Lafayette Square USA Inc.

11/07/2024 | Press release | Distributed by Public on 11/07/2024 14:23

Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

ls-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2024
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______ to______
Commission File Number 814-01427
LAFAYETTE SQUARE USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-2807075
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
175 SW 7th St, Unit 2307
Miami, FL 33130
(Address of principal executive offices)
(786) 753-7096
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol
Name of each exchange on which registered
None
None
None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Common Stock, par value $0.001 per share
(Title of class)
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 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 November 7, 2024 the Registrant had 23,797,438 shares of common stock, $0.001 par value per share, outstanding.
Table of Contents
Page
Cautionary Statement Regarding Forward-Looking Statements
1
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, 2024and 2023(unaudited)
4
Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2024and 2023(unaudited)
6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2024and 2023(unaudited)
8
Consolidated Schedule of Investments as of September 30, 2024(unaudited) and December 31, 2023
10
Notes to Consolidated Financial Statements (unaudited)
17
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
46
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
69
Item 4.
Controls and Procedures
71
Part II. Other Information
Item 1.
Legal Proceedings
72
Item 1A.
Risk Factors
72
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
72
Item 3.
Defaults Upon Senior Securities
72
Item 4.
Mine Safety Disclosures
72
Item 5.
Other Information
72
Item 6.
Exhibits
72
SIGNATURES
73
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Lafayette Square USA, Inc.
Cautionary Statement Regarding Forward-Looking Statements
This report contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Lafayette Square USA, Inc., together with its consolidated subsidiaries ("we," "us," "our," or the "Company"), our prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as " anticipates," " expects," " intends," " plans," "will," "may," " continue," " believes," " seeks," " estimates," "would," " could," " should," " targets," " projects," " outlook," " potential," " predicts" and variations of these words and similar expressions are intended to identify forward-looking statements. 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:
•our business prospects and the prospects of the companies in which we may invest;
•our ability to raise sufficient capital to execute our investment strategy;
•the impact of economic recessions or downturns could harm our operating results;
•price inflation and changes in the general interest rate environment, which could adversely affect the operating results of our portfolio companies and impact their ability to pay interest and principal on our loans;
•general economic and political trends and other external factors, including the impact of any future pandemic or epidemic;
•heightened global political and economic uncertainty caused by war, social unrest and political tension;
•the demand from middle market businesses for capital investment and managerial assistance;
•our ability to create and preserve jobs and stimulate the economy;
•the ability of our portfolio companies to achieve their objectives;
•our expected financing arrangements and expected investments;
•changes in the general interest rate environment, including recent increases in interest rates;
•the adequacy of our cash resources, financing sources and working capital;
•the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with LS BDC Adviser, LLC (the "Adviser") or any of its affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we invest;
•our use of financial leverage;
•the ability of the Adviser to source suitable investments for us and to monitor and administer our investments;
•the ability of the Adviser or its affiliates to attract and retain highly talented professionals;
•the impact on our business of U.S. and international financial reform legislation, rules and regulations;
•the effect of changes to tax legislation and our tax position;
•the impact of information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks;
•the ability of our subsidiaries to maintain their small business investment companies licenses from the Small Business Administration (the "SBA"), like the license for a small business investment company ("SBIC")
1
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currently held by Lafayette Square SBIC, LP and the license for a specialized small business investment company ("SSBIC") currently held by Lafayette Square SSBIC, LP, and the potential benefits from having such licenses;
•our ability to adhere to or meet our goals, including our 2030 Goals (as defined herein);
•our ability to deploy at least 51% of our invested capital with working class communities;
•our ability to improve the retention, well-being, and productivity of employees in our portfolio companies;
•our ability to enhance the risk-adjusted financial returns of our portfolio companies;
•our ability to convince our portfolio companies to use our services platform, Worker Solutions®;
•our ability to reduce employee turnover and increase median income of employees within our portfolio companies;
•our ability to encourage and increase participation in medical care benefits and retirement benefits by employees within our portfolio companies;
•the likelihood that the federal government will expand its partnerships with the private sector, including through programs aligned with our 2030 Goals; and
•our ability to qualify for and maintain our qualification as a regulated investment company (a "RIC") and as a business development company (a "BDC").
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of any projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. Moreover, we assume no duty and do not undertake to update the forward-looking statements, except as required by applicable law. Because we are an investment company, the forward-looking statements and projections contained in this report are excluded from the safe harbor protection provided by Section 21E of the U.S. Securities Exchange Act of 1934 Act, as amended (the "Exchange Act").
2
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Lafayette Square USA, Inc.
Consolidated Statements of Assets and Liabilities
(dollar amounts in thousands, except per share data or otherwise noted)
September 30, 2024 December 31, 2023
(unaudited)
Assets
Investments, at fair value:
Non-controlled/non-affiliated investments at fair value (amortized cost of $434,166 and $244,442 as of September 30, 2024 and December 31, 2023, respectively)
$ 433,974 $ 246,342
Non-controlled/affiliated investments at fair value (amortized cost of $26,936 and $27,081 as of September 30, 2024 and December 31, 2023, respectively)
27,180 27,251
Cash and cash equivalents 216,880 109,771
Deferred financing costs 7,234 1,094
Interest receivable 1,797 961
Due from affiliate 130 -
Other assets 1,214 407
Total assets $ 688,409 $ 385,826
Liabilities
SBA-guaranteed debentures (see Note 5) $ 165,005 $ 31,000
Secured borrowings (see Note 5) 147,000 27,500
Reverse repurchase agreement (see Note 5) 10,996 -
Distributions payable 7,460 3,937
Deferred revenue payable 4,404 -
Incentive fee payable (see Note 6) 1,312 565
Accounts payable and accrued expenses 1,105 1,277
Management fee payable (see Note 6) 1,147 605
Interest and financing payable 789 695
Income tax payable 156 -
Due to affiliate 97 123
Administrative services fee payable (see Note 6) - 885
Total liabilities 339,471 66,587
Commitments and Contingencies (See Note 7)
Net assets
Preferred stock, par value $0.001 per share (50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2024 and December 31, 2023)
- -
Common stock, par value $0.001 per share (450,000,000 shares authorized, 23,633,167 and 21,502,768 shares issued and outstanding as of September 30, 2024 and December 31, 2023, respectively)
24 22
Paid-in capital in excess of par 349,095 317,677
Distributable earnings (losses) (181) 1,540
Total net assets 348,938 319,239
Total liabilities and net assets $ 688,409 $ 385,826
Net asset value per common share $ 14.76 $ 14.85
The accompanying notes are an integral part of these consolidated financial statements.
3
Lafayette Square USA, Inc.
Consolidated Statements of Operations
(dollar amounts in thousands, except per share data or otherwise noted)
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
(unaudited) (unaudited) (unaudited) (unaudited)
Investment Income:
Interest income from non-controlled/non-affiliated investments:
Cash $ 13,813 $ 4,139 $ 33,372 $ 9,784
Fee income 219 18 706 28
Interest income from non-controlled/affiliated investments:
Cash 14 860 1,604 2,250
Fee income - - 66 -
Interest from cash and cash equivalents 518 724 2,271 1,269
Total investment income 14,564 5,741 38,019 13,331
Expenses:
Interest and financing expenses (see Note 5) $ 2,714 $ 307 $ 5,261 $ 1,193
Incentive fee (see Note 6) 1,312 535 3,694 1,050
Management fee (see Note 6) 1,147 431 2,761 1,035
General and administrative expenses 346 601 1,449 1,922
Administrative services fee (see Note 6) 500 251 1,506 600
Legal fees 366 - 929 -
Professional fees 349 449 757 851
Income tax expense 236 - 236 -
Directors' fees 80 80 240 240
Placement fees 64 - 216 -
Organizational costs (See Note 2) - 46 - 332
Offering expenses - - - 151
Total expenses 7,114 2,700 17,049 7,374
Expense support reimbursement (see Note 6) - 123 - 452
Total expenses, including expenses support reimbursement 7,114 2,823 17,049 7,826
Net investment income (loss) 7,450 2,918 20,970 5,505
Net change in unrealized gains (losses) on investments:
Net change in unrealized gains (losses) on investments in non-controlled/non-affiliated investments (2,832) 767 (2,092) 954
Net change in unrealized gains (losses) on investments in non-controlled/affiliated investments (15) (209) 74 (154)
Total net change in unrealized gains (losses) on investments (2,847) 558 (2,018) 800
Net increase (decrease) in net assets resulting from operations $ 4,603 $ 3,476 $ 18,952 $ 6,305
Weighted average common shares outstanding 22,614,966 13,053,832 22,126,853 10,254,893
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Lafayette Square USA, Inc.
Consolidated Statements of Operations (continued)
(dollar amounts in thousands, except per share data or otherwise noted)
Net investment income (loss) per common share (basic and diluted) $ 0.33 $ 0.22 $ 0.95 $ 0.54
Earnings (loss) per common share (basic and diluted) $ 0.20 $ 0.27 $ 0.86 $ 0.61
The accompanying notes are an integral part of these consolidated financial statements.
5
Lafayette Square USA, Inc.
