarter of 2024 for the first time since March 2020 and indicated that there may be additional rate cuts in 2024, future reductions to benchmark rates are not certain. Additionally, there can be no assurance that the Federal Reserve will not return to making upwards adjustments to the federal funds rate in the future. These developments, along with the United States government's credit and deficit concerns, global economic uncertainties and market volatility and the impacts of COVID-19, could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets and capital markets on favorable terms.
Continuing market uncertainty may have a significant impact on the business of the Company. Among other things, the level of investment opportunities may decline from the Adviser's current expectations. One possible consequence is that the Company may take a longer than anticipated period to invest capital and/or the Company may be relatively concentrated in a limited number of
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investments. Consequently, during this period, the returns (if any) realized by Unitholders may be substantially adversely affected by the unfavorable performance of a small number of these investments. Furthermore, market conditions may unfavorably impact the Company's ability to secure leverage on terms as favorable as more established borrowers in the market, or to obtain any leverage on commercially favorable terms. To the extent the Company is able to secure financing for investments, increases in interest rates or in the risk spread demanded by financing sources would make the use of leverage more expensive and could limit the Company's ability to structure and consummate its investments. Although the Adviser believes that recent market dislocations will result in attractive investment opportunities, the Company may not be able to time the acquisition or disposition of its investments correctly, which could result in further depreciation in values.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities other than those already disclosed in certain Form 8-Ks filed with the SEC.
Item 3. DefaultsUpon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) under the Exchange Act or any "non-Rule 10b5-1 trading arrangement" as defined in Item 408(c) of Regulation S-K.
Item 6.Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
|
3.1 |
||
|
3.2 |
||
|
4.1 |
||
|
14.1 |
Code of Business Conduct* |
|
|
19.1 |
Joint Code of Ethics and Insider Trading Policy* |
|
|
31.1 |
Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.* |
|
|
31.2 |
Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.* |
|
|
31.3 |
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.* |
|
|
32.1 |
Certification of Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
32.2 |
Certification of Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
32.3 |
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** |
|
|
101.INS |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document* |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents* |
|
|
104 |
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document* |
* Filed herewith.
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** Furnished herewith.
(1)
Previously filed as an exhibit to the Registrant's Registration Statement on Form 10 (File No. 000-56518) filed with the SEC on February 1, 2023.
(2)
Previously filed as an exhibit to Amendment No. 1 to the Registrant's Registration Statement on Form 10 (File No. 000-56518) filed with the SEC on March 31, 2023.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 6, 2024.
|
SLR PRIVATE CREDIT BDC II LLC |
|
|
By: |
/s/ MICHAEL S. GROSS |
|
Michael S. Gross Co-Chief Executive Officer (Principal Executive Officer) |
|
|
By: |
/s/ BRUCE J. SPOHLER |
|
Bruce J. Spohler Co-Chief Executive Officer (Principal Executive Officer) |
|
By: |
/s/ SHIRAZ Y. KAJEE |
|
Shiraz Y. Kajee Chief Financial Officer (Principal Financial and Accounting Officer) |
44