Consolidated Statements of Changes in Net Assets
(dollar amounts in thousands, except per share data or otherwise noted)
Common Stock
Shares Par
Amount 		Paid in Capital Excess of Par Distributable Earnings (Losses) Total net assets
Balance at June 30, 2023 13,038,253 $ 13 $ 193,022 $ (593) $ 192,442
Capital transactions:
Issuance of common stock - - - - -
Reinvestment of stockholder distributions 29,859 - 440 - 440
Net increase in net assets from capital transactions 29,859 - 440 - 440
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) - - - 2,918 2,918
Net change in unrealized gain (losses) - - - 558 558
Total increase (decrease) in net assets resulting from operations - - - 3,476 3,476
Distributions to stockholders from:
Distributable earnings - - - (2,614) (2,614)
Total distributions to stockholders - - - (2,614) (2,614)
Total increase (decrease) for the three months ended September 30, 2023 29,859 - 440 862 1,302
Balance, September 30, 2023 13,068,112 $ 13 $ 193,462 $ 269 $ 193,744
Common Stock
Shares Par
Amount 		Paid in Capital Excess of Par Distributable Earnings (Losses) Total net assets
Balance at June 30, 2024
22,458,336 $ 23 $ 331,672 $ 2,676 $ 334,371
Capital transactions:
Issuance of common stock 1,027,611 1 15,227 - 15,228
Reinvestment of stockholder distributions 147,220 - 2,196 - 2,196
Net increase in net assets from capital transactions 1,174,831 1 17,423 - 17,424
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) - - - 7,450 7,450
Net change in unrealized gain (losses) - - - (2,847) (2,847)
Total increase (decrease) in net assets resulting from operations - - - 4,603 4,603
Distributions to stockholders from:
Distributable earnings - - - (7,460) (7,460)
Total distributions to stockholders - - - (7,460) (7,460)
Total increase (decrease) for the three months ended September 30, 2024 1,174,831 1 17,423 (2,857) 14,567
Balance, September 30, 2024 23,633,167 $ 24 $ 349,095 $ (181) $ 348,938
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Lafayette Square USA, Inc.
Consolidated Statements of Changes in Net Assets (continued)
(dollar amounts in thousands, except per share data or otherwise noted)
Common Stock
Shares Par
Amount* 		Paid in Capital Excess of Par Distributable Earnings (Losses) Total net assets
Balance, December 31, 2022 4,916,554 $ 5 $ 72,610 $ (833) $ 71,782
Capital transactions:
Issuance of common stock 8,091,531 8 119,964 - 119,972
Reinvestment of stockholder distributions 60,027 - 888 - 888
Net increase in net assets from capital transactions 8,151,558 8 120,852 - 120,860
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) - - - 5,505 5,505
Net change in unrealized gain (losses) - - - 800 800
Total increase (decrease) in net assets resulting from operations - - - 6,305 6,305
Distributions to stockholders from:
Distributable earnings - - - (5,203) (5,203)
Total distributions to stockholders - - - (5,203) (5,203)
Total increase (decrease) for the nine months ended September 30, 2023 8,151,558 8 120,852 1,102 121,962
Balance, September 30, 2023 13,068,112 $ 13 $ 193,462 $ 269 $ 193,744
Common Stock
Shares Par
Amount 		Paid in Capital Excess of Par Distributable Earnings (Losses) Total net assets
Balance at December 31, 2023
21,502,768 $ 22 $ 317,677 $ 1,540 $ 319,239
Capital transactions:
Issuance of common stock 1,760,704 2 26,222 - 26,224
Reinvestment of stockholder distributions 369,695 - 5,196 - 5,196
Net increase in net assets from capital transactions 2,130,399 2 31,418 - 31,420
Net increase (decrease) in net assets resulting from operations:
Net investment income (loss) - - - 20,970 20,970
Net change in unrealized gain (losses) - - - (2,018) (2,018)
Total increase (decrease) in net assets resulting from operations - - - 18,952 18,952
Distributions to stockholders from:
Distributable earnings - - - (20,673) (20,673)
Total distributions to stockholders - - - (20,673) (20,673)
Total increase (decrease) for the nine months ended September 30, 2024 2,130,399 2 31,418 (1,721) 29,699
Balance, September 30, 2024 23,633,167 $ 24 $ 349,095 $ (181) $ 348,938
The accompanying notes are an integral part of these consolidated financial statements.
7
Lafayette Square USA, Inc.
Consolidated Statements of Cash Flows
(dollar amounts in thousands, except per share data or otherwise noted)
For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
(unaudited) (unaudited)
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations $ 18,952 $ 6,305
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Net change in unrealized (gain) loss on investments 2,018 (800)
Purchases of investments (205,399) (86,060)
Net accretion of discount on investments (975) (290)
Proceeds from sales and repayments of investments 16,795 1,215
Amortization of deferred financing costs 522 294
Changes in operating assets and liabilities:
Interest receivable (836) (617)
Due from affiliate (130) -
Deferred offering costs - 151
Other assets (807) (115)
Deferred revenue payable 4,404 -
Accounts payable and accrued expenses (172) 360
Management fee payable 542 264
Incentive fee payable 747 535
Administrative services fee payable (885) (299)
Interest and financing payable 94 (175)
Income tax payable 156 -
Due to affiliate (26) 821
Net cash provided by (used in) operating activities (165,000) (78,411)
Cash flows from financing activities
Proceeds from issuance of shares of common stock 26,224 119,972
Distributions paid (11,954) (1,701)
Proceeds from secured borrowings 245,400 77,448
Repayments of secured borrowings (125,900) (85,548)
Proceeds from reverse repurchase agreement 20,355 -
Repayments of reverse repurchase agreement (9,359) -
Proceeds from SBA-guaranteed debentures 134,005 31,000
Deferred financing costs paid (6,662) (1,228)
Net cash provided by (used in) financing activities 272,109 139,943
Net increase (decrease) in cash and cash equivalents 107,109 61,532
Cash and cash equivalents at beginning of period 109,771 20,687
Cash and cash equivalents at end of period $ 216,880 $ 82,219
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Lafayette Square USA, Inc.
Consolidated Statements of Cash Flows (continued)
(dollar amounts in thousands, except per share data or otherwise noted)
Supplemental information:
Cash paid for interest $ 4,477 $ 644
Shares issued from dividend reinvestment plan $ 5,196 $ 888
Accrual for deferred financing costs $ 7,234 $ 1,240
Income tax paid $ 80 $ -
The accompanying notes are an integral part of these consolidated financial statements.
9
Lafayette Square USA, Inc.
Consolidated Schedule of Investments
September 30, 2024
Company (1)(2)(3)(11)(13) Footnotes Investment Type Reference
Rate and
Spread 		Interest
Rate 		Maturity
Date 		Par
Amount/
Shares (4) 		Amortized
Cost 		Fair
Value 		Percentage
of Net
Assets (5)
Non-controlled/non-affiliated investments
Commercial Services & Supplies
Rotolo Consultants, Inc. (6)(7) First lien senior secured loan S+ 6.95% 12.27% 1/15/2029 $ 20,334 $ 20,236 $ 20,334 5.8 %
Zero Waste Recycling LLC (6)(7)(8) First lien senior secured loan S+ 6.45% 11.77% 5/15/2026 4,222 4,277 4,227 1.2 %
Zero Waste Recycling LLC (6)(7) First lien senior secured loan S+ 6.45% 11.77% 5/15/2026 13,216 13,139 13,216 3.8 %
ZWR Holdings, Inc. Subordinated debt
14.00% (Inc. 10.00% PIK)
14.00% 2/16/2027 1,703 1,703 1,660 0.5 %
ZWR Holdings, Inc. Warrants 24,953 - - - %
39,355 39,437 11.3 %
Construction & Engineering
H.W. Lochner, Inc. (6)(7) First lien senior secured loan S+ 6.75% 12.22% 7/2/2027 13,039 12,745 13,039 3.7 %
H.W. Lochner, Inc. (6)(7) First lien senior secured loan S+ 6.25% 11.23% 7/2/2027 3,000 2,905 3,000 0.9 %
Synergi, LLC (6)(7) First lien senior secured loan S+ 7.50% 12.37% 12/17/2027 17,618 17,500 17,309 5.0 %
Synergi, LLC (6)(7)(8) First lien senior secured loan S+ 7.50% -% 12/17/2027 - (24) (66) - %
TCFIII Owl Buyer LLC (6)(7) First lien senior secured loan S+ 5.50% 10.46% 4/17/2026 10,814 10,744 10,814 3.1 %
Trilon Group, LLC (6)(7) First lien senior secured loan S+ 5.50% 10.95% 5/25/2029 12,187 12,182 12,187 3.5 %
Trilon Group, LLC (6)(7)(8) First lien senior secured loan S+ 5.50% 10.82% 5/25/2029 1,253 1,253 1,253 0.4 %
Trilon Group, LLC (6)(7)(8) First lien senior secured loan S+ 5.50% 10.93% 5/25/2029 33 24 33 - %
57,329 57,569 16.6 %
Consumer Discretionary
Med Learning Group, LLC (6)(7) First lien senior secured loan S+ 6.50% 11.10% 12/30/2027 15,610 15,474 15,610 4.5 %
Med Learning Group, LLC (6)(7)(8) First lien senior secured loan S+ 6.50% -% 12/30/2027 - (19) - - %
15,455 15,610 4.5 %
Consumer Services
LC Hospitality, LLC (6)(7)(12) First lien senior secured loan S+ 5.50% 10.10% 7/25/2031 9,588 9,494 9,494 2.7 %
9,494 9,494 2.7 %
Education
3360 Frankford LLC Equity 2,459 2,459 2,459 0.7 %
2,459 2,459 0.7 %
Environmental & Facilities Services
Ironhorse Purchaser, LLC (6)(7)(8) First lien senior secured loan S+ 5.25% -% 9/30/2027 - (102) - - %
Ironhorse Purchaser, LLC (6)(7) First lien senior secured loan S+ 5.25% 10.10% 9/30/2027 10,047 9,884 10,047 2.9 %
9,782 10,047 2.9 %
Food & Staples Retailing
Capital City LLC (6)(7)(8)(15) First lien senior secured loan S+ 8.00% -% 9/20/2029 - (25) - - %
Capital City LLC (6)(7)(15) First lien senior secured loan S+ 8.00% 12.81% 9/20/2029 500 495 495 0.1 %
470 495 0.1 %
Health Care Equipment & Services
MSPB MSO, LLC (6)(7)(8) First lien senior secured loan S+ 5.75% 10.35% 11/10/2028 9,917 9,804 9,884 2.8 %
MSPB MSO, LLC (6)(7)(8) First lien senior secured loan S+ 5.75% 10.35% 11/10/2028 1,695 1,625 1,685 0.5 %
MSPB MSO, LLC (6)(7) First lien senior secured loan S+ 5.75% 10.35% 11/10/2028 8,413 8,333 8,403 2.4 %
19,762 19,972 5.7 %
Health Care Providers & Services
Salt Dental Collective LLC (6)(7) First lien senior secured loan S+ 6.75% 11.70% 2/15/2028 17,813 17,632 17,678 5.1 %
17,632 17,678 5.1 %
Health Care Services
Critical Nurse Staffing, LLC (6)(7)(12) First lien senior secured loan S+ 6.50% 11.88% 11/1/2026 13,803 13,696 13,803 4.0 %
13,696 13,803 4.0 %
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Lafayette Square USA, Inc.
Consolidated Schedule of Investments (continued)
September 30, 2024
Company (1)(2)(3)(11)(13) Footnotes Investment Type Reference
Rate and
Spread 		Interest
Rate 		Maturity
Date 		Par
Amount/
Shares (4) 		Amortized
Cost 		Fair
Value 		Percentage
of Net
Assets (5)
Hotels, Restaurants & Leisure
Aetius Holdings, LLC (6)(7) First lien senior secured loan S+ 7.00% 11.87% 11/15/2024 1,000 999 1,000 0.3 %
999 1,000 0.3 %
Independent Power & Renewable Electricity Producer
National Carbon
Technologies - California, LLC 		Bonds 12.25% 12.25% 5/31/2029 5,067 5,051 5,051 1.4 %
5,051 5,051 1.4 %
Industrials
truCurrent LLC (6)(7)(8) First lien senior secured loan S+ 7.25% -% 2/12/2029 - (109) - - %
truCurrent LLC (6)(7) First lien senior secured loan S+ 7.25% 11.86% 2/12/2029 12,500 12,386 12,500 3.6 %
12,277 12,500 3.6 %
IT Services
Dartpoints Operating Company, LLC (6)(7)(9)
(12) 		First lien senior secured loan S+ 9.35% 14.75% 5/14/2026 3,425 3,394 3,425 1.0 %
3,394 3,425 1.0 %
Leisure Facilities
Dance Nation Holdings LLC (6)(7) First lien senior secured loan S+ 7.00% 11.87% 8/24/2028 31,895 31,633 31,857 9.1 %
Dance Nation Holdings LLC (6)(7)(8) First lien senior secured loan S+ 7.00% 12.21% 8/24/2028 3,304 3,272 3,299 0.9 %
Dance Nation Topco LLC Preferred Equity 1,652,200 1,652 1,652 0.5 %
36,557 36,808 10.5 %
Media
Direct Digital Holdings, LLC (6)(7) First lien senior secured loan S+ 8.45% 13.66% 12/3/2026 7,596 7,573 7,245 2.1 %
Direct Digital Holdings, LLC (6)(7) First lien senior secured loan S+ 8.45% 13.66% 12/3/2026 20,625 20,562 19,671 5.6 %
28,135 26,916 7.7 %
Professional Services
M&S Acquisition Corporation (6)(7)(12) First lien senior secured loan S+ 6.50% 11.87% 12/19/2028 42,322 41,955 42,322 12.1 %
41,955 42,322 12.1 %
Real Estate Management & Development
Standard Real Estate Investments LP (6)(7) First lien senior secured loan S+ 8.70% 13.57% 10/6/2026 2,000 1,986 1,986 0.6 %
Standard Real Estate Investments LP (6)(7) First lien senior secured loan S+ 8.70% 13.57% 10/6/2026 3,000 2,976 2,976 0.9 %
4,962 4,962 1.5 %
Restaurants
Café Zupas, L.C (6)(7)(8)
(12) 		First lien senior secured loan S+ 7.00% 12.67% 12/30/2027 2,341 2,313 2,341 0.7 %
Café Zupas, L.C (6)(7)(8)
(12) 		First lien senior secured loan S+ 7.00% 12.67% 12/30/2027 334 330 334 0.1 %
Café Zupas, L.C (6)(7)(12) First lien senior secured loan S+ 7.00% 12.67% 12/30/2027 8,359 8,288 8,359 2.4 %
10,931 11,034 3.2 %
Road & Rail
160 Driving Academy (a/k/a Rock Gate Capital, LLC) (6)(7)(12) First lien senior secured loan S+ 6.75% 11.35% 5/30/2029 42,000 41,603 39,900 11.4 %
160 Driving Academy (a/k/a Rock Gate Capital, LLC) (12) Warrants 166,108 - - - %
41,603 39,900 11.4 %
Software
CentralBDC Enterprises, LLC (6)(7)(8)(12) First lien senior secured loan S+ 5.00% 9.85% 6/11/2029 1,263 1,248 1,263 0.4 %
11
Table of Contents
Lafayette Square USA, Inc.
Consolidated Schedule of Investments (continued)
September 30, 2024
Company (1)(2)(3)(11)(13) Footnotes Investment Type Reference
Rate and
Spread 		Interest
Rate 		Maturity
Date 		Par
Amount/
Shares (4) 		Amortized
Cost 		Fair
Value 		Percentage
of Net
Assets (5)
CentralBDC Enterprises, LLC (6)(7)(12) First lien senior secured loan S+ 5.00% 9.85% 6/11/2029 16,800 16,698 16,800 4.8 %
17,946 18,063 5.2 %
Specialized Consumer Services
Best Friends Pet Care Holdings Inc. (6)(7)(8)
(12) 		First lien senior secured loan S+ 6.45% 11.32% 6/21/2028 16,267 16,020 16,267 4.7 %
Best Friends Pet Care Holdings Inc. (6)(7)(12) First lien senior secured loan S+ 6.45% 11.32% 6/21/2028 15,696 15,535 15,696 4.5 %
31,555 31,963 9.2 %
Utilities
Puris LLC (6)(7)(12) First lien senior secured loan S+ 5.75% 10.35% 6/28/2029 13,466 13,367 13,466 3.9 %
13,367 13,466 3.9 %
Total non-controlled/non-affiliated investments 434,166 433,974 124.6 %
Non-controlled/affiliated investments (10)
Commercial Services & Supplies
GK9 Global Companies, LLC (6)(7)(12) First lien senior secured loan S+ 7.50% 12.37% 10/7/2027 18,781 18,673 18,781 5.4 %
GK9 Global Companies, LLC (6)(7)(8)
(12) 		First lien senior secured loan S+ 7.50% 12.37% 10/7/2027 3,399 3,382 3,399 1.0 %
IVM GK9 Holdings LLC (12) Equity 14,969 4,881 5,000 1.4 %
26,936 27,180 7.8 %
Total non-controlled/affiliated investments 26,936 27,180 7.8 %
Controlled/affiliated investments (10)
Food Retail
Neighborhood Grocery Catalyst Fund LLC (8)(14) Equity - - - - %
- - - %
Total controlled/affiliated investments - - - %
Total Portfolio Investments $ 461,102 $ 461,154 132.4 %
(1) Unless otherwise indicated, all investments are considered Level 3 investments. The fair value of the investment was determined using significant unobservable inputs. See Note 4 "Fair Value Measurement of Investments."
(2) All investments were qualifying assets as defined under Section 55(a) of the Investment Company Act of 1940 (the "1940 Act").
(3) All investments are denominated in U.S. dollars unless otherwise noted. The prior year table has been modified to conform to the current year.
(4) The total funded par amount is presented for debt investments, while the number of shares or units owned is presented for equity investments.
(5)
Percentage is based on net assets of $348,938 as of September 30, 2024.
(6)
Loan includes interest rate floor feature, which generally ranges from 1.00% to 4.00%.
(7)
Variable rate loans to the portfolio companies bear interest at a rate that is determined by reference to the Secured Overnight Financing Rate ("SOFR" or "S") or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate), which generally resets quarterly. For each such loan, the Company has indicated the reference rate used and provided the spread and the interest rate in effect as of September 30, 2024. As of September 30, 2024, the reference rates for our variable rate loans were the 90-day SOFR at 4.59% and 30-day SOFR at 4.85%.
(8) Position or portion thereof is an unfunded loan or equity commitment, and no interest is being earned on the unfunded portion, although the investment may earn unused commitment fees. Negative cost and fair value, if any, results from unamortized fees, which are capitalized to the cost of the investment. The unfunded commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See below for more information on the Company's unfunded commitments as of September 30, 2024:
12
Table of Contents
Lafayette Square USA, Inc.
Consolidated Schedule of Investments (continued)
September 30, 2024
Investments Unused Fee Rate Commitment Type Commitment Expiration Date Unfunded Commitment Fair Value
First Lien Debt
Zero Waste Recycling LLC 0.50% Delayed Draw Term Loan 5/15/2026 $ 766 $ -
Ironhorse Purchaser, LLC 1.00% Delayed Draw Term Loan 9/30/2027 6,377 -
GK9 Global Companies, LLC 0.50% Delayed Draw Term Loan 10/07/2027 1,940 -
Synergi, LLC 0.50% Revolver 12/17/2027 3,750 (66)
Café Zupas, L.C 0.50% Delayed Draw Term Loan 12/30/2027 1,003 -
Café Zupas, L.C 0.50% Revolver 12/30/2027 223 -
Med Learning Group LLC 1.00% Delayed Draw Term Loan 12/30/2027 4,281 -
Best Friends Pet Care Holdings Inc. 0.50% Delayed Draw Term Loan 6/21/2028 8,366 -
Dance Nation Holdings LLC 0.50% Revolver 8/24/2028 826 (1)
MSPB MSO, LLC 0.38% Delayed Draw Term Loan 11/10/2028 17,630 (21)
MSPB MSO, LLC 0.38% Revolver 11/10/2028 6,781 (8)
truCurrent LLC 0.50% Delayed Draw Term Loan 2/12/2029 25,000 -
Trilon Group, LLC 1.00% Delayed Draw Term Loan 5/25/2029 1,347 -
Trilon Group, LLC 0.50% Revolver 5/25/2029 883 -
CentralBDC Enterprises, LLC 0.50% Revolver 6/11/2029 1,895 -
Neighborhood Grocery Catalyst Fund LLC -% Equity - 12,500 -
National Carbon Technologies - California, LLC -% Bonds 5/25/2029 14,933 -
Capital City LLC -% Delayed Draw Term Loan 9/20/2029 2,500 -
$ 111,001 $ (96)
(9) The Company categorized its unitranche loan as First Lien Senior Secured Loan. The First Lien Senior Secured Loan is comprised of two components: a first out tranche ("First Out") and last out tranche ("Last Out"). The Company syndicates the First Out tranche and retains the Last Out tranche. The First Out and Last Out tranches have the same maturity date. Interest disclosed reflects the contractual rate of First Lien Senior Secured Loan. The First Out tranche has priority over the Last Out tranche with respect to payments of principal, interest and any amounts due thereunder. The Company may be entitled to receive additional interest as a result of the Agreement Among Lenders ("AAL") entered into with the First Out lender. In exchange for the higher interest rate, the Last Out tranche is at a greater risk of loss.
(10) Under the 1940 Act, the Company would be deemed to "control" a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of September 30, 2024, the Company does not "control" any of these portfolio companies. Under the 1940 Act, the Company would be deemed an "affiliated person" of a portfolio company if the Company owns 5% or more of the portfolio company's outstanding voting securities. As of September 30, 2024, the Company's non-controlled/affiliated investments and controlled/affiliated investments were as follows:
Non-controlled/affiliated investments Fair Value as of
December 31, 2023 		Gross
Additions 		Gross
Reductions 		Change in
Unrealized
Gains (Losses) 		Fair Value as of
September 30, 2024 		Investment
Income
GK9 Global Companies, LLC $ 22,350 $ 25 $ (170) $ (25) $ 22,180 $ 1,670
IVM GK9 Holdings LLC 4,901 - - 99 5,000 -
Non-controlled/affiliated investments $ 27,251 $ 25 $ (170) $ 74 $ 27,180 $ 1,670
Controlled/affiliated investments Fair Value as of
December 31, 2023 		Gross
Additions 		Gross
Reductions 		Change in
Unrealized
Gains (Losses) 		Fair Value as of
September 30, 2024 		Investment
Income
Neighborhood Grocery Catalyst Fund LLC $ - $ - $ - $ - $ - $ -
Controlled/affiliated investments $ - $ - $ - $ - $ - $ -
(11) Except as noted by this footnote, all of the instruments on this table are subject to restrictions on resale.
(12) Investments, or portion thereof, held by the SBIC subsidiary (as defined in Note 1).
(13) Industries are classified by The Global Industry Classification Standard ("GICS").
(14)
The Company owns a 31.25% share in Neighborhood Grocery Catalyst Fund LLC.
(15) Investments, or portion thereof, held by the SSBIC subsidiary (as defined in Note 1).
The accompanying notes are an integral part of these consolidated financial statements.
13
Lafayette Square USA, Inc.
Consolidated Schedule of Investments
December 31, 2023
Company (1)(2)(3)(11)(13) Footnotes Investment Type Reference Rate and Spread Interest
Rate 		Maturity
Date 		Par
Amount/
Shares (4) 		Amortized
Cost 		Fair
Value 		Percentage
of Net
Assets (5)
Non-controlled/non-affiliated investments
Commercial Services & Supplies
Rotolo Consultants, Inc. (6)(7) First lien senior secured loan S+ 7.45% 13.10% 12/18/2026 $ 3,174 $ 3,133 $ 3,166 1.0 %
Zero Waste Recycling LLC (6)(7)(8) First lien senior secured loan S+ 6.45% 12.10% 5/15/2026 3,878 3,887 3,859 1.2 %
Zero Waste Recycling LLC (6)(7) First lien senior secured loan S+ 6.45% 12.10% 5/15/2026 9,835 9,774 9,799 3.1 %
ZWR Holdings, Inc. Subordinated debt
14.00% (Inc. 10.00% PIK)
14.00% 2/16/2027 1,872 1,872 1,753 0.5 %
ZWR Holdings, Inc. Warrants 24,953 - - - %
18,666 18,577 5.8 %
Construction & Engineering
H.W. Lochner, Inc. (6)(7) First lien senior secured loan S+ 6.75% 12.27% 7/02/2027 13,138 12,780 13,138 4.1 %
H.W. Lochner, Inc. (6)(7)(8) First lien senior secured loan S+ 6.25% 11.76% 7/02/2027 1,447 1,331 1,447 0.5 %
Synergi, LLC (6)(7) First lien senior secured loan S+ 7.50% 13.11% 12/17/2027 22,286 22,110 22,286 7.0 %
Synergi, LLC (6)(7)(8) First lien senior secured loan S+ 7.50% -% 12/17/2027 - (30) - - %
TCFIII Owl Buyer LLC (6)(7) First lien senior secured loan S+ 5.50% 10.97% 4/17/2026 10,897 10,813 10,870 3.4 %
Trilon Group, LLC (6)(7) First lien senior secured loan S+ 6.25% 11.78% 5/25/2029 6,066 5,972 6,066 1.9 %
Trilon Group, LLC (6)(7)(8) First lien senior secured loan S+ 6.25% 11.80% 5/25/2029 4,498 4,435 4,498 1.4 %
Trilon Group, LLC (6)(7)(8) First lien senior secured loan S+ 6.25% 11.75% 5/25/2029 55 47 55 - %
57,458 58,360 18.3 %
Environmental & Facilities Services
Ironhorse Purchaser, LLC (6)(7)(8) First lien senior secured loan S+ 6.50% -% 9/30/2027 - (127) - - %
Ironhorse Purchaser, LLC (6)(7) First lien senior secured loan S+ 6.50% 12.14% 9/30/2027 10,123 9,922 9,922 3.1 %
9,795 9,922 3.1 %
Health Care Equipment & Services
MSPB MSO, LLC (6)(7)(8) First lien senior secured loan S+ 5.75% -% 11/10/2028 - (134) - - %
MSPB MSO, LLC (6)(7)(8) First lien senior secured loan S+ 5.75% -% 11/10/2028 - (82) - - %
MSPB MSO, LLC (6)(7) First lien senior secured loan S+ 5.75% 11.14% 11/10/2028 8,476 8,391 8,391 2.6 %
8,175 8,391 2.6 %
Health Care Providers & Services
Salt Dental Collective LLC (6)(7) First lien senior secured loan S+ 7.50% 12.96% 2/15/2028 7,940 7,840 7,940 2.5 %
7,840 7,940 2.5 %
Health Care Services
Critical Nurse Staffing, LLC (6)(7)(12) First lien senior secured loan S+ 6.50% 12.04% 11/1/2026 13,908 13,773 13,773 4.3 %
13,773 13,773 4.3 %
Hotels, Restaurants & Leisure
Aetius Holdings, LLC (6)(7) First lien senior secured loan S+ 7.00% 12.61% 4/25/2024 2,000 1,994 2,000 0.6 %
1,994 2,000 0.6 %
IT Services
Dartpoints Operating Company, LLC (6)(7)(9)
(12) 		First lien senior secured loan S+ 9.38% 14.87% 5/14/2026 3,425 3,380 3,425 1.1 %
3,380 3,425 1.1 %
Leisure Facilities
Dance Nation Holdings LLC (6)(7) First lien senior secured loan S+ 6.50% 12.11% 8/24/2028 32,137 31,825 32,137 10.1 %
Dance Nation Holdings LLC (6)(7)(8) First lien senior secured loan S+ 6.50% -% 8/24/2028 - (38) - - %
Dance Nation Topco LLC Preferred Equity 1,652,200 1,652 1,652 0.5 %
33,439 33,789 10.6 %
14
Table of Contents
Lafayette Square USA, Inc.
Consolidated Schedule of Investments (continued)
December 31, 2023
Company (1)(2)(3)(11)(13) Footnotes Investment Type Reference Rate and Spread Interest
Rate 		Maturity
Date 		Par
Amount/
Shares (4) 		Amortized
Cost 		Fair
Value 		Percentage
of Net
Assets (5)
Media
Direct Digital Holdings, LLC (6)(7) First lien senior secured loan S+ 7.95% 13.49% 12/3/2026 7,694 7,662 7,694 2.4 %
Direct Digital Holdings, LLC (6)(7) First lien senior secured loan S+ 7.95% 13.49% 12/3/2026 20,900 20,805 20,900 6.5 %
28,467 28,594 8.9 %
Professional Services
M&S Acquisition Corporation (6)(7)(12) First lien senior secured loan S+ 6.50% 12.11% 12/19/2028 34,600 34,254 34,254 10.7 %
34,254 34,254 10.7 %
Real Estate Management & Development
Standard Real Estate Investments LP (6)(7)(8) First lien senior secured loan S+ 8.75% -% 10/6/2026 - (18) - - %
Standard Real Estate Investments LP (6)(7) First lien senior secured loan S+ 8.75% 14.36% 10/6/2026 3,000 2,970 2,970 0.9 %
2,952 2,970 0.9 %
Restaurants
Café Zupas, L.C (6)(7)(8)
(12) 		First lien senior secured loan S+ 7.00% 12.35% 12/30/2027 446 413 446 0.1 %
Café Zupas, L.C (6)(7)(8)
(12) 		First lien senior secured loan S+ 7.00% -% 12/30/2027 - (6) - - %
Café Zupas, L.C (6)(7)(12) First lien senior secured loan S+ 7.00% 12.35% 12/30/2027 8,359 8,276 8,276 2.6 %
8,683 8,722 2.7 %
Specialized Consumer Services
Best Friends Pet Care Holdings Inc. (6)(7)(8)
(12) 		First lien senior secured loan S+ 6.50% -% 6/21/2028 - (59) - - %
Best Friends Pet Care Holdings Inc. (6)(7)(12) First lien senior secured loan S+ 6.45% 12.06% 6/21/2028 15,814 15,625 15,625 4.9 %
15,566 15,625 4.9 %
Total non-controlled/non-affiliated investments 244,442 246,342 77.0 %
Non-controlled/affiliated investments (10)
Commercial Services & Supplies
GK9 Global Companies, LLC (6)(7)(12) First lien senior secured loan S+ 9.25% 14.86% 10/07/2027 18,925 18,794 18,925 5.9 %
GK9 Global Companies, LLC (6)(7)(8)
(12) 		First lien senior secured loan S+ 9.25% 14.86% 10/07/2027 3,425 3,406 3,425 1.1 %
IVM GK9 Holdings LLC (12) Equity 14,969 4,881 4,901 1.5 %
27,081 27,251 8.5 %
Total non-controlled/affiliated investments 27,081 27,251 8.5 %
Total Portfolio Investments $ 271,523 $ 273,593 85.5 %
(1) Unless otherwise indicated, all investments are considered Level 3 investments. The fair value of the investment was determined using significant unobservable inputs. See Note 4 "Fair Value Measurement of Investments."
(2) All investments were qualifying assets as defined under Section 55(a) of the 1940 Act.
(3) All investments are denominated in U.S. dollars unless otherwise noted. The prior year table has been modified to conform to the current year.
(4) The total funded par amount is presented for debt investments, while the number of shares or units owned is presented for equity investments.
(5)
Percentage is based on net assets of $319,239 as of December 31, 2023.
(6)
Loan includes interest rate floor feature, which generally ranges from 1.00% to 2.50%.
(7)
Variable rate loans to the portfolio companies bear interest at a rate that is determined by reference to the SOFR or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate), which generally resets quarterly. For each such loan, the Company has indicated the reference rate used and provided the spread and the interest rate in effect as of December 31, 2023. As of December 31, 2023, the reference rates for our variable rate loans were the 90-day SOFR at 5.36% and 30-day SOFR at 5.34%.
(8) Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion, although the investment may earn unused commitment fees. Negative cost and fair value, if any, results from unamortized fees, which are capitalized to the cost of the investment. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See below for more information on the Company's unfunded commitments as of December 31, 2023:
15
Table of Contents
Lafayette Square USA, Inc.
Consolidated Schedule of Investments (continued)
December 31, 2023
Investments Unused Fee Rate Commitment Type Commitment
Expiration Date 		Unfunded
Commitment 		Fair Value
First Lien Debt
Zero Waste Recycling LLC 0.50% Delayed Draw Term Loan 5/15/2026 $ 1,141 $ (4)
Standard Real Estate Investments LP -% Delayed Draw Term Loan 10/06/2026 2,000 -
H.W. Lochner, Inc. 0.50% Revolver 7/02/2027 1,553 -
Ironhorse Purchaser, LLC 1.00% Delayed Draw Term Loan 9/30/2027 6,377 -
GK9 Global Companies, LLC 0.50% Delayed Draw Term Loan 10/07/2027 1,940 -
Synergi, LLC 0.50% Revolver 12/17/2027 3,750 -
Café Zupas, L.C 0.50% Delayed Draw Term Loan 12/30/2027 2,898 -
Café Zupas, L.C 0.50% Revolver 12/30/2027 557 -
Best Friends Pet Care Holdings Inc. 0.50% Delayed Draw Term Loan 6/21/2028 11,186 -
Dance Nation Holdings LLC 0.50% Revolver 8/24/2028 4,131 -
MSPB MSO, LLC 0.38% Delayed Draw Term Loan 11/10/2028 27,548 -
MSPB MSO, LLC 0.38% Revolver 11/10/2028 8,476 -
Trilon Group, LLC 1.00% Delayed Draw Term Loan 5/25/2029 2,075 -
Trilon Group, LLC 0.50% Revolver 5/25/2029 345 -
$ 73,977 $ (4)
(9) The Company categorized its unitranche loan as First Lien Senior Secured Loan. The First Lien Senior Secured Loan is comprised of two components: a First Out and Last Out tranche. The Company syndicates the First Out tranche and retains the Last Out tranche. The First Out and Last Out tranches have the same maturity date. Interest disclosed reflects the contractual rate of First Lien Senior Secured Loan. The First Out tranche has priority over the Last Out tranche with respect to payments of principal, interest and any amounts due thereunder. The Company may be entitled to receive additional interest as a result of the AAL entered into with the First Out lender. In exchange for the higher interest rate, the Last Out tranche is at a greater risk of loss.
(10) Under the 1940 Act, the Company would be deemed to "control" a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of December 31, 2023, the Company does not "control" any of these portfolio companies. Under the 1940 Act, the Company would be deemed an "affiliated person" of a portfolio company if the Company owns 5% or more of the portfolio company's outstanding voting securities. As of December 31, 2023, the Company's non-controlled/affiliated investments were as follows:
Non-controlled/affiliated investments Fair Value as of
December 31,2022 		Gross
Additions 		Gross
Reductions 		Change in
Unrealized
Gains (Losses) 		Fair Value as of
December 31, 2023 		Investment
Income
GK9 Global Companies, LLC $ 16,076 $ 6,413 $ (289) $ 150 $ 22,350 $ 3,127
IVM GK9 Holdings LLC 4,631 250 - 20 4,901 -
Non-controlled/affiliated investments $ 20,707 $ 6,663 $ (289) $ 170 $ 27,251 $ 3,127
(11) Except as noted by this footnote, all of the instruments on this table are subject to restrictions on resale.
(12) Investments, or portion thereof, held by the SBIC subsidiary (as defined in Note 1).
(13) Industries are classified by The Global Industry Classification Standard ("GICS").
The accompanying notes are an integral part of these consolidated financial statements.
16
Table of Contents
Lafayette Square USA, Inc.
Notes to Consolidated Financial Statements
September 30, 2024
(dollar amounts in thousands, except per share data or otherwise noted)
Note 1. Organization
Lafayette Square USA, Inc. (the "Company," which term refers to either Lafayette Square USA, Inc. or Lafayette Square USA, Inc. together with its consolidated subsidiaries, as the context may require) is an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company ("BDC") under the 1940 Act. On May 16, 2022, Lafayette Square Empire BDC, Inc. filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation to change its corporate name from "Lafayette Square Empire BDC, Inc." to "Lafayette Square USA, Inc.," effective May 16, 2022. In addition, for U.S. federal income tax purposes, the Company adopted an initial tax year end of December 31, 2021, and was taxed as a corporation for the tax years ending December 31, 2021 and December 31, 2022. The Company intends to elect to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") for the tax year ended December 31, 2023, as well as maintain such election in future taxable years. However, there is no guarantee that the Company will qualify to make such an election for any taxable year.
The Company is externally managed by Adviser pursuant to an investment advisory and management agreement between the Company and the Adviser, dated as of April 26, 2021 and approved by the Board for renewal on June 4, 2024 (and as may be amended, the "Investment Advisory Agreement"). The Adviser is a subsidiary of Lafayette Square Holding Company, LLC (together with its controlled subsidiaries, including the Adviser and LS Administration, LLC, "Lafayette Square").
The Company invests in businesses that are primarily domiciled, headquartered and/or have a significant operating presence in each of the ten regions below (each, a "Target Region"), with a goal to invest at least 5% of its assets in each Target Region over time. However, the Company anticipates that it could take time to invest substantially all of the capital it expects to raise in a geographically diverse manner due to general market conditions, the time necessary to identify, evaluate, structure, negotiate and close suitable investments in private middle market companies, and the potential for allocations to other affiliated investment vehicles which focus their investments on a specific region. As a result, at any point in time, the Company may have a disproportionate amount of investments in certain Target Regions, and there can be no assurance that the Company will achieve geographic diversification across all ten Target Regions.
• Cascade Region: Alaska, Idaho, Oregon and Washington
• Empire Region: New York, New Jersey, Connecticut and Pennsylvania
• Far West Region: California, Hawaii and Nevada
• Four Corners Region: Arizona, Colorado, New Mexico and Utah
• Great Lakes Region: Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin
• Gulf Coast Region: Arkansas, Louisiana, Oklahoma and Texas
• Mid-Atlantic Region: Delaware, Kentucky, Maryland, North Carolina, South Carolina, Tennessee, Virginia and West Virginia and the District of Columbia
• Northeast Region: Maine, Massachusetts, New Hampshire, Rhode Island and Vermont
• Plains Region: Iowa, Kansas, Missouri, Montana, Nebraska, North Dakota, South Dakota and Wyoming
• Southeast Region: Alabama, Georgia, Florida, Mississippi and the territory of Puerto Rico
The Company's investment objective is to generate favorable risk-adjusted returns, including current income and capital appreciation, from directly originated investments in middle market companies.
17
The Company invests primarily in first and second lien loans and, to a lesser extent, in subordinated and mezzanine loans and equity and equity-like securities, including common stock, preferred stock and warrants. The Company defines middle market companies as those with annual revenues between $10 million and $1 billion, and annual earnings before interest, taxes, depreciation, and amortization ("EBITDA") of between $10 million and $100 million, although the Company may invest in larger or smaller companies. The Company also may purchase interests in loans, corporate bonds or other instruments through secondary market transactions.
The Company has formed wholly-owned subsidiaries, LS BDC Holdings, LLC, LS BDC Holdings (DN), LLC, LS BDC Holdings (160), LLC and LS SBIC Holdings (160), LLC, each of which is a Delaware limited liability company, to hold certain equity or equity-like investments in portfolio companies to which the Company has also made loans. In addition, LS BDC Holdings (NGCF), LLC, a wholly-owned subsidiary of the Company, co-owns and co-manages NGCF Manager LLC (the "NGCF Manager") with the affiliate of a third-party investor. The NGCF Manager manages Neighborhood Grocery Catalyst Fund LLC ("NGCF"), a private real estate investment vehicle, whose investment strategy focuses on necessity-based, ecommerce-resistant, and well-located neighborhood shopping centers anchored by omni-channel grocers serving the essential needs of diverse communities.
Additionally, the Company formed (i) a wholly-owned subsidiary, Lafayette Square SBIC, LP ("SBIC LP"), a small business investment company ("SBIC") licensed by the U.S. Small Business Administration (the "SBA"), to invest in eligible "small businesses" as defined by the SBA and (ii) a wholly-owned subsidiary, Lafayette Square SSBIC, LP ("SSBIC LP"), a specialized small business investment company ("SSBIC") licensed by the SBA, to invest in eligible "small businesses: as defined by the SBA. SBIC LP received its SBIC license on February 1, 2023 (made effective as of January 27, 2023) and SSBIC LP received its SSBIC license on September 12, 2024. SBA regulations currently permit SBIC LP to borrow up to $175.0 million in SBA-guaranteed debentures with at least $87.5 million in regulatory capital (as defined in the SBA regulations), and SSBIC license to borrow an additional $175.0 million of SBA-guaranteed debentures with at least $87.5 million in regulatory capital, subject to the SBA's approval. As a result, the Company has access to up to $350.0 million in SBA-guaranteed debentures amongst its family of SBIC funds under common control. The Company consolidates its wholly-owned subsidiaries in these consolidated financial statements from the date of each subsidiary's formation. All significant intercompany transactions and balances have been eliminated in such consolidation.
Note 2. Significant Accounting Policies
Basis of Presentation
The following is a summary of significant accounting policies consistently followed by the Company in the preparation of its consolidated financial statements. The Company is an investment company and accordingly applies specific accounting and financial reporting requirements under Accounting Standards Codification, as issued by the Financial Accounting Standards Board ("ASC") Topic 946-Financial Services-Investment Companies ("Topic 946"). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP") and pursuant to Articles 6, 10 and 12 of Regulation S-X. Certain reclassifications have been made to certain prior period balances to conform with current presentation.
These consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes related thereto for the year ended December 31, 2023, included in the Company's annual report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission (the "SEC") on March 20, 2024. The results for the nine months ended September 30, 2024 are not necessarily indicative of the results to be expected for the full fiscal year, any other interim period or any future year or period.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
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at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company deposits its cash in a financial institution and, at times, such deposits may exceed the Federal Deposit Insurance Corporation insurance limits. As of September 30, 2024 and December 31, 2023, the Company held $216,880 and $109,771 in cash and cash equivalents, respectively, of which no cash or cash equivalents were restricted. Of the total cash and cash equivalents balance, $216,880 and $109,771 were held in an interest bearing account with U.S. Bank National Association as of September 30, 2024 and December 31, 2023, respectively. For the three and nine months ended September 30, 2024 the Company earned $518 and $2,271, respectively, in interest on cash and cash equivalents balances, and the balance is included under Interest from cash and cash equivalents in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2023 the Company earned $724 and $1,269, respectively, in interest on cash and cash equivalents balances, and the balance is included under Interest from cash and cash equivalents in the Consolidated Statements of Operations.
Organization and Offering Costs
Organization costs consist of costs incurred to establish the Company and enable it to do business legally. Organization costs are expensed as incurred. Offering costs consist of costs incurred in connection with the offering of the common stock of the Company.
The Company's initial organizational costs incurred were expensed and initial offering costs are amortized over one year.
The Company may incur organization and offering expenses of up to $1 million in connection with the formation of the Company and the offering of shares of its common stock, including the out-of-pocket expenses of the Adviser and its agents and affiliates. The Company reimburses the Adviser for the organization and offering costs it incurs on the Company's behalf. If actual organization and offering costs incurred exceed $1 million, the Adviser or its affiliates will bear the excess costs. As of September 30, 2024, the Company incurred $804 (since inception) of organization and offering costs.
Deferred Financing Costs
Deferred financing costs, incurred in connection with any credit facility and SBA-guaranteed debentures (see Note 5) are deferred and amortized over the life of the respective credit facility and SBA-guaranteed debentures.
Indemnifications
In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote.
Revenue Recognition
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment using specific identification method without regard to unrealized gains or losses previously recognized. The Company reports current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the Consolidated Statements of Operations.
Investment Income
Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are collected. The Company records amortized or accreted discounts or premiums as interest income using the effective interest method or straight-line interest method, as applicable, and adjusted only for material amendments or prepayments. Dividend income, which represents dividends from equity investments and distributions from subsidiaries, if any, is recognized on an accrual basis to the extent that the Company collects such amount.
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Original Issue Discount
Discounts to par on portfolio securities are accreted into income over the tenor of the instrument. Any remaining discount is accreted into income upon prepayment or redemption of the instrument. The Company then amortizes such amounts using the effective interest method as interest income over the expected life of the investment.
PIK Interest
The Company may, from time to time, hold loans in its portfolio that contain a payment-in-kind ("PIK") interest provision. PIK interest, computed at the contractual rate specified in each loan agreement, is periodically added to the principal balance of the loan, rather than being paid to the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest in cash may be deferred until the time of debt principal repayment.
PIK interest, which is a non-cash source of income at the time of recognition, is included in the Company's taxable income. This affects the amount the Company would be required to distribute to its stockholders to maintain its tax treatment as a RIC for federal income tax purposes, even though the Company has not yet collected the cash.
Fee Income
Origination fees received are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized origination fees are recorded as investment income. The Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, covenant waiver fees and loan amendment fees, which are recorded as investment income when earned.
Non-accrual loans
A loan can be left on accrual status during the period the Company is pursuing repayment of the loan. Management reviews all loans that become 90 days or more past due on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date such loan is placed on non-accrual status. Interest payments received on non-accrual loans are recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid, and, in management's judgment, future payments are likely to remain current.
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, the Company is deemed to "control" a portfolio company if it owns more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. Such investments in portfolio companies that the Company "controls" are referred to as "Control Investments." Under the 1940 Act, the Company is deemed to be an "Affiliated Person" of a portfolio company if it owns more than 5% of the portfolio company's outstanding voting securities or the Company is under common control with such portfolio company. The Company refer to such investments in Affiliated Persons as "Affiliated Investments." Investments which are neither Control Investments or Affiliated Investments are referred to as "Non-Controlled/Non-Affiliated Investments."
Fair Value of Financial Instruments
The Company applies fair value to all of its financial instruments in accordance with ASC Topic 820-Fair Value Measurement ("ASC Topic 820"). ASC Topic 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC Topic 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy.
The availability of observable inputs can vary depending on the financial instrument and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market and the current market conditions. To the extent that the valuation is based on models
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or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for financial instruments classified as Level 3.
Investments for which market quotations are not readily available are valued at fair value as determined in good faith pursuant to Rule 2a-5 under the 1940 Act and ASC Topic 820. As a general principle, the fair value of a security or other asset is 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. Pursuant to Rule 2a-5, the Board has designated the Adviser as the valuation designee ("Valuation Designee") for the Company to perform the fair value determination relating to all Company investments, subject to the oversight of the Board. The Adviser may carry out its designated responsibilities as Valuation Designee through various teams and committees. The Valuation Designee's Board-approved policies and procedures govern the Valuation Designee's selection and application of methodologies for determining and calculating the fair value of Company investments. The Valuation Designee may value Company portfolio securities for which market quotations are not readily available and other Company assets utilizing inputs from pricing sources, quotation reporting systems, valuation agents and other third-party sources.
The Adviser has established a valuation committee (the "Valuation Committee") to carry out the day-to-day fair valuation responsibilities and has adopted policies and procedures to govern activities of the Valuation Committee and the performance of functions required to determine the fair value of the Company's investments in good faith. These functions include periodically assessing and managing material risks associated with fair value determinations, selecting, applying, reviewing, and testing fair value methodologies, monitoring for circumstances that may necessitate the use of fair value, and overseeing and evaluating pricing services used.
Income Taxes
The Company intends to elect to be treated as a RIC under Subchapter M of the Code for the tax year ending 2023, as well as maintain such election in future taxable years. However, there is no guarantee that the Company will qualify to make such an election for any taxable year. In order to qualify and be subject to tax as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute dividends for U.S. federal income tax purposes to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. As a RIC, the Company would intend to make the requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to its stockholders. The Company may be subject to regular federal and state corporate income tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that the Company elects to recognize upon RIC election or when recognized over the next five taxable years.
The Company is subject to a nondeductible 4% U.S. federal excise tax on its undistributed income, unless it timely distributes (or is deemed to have timely distributed) an amount equal to the sum of (1) 98% of ordinary income for each calendar year, (2) 98.2% of the amount by which capital gains exceeds capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31 of the calendar year, and (3) any income and gains recognized, but not distributed, from the previous years. While the Company intends to distribute any income and capital gains to avoid imposition of this 4% U.S. federal excise tax, it may not be successful in avoiding entirely the imposition of this tax. In that case, the Company will be liable for the tax only on the amount by which it does not meet the distribution requirement.
The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes ("ASC Topic 740"). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense or tax benefit in the current year. It is the Company's policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material unrecognized net tax benefits or unrecognized net tax liabilities related to uncertain income tax positions as of and through September 30, 2024.
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Distributions
Distributions to common stockholders are recorded on the record date. Subject to the discretion of and as determined by the Board, the Company will authorize and declare ordinary cash distributions approved by the Board on a quarterly basis. The amount to be paid out as a dividend or distribution is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are distributed to shareholders at least annually, although the Company can retain such capital gains for investment in its discretion.
The Company has adopted a dividend reinvestment plan (the "DRIP") that provides for reinvestment of any distributions the Company declares in cash on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Board authorizes and the Company declares a cash distribution, then stockholders who have not "opted out" of the DRIP will have their cash distribution automatically reinvested in additional shares of the Company's common stock, rather than receiving the cash distribution. Shares issued under the DRIP will be issued at a price per share equal to the most recent net asset value ("NAV") per share as determined by the Board (subject to adjustment to the extent required by Section 23 of the 1940 Act).
Recent Accounting Pronouncements
The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the Financial Accounting Standards Board ("FASB"). ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on the Company's consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which updates reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. Management is currently evaluating this ASU to determine its impact on the Company's disclosures.
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Note 3. Investments
The following tables show the composition of the Company's investment portfolio, at amortized cost and fair value (with corresponding percentage of total portfolio investments) as of September 30, 2024 and December 31, 2023.
September 30, 2024
Amortized Cost Fair Value
First lien senior secured loans $ 445,356 96.5 % $ 445,332 96.5 %
Equity 7,340 1.6 % 7,459 1.6 %
Subordinated debt 1,703 0.4 % 1,660 0.4 %
Preferred equity 1,652 0.4 % 1,652 0.4 %
Bonds 5,051 1.1 % 5,051 1.1 %
Warrants - - % - - %
Total $ 461,102 100.0 % $ 461,154 100.0 %
December 31, 2023
Amortized Cost Fair Value
First lien senior secured loans $ 263,118 96.9 % $ 265,287 97.0 %
Equity 4,881 1.8 % 4,901 1.8 %
Subordinated debt 1,872 0.7 % 1,753 0.6 %
Preferred equity 1,652 0.6 % 1,652 0.6 %
Warrants - - % - - %
Total $ 271,523 100.0 % $ 273,593 100.0 %
The following tables show the composition of the Company's investment portfolio by geographic region, at amortized cost and fair value (with corresponding percentage of total portfolio investments) as of September 30, 2024 and December 31, 2023. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company's business:
September 30, 2024
Amortized Cost Fair Value
Far West $ 83,474 18.1 % $ 84,092 18.3 %
Gulf Coast 84,408 18.3 % 83,682 18.1 %
Great Lakes 73,048 15.8 % 71,804 15.6 %
Mid-Atlantic 68,287 14.9 % 68,404 14.9 %
Empire 49,469 10.7 % 50,032 10.8 %
Southeast 46,698 10.1 % 47,152 10.2 %
Four Corners 38,086 8.3 % 38,310 8.3 %
Cascade 17,632 3.8 % 17,678 3.8 %
Total $ 461,102 100.0 % $ 461,154 100.0 %
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December 31, 2023
Amortized Cost Fair Value
Far West $ 70,645 26.0 % $ 71,013 26.0 %
Gulf Coast 44,775 16.5 % 45,107 16.5 %
Mid-Atlantic 39,607 14.6 % 39,697 14.5 %
Southeast 35,256 13.0 % 35,642 13.0 %
Four Corners 32,910 12.1 % 33,114 12.1 %
Great Lakes 24,924 9.2 % 25,455 9.3 %
Empire 15,566 5.7 % 15,625 5.7 %
Cascade 7,840 2.9 % 7,940 2.9 %
Total $ 271,523 100.0 % $ 273,593 100.0 %
The following tables show the composition of the Company's investment portfolio by industry, at amortized cost and fair value (with corresponding percentage of total portfolio investments) as of September 30, 2024 and December 31, 2023.
September 30, 2024
Amortized Cost Fair Value
Commercial Services & Supplies $ 66,291 14.4 % $ 66,617 14.5 %
Construction & Engineering 57,329 12.4 % 57,569 12.5 %
Specialized Consumer Services 31,555 6.8 % 31,963 6.9 %
Professional Services 41,955 9.1 % 42,322 9.2 %
Road & Rail 41,603 9.0 % 39,900 8.7 %
Leisure Facilities 36,557 7.9 % 36,808 8.0 %
Media 28,135 6.1 % 26,916 5.8 %
Health Care Equipment & Services 19,762 4.3 % 19,972 4.3 %
Software 17,946 3.9 % 18,063 3.9 %
Health Care Providers & Services 17,632 3.8 % 17,678 3.8 %
Consumer Discretionary 15,455 3.4 % 15,610 3.4 %
Health Care Services 13,696 3.0 % 13,803 3.0 %
Utilities 13,367 2.9 % 13,466 2.9 %
Industrials 12,277 2.7 % 12,500 2.7 %
Restaurants 10,931 2.4 % 11,034 2.4 %
Environmental & Facilities Services 9,782 2.1 % 10,047 2.2 %
Consumer Services 9,494 2.1 % 9,494 2.1 %
Independent Power & Renewable Electricity Producer 5,051 1.1 % 5,051 1.1 %
Real Estate Management & Development 4,962 1.1 % 4,962 1.1 %
IT Services 3,394 0.7 % 3,425 0.7 %
Education 2,459 0.5 % 2,459 0.5 %
Hotels, Restaurants & Leisure 999 0.2 % 1,000 0.2 %
Food & Staples Retailing 470 0.1 % 495 0.1 %
Food Retail - - % - - %
Total $ 461,102 100.0 % $ 461,154 100.0 %
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December 31, 2023
Amortized Cost Fair Value
Construction & Engineering $ 57,458 21.3 % $ 58,360 21.2 %
Commercial Services & Supplies 45,747 16.8 % 45,828 16.8 %
Professional Services 34,254 12.6 % 34,254 12.5 %
Leisure Facilities 33,439 12.3 % 33,789 12.4 %
Media 28,467 10.5 % 28,594 10.5 %
Specialized Consumer Services 15,566 5.7 % 15,625 5.7 %
Health Care Services 13,773 5.1 % 13,773 5.0 %
Environmental & Facilities Services 9,795 3.6 % 9,922 3.6 %
Restaurants 8,683 3.2 % 8,722 3.2 %
Health Care Equipment & Services 8,175 3.0 % 8,391 3.1 %
Health Care Providers & Services 7,840 2.9 % 7,940 2.9 %
IT Services 3,380 1.2 % 3,425 1.3 %
Real Estate Management & Development 2,952 1.1 % 2,970 1.1 %
Hotels, Restaurants & Leisure 1,994 0.7 % 2,000 0.7 %
Total $ 271,523 100.0 % $ 273,593 100.0 %
Note 4. Fair Value Measurement of Investments
ASC Topic 820 defines fair value as the amount that would be received in the sale of an asset or paid in the transfer of a liability in an orderly transaction between market participants at the measurement date. Where available, the Company uses quoted market prices based on the last sales price on the measurement date.
In accordance with ASC Topic 820, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). To the extent that fair value is based on inputs that are less observable, the determination of fair value requires a significant amount of management judgment.
The three-tier hierarchy of inputs is summarized below.
Level 1 - Quoted prices are available in active markets/exchanges for identical investments as of the reporting date.
Level 2 - Pricing inputs are observable inputs including, but not limited to, prices quoted for similar assets or liabilities in active markets/exchanges or prices quoted for identical or similar assets or liabilities in markets that are not active, and fair value is determined through the use of models or other valuation methodologies.
Level 3 - Pricing inputs are unobservable for the investment and include activities where there is little, if any, market activity for the investment. The inputs into determination of fair value require significant management judgment and estimation.
The inputs used by management in estimating the fair value of Level 3 investments may include valuations and other reporting provided by representatives of the portfolio companies, original transaction prices, recent transactions for identical or similar instruments, and comparisons to fair values of comparable investments, and may include adjustments to reflect illiquidity or non-transferability. The Adviser has policies with respect to its investments, which may assist the Adviser in assessing the quality of information provided by, or on behalf of, each portfolio investment and in determining whether such information continues to be provided by a reliable source or whether further investigation is necessary. Any such investigation, as applicable, may or may not require the Adviser to forego its normal reliance on the value supplied by, or on behalf of, such portfolio investment and to independently determine the fair value of the Company's interest in such portfolio investments, consistent with the Adviser's valuation procedures.
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The Company has engaged an independent third-party valuation provider, which performs valuation procedures to arrive at estimated valuation ranges of the illiquid investments on a quarterly basis (other than immaterial investments, which are internally valued quarterly unless otherwise deemed appropriate by the Valuation Committee, and subsequently corroborated by an independent valuation firm on an annual basis). Investments that have been completed within the past three months are fair valued approximating cost unless there has been a material event since the completion date. If there has been a material event or material information that was not known as of the close of the transaction, the independent third-party valuation provider provides an independent valuation range. The types of valuation methodologies employed by the third-party valuation provider include discounted cash flow, recent financing and enterprise value valuation methodologies. Pursuant to the Rule 2a-5 under the 1940 Act, the Board has chosen to designate the Adviser as the Valuation Designee to perform fair value determinations relating to the value of the assets for which market quotations are not readily available, subject to the Board's oversight.
The Company's investments and borrowings are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments and borrowings are traded.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics and other factors.
The use of these valuation models requires significant estimation and judgment by the Adviser. While the Company believes its valuation methods are appropriate, other market participants may value identical assets differently than the Company at the measurement date. The methods used by the Company may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The Company may also have risk associated with its concentration of investments in certain geographic regions and industries.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Accordingly, the degree of judgment exercised by the Adviser in determining fair value is greatest for securities categorized in Level 3.
The determination of what constitutes "observable" requires significant judgment by the Adviser. The Adviser considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary. Such observable data may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy where the fair value measurement falls (in its entirety) is based on the lowest level input that is significant to the fair value measurement. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment, and observability of prices and inputs may be reduced for many investments. This condition could cause the investment to be reclassified to a lower level within the fair value hierarchy.
The consolidated financial statements include portfolio investments at fair value of $461,154 and $273,593 as of September 30, 2024 and December 31, 2023, respectively. The fair value of the Company's portfolio investments was determined in good faith by the Company's Board. Because of the inherent uncertainty of valuation, the determined values may differ significantly from the values that would have been used had a liquid market existed for the investments as of September 30, 2024 and December 31, 2023.
The following tables present fair value measurements of investments, by major class according to the fair value hierarchy as of September 30, 2024 and December 31, 2023.
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September 30, 2024
Fair Value Measurements
Level 1 Level 2 Level 3 Total
First lien senior secured loans $ - $ - $ 445,332 $ 445,332
Equity - - 7,459 7,459
Subordinated debt - - 1,660 1,660
Preferred equity - - 1,652 1,652
Bonds - - 5,051 5,051
Warrants - - - -
Total Investments $ - $ - $ 461,154 $ 461,154
December 31, 2023
Fair Value Measurements
Level 1 Level 2 Level 3 Total
First lien senior secured loans $ - $ - $ 265,287 $ 265,287
Equity - - 4,901 4,901
Subordinated debt - - 1,753 1,753
Preferred equity - - 1,652 1,652
Warrants - - - -
Total Investments $ - $ - $ 273,593 $ 273,593
The carrying value of the Credit Facility and SBA-guaranteed debentures approximates fair value as of September 30, 2024 and December 31, 2023, and is considered Level 3.
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended September 30, 2024 and September 30, 2023.
For the nine months ended
September 30, 2024
Investments
First Lien Senior Secured Loans Subordinated
Debt 		Bonds Equity Preferred
Equity 		Warrants Total
Investments
Balance as of December 31, 2023 $ 265,287 $ 1,753 $ - $ 4,901 $ 1,652 $ - $ 273,593
Purchases of investments and other adjustments to cost 197,747 143 5,050 2,459 - - 205,399
Proceeds from sales and repayments of investments (16,483) (312) - - - - (16,795)
Net realized gain (loss) - - - - - - -
Net accretion of discount on investments 974 - 1 - - 975
Net change in unrealized gain (loss) on investments (2,193) 76 - 99 - - (2,018)
Balance as of September 30, 2024 $ 445,332 $ 1,660 $ 5,051 $ 7,459 $ 1,652 $ - $ 461,154
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For the nine months ended
September 30, 2023
Investments
First Lien Senior Secured Loans Subordinated
Debt 		Equity Preferred
Equity 		Warrants Total
Investments
Balance as of December 31, 2022 $ 78,156 $ 1,556 $ 4,631 $ - $ - $ 84,343
Purchases of investments and other adjustments to cost 84,026 132 250 1,652 - 86,060
Proceeds from sales and repayments of investments (1,215) - - - - (1,215)
Net realized gain (loss) - - - - - -
Net accretion of discount on investments 290 - - - - 290
Net change in unrealized gain (loss) on investments 924 (2) (122) - - 800
Balance as of September 30, 2023 $ 162,181 $ 1,686 $ 4,759 $ 1,652 $ - $ 170,278
For the nine months ended September 30, 2024 the net change in unrealized gain (loss) on investments attributable to Level 3 investments still held on September 30, 2024 was $(2,018) as shown on the Consolidated Statements of Operations. For the nine months ended September 30, 2023 the net change in unrealized gain (loss) on investments attributable to Level 3 investments still held on September 30, 2023 was $800 as shown on the Consolidated Statements of Operations.
Purchases of investments and other adjustments to costs include purchases of new investments at cost, accretion/amortization of income from discount/premium on debt securities and PIK.
Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of Level 3 as of the beginning of the period which the reclassifications occur. There were no transfers between Levels 1, 2 and 3 during the nine months ended September 30, 2024 and September 30, 2023.
Significant Unobservable Inputs
ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. The table below is not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.
The tables below summarize the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of September 30, 2024 and December 31, 2023.
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Range
Fair Value, as of September 30, 2024 Valuation
Technique 		Unobservable
Input 		Weighted
Average Mean 		Minimum Maximum
Assets:
First lien senior secured loans $ 389,481 Discounted Cash Flow Discount Rate 10.2% 7.8% 15.6%
First lien senior secured loans 39,900 Comparable Multiples EV/EBITDA 8.0x 7.0x 9.0x
First lien senior secured loans 15,951 Amortized Cost Cost N/A N/A N/A
Equity 5,000 Comparable Multiples EV/EBITDA 6.8x 6.5x 7.0x
Equity 2,459 Amortized Cost Cost N/A N/A N/A
Subordinated debt 1,660 Discounted Cash Flow Discount Rate 15.1% 14.8% 15.5%
Preferred equity 1,652 Comparable Multiples EV/EBITDA 8.5x 8.3x 8.8x
Bonds 5,051 Amortized Cost Cost N/A N/A N/A
Warrants - Comparable Multiples EV/EBITDA 7.9x 7.0x 9.0x
Total Level 3 Assets $ 461,154
Range
Fair Value, as of December 31, 2023 Valuation
Technique 		Unobservable
Input 		Weighted
Average Mean 		Minimum Maximum
Assets:
First lien senior secured loans $ 169,630 Discounted Cash Flow Discount Rate 11.5% 9.9% 14.1%
First lien senior secured loans 95,657 Amortized Cost Cost N/A N/A N/A
Equity 4,901 Comparable Multiples EV/EBITDA 6.8x 6.5x 7.0x
Subordinated debt 1,753 Discounted Cash Flow Discount Rate 16.3% 15.8% 16.8%
Preferred equity 1,652 Comparable Multiples EV/EBITDA 6.3x 6.0x 6.5x
Warrants - Comparable Multiples EV/EBITDA 8.5x 8.3x 8.8x
Total Level 3 Assets $ 273,593
The significant unobservable input used in the income approach of fair value measurement of the Company's investments is the discount rate used to discount the estimated future cash flows received from the underlying investment, which include both future principal and interest payments. Increases (decreases) in the discount rate would result in a decrease (increase) in the fair value estimate of the investment. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable investments, and call provisions.
The significant unobservable inputs used in the market approach of fair value measurement of the Company's investments are the market multiples of EBITDA or revenue of the comparable guideline public companies. The Company selects a population of public companies for each investment with similar operations and attributes of the portfolio company. Using these guideline public company data, a range of multiples of enterprise value to EBITDA or revenue is calculated. The Company selects percentages from the range of multiples for purposes of determining the portfolio company's estimated enterprise value based on such multiple and generally the latest twelve months EBITDA or revenue of the portfolio company (or other meaningful measure). Increases (decreases) in the multiple will result in an increase (decrease) in enterprise value, resulting in an increase (decrease) in the fair value estimate of the investment.
Note 5. Debt
As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to shares of our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150%, subject to
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receipt of certain approvals and compliance with certain disclosure requirements, immediately after each such issuance. Section 61(a) of the 1940 Act reduces the asset coverage requirements applicable to BDCs from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. In April 2021, our Board and initial stockholder approved the reduced asset coverage ratio. The reduced asset coverage requirements permit us to increase the maximum amount of leverage that we are permitted to incur by reducing the asset coverage requirements applicable to us from 200% to 150%. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets we hold, we may raise $200 from borrowing and issuing senior securities as compared to $100 from borrowing and issuing senior securities for every $100 of net assets under a 200% asset coverage requirement. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. As of September 30, 2024 and December 31, 2023, the Company's asset coverage ratio based on the aggregate amount outstanding of senior securities was 320.9% and 645.7%.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Company's total debt for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 2,478 $ 160 $ 4,668 $ 835
Non-usage fee (1)
45 22 71 64
Amortization of financing costs 191 125 522 294
Weighted average stated interest rate 6.60 % 6.74 % 6.75 % 7.64 %
Weighted average outstanding balance $ 149,376 $ 9,419 $ 92,408 $ 14,609
(1) Non-usage fee includes the portion of the facility agent fee applicable to the undrawn portion of the Subscription Facility.
Credit Facilities
ING Credit Facility
On June 18, 2024, Lafayette Square USA, Inc. (the "Company") entered into a Senior Secured Revolving Credit Agreement (as amended, restated, supplemented, or otherwise modified from time to time, the "ING Credit Facility") with ING Capital, LLC, as Administrative Agent, Lead Arranger, Bookrunner and Sustainability Structuring Agent.
On September 20, 2024, the Company entered into Amendment No. 1 to the Senior Secured Revolving Credit Agreement (the "First Amendment"), which amends the ING Credit Facility. The parties to the First Amendment include the Company, the lenders party thereto, Subsidiary Guarantors party thereto and ING Capital LLC, as Administrative Agent. The First Amendment provides for, among other things, an upsize in the total commitments from lenders under the credit facility from $75,000,000 to $150,000,000.
The ING Credit Facility is guaranteed by certain subsidiaries of the Company in existence as of the closing date of the ING Credit Facility, and will be guaranteed by certain subsidiaries of the Company that are formed or acquired by the Company in the future (collectively, the "Guarantors"). Proceeds of the ING Credit Facility may be used for general corporate purposes, including the funding of portfolio investments.
The ING Credit Facility allows the Company to borrow up to $150 million, subject to certain restrictions, including availability under a borrowing base, which is based upon unused capital commitments made by investors in the Company and the value of eligible portfolio investments. The amount of permissible borrowings under the ING Credit Facility may be increased through an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing up to an aggregate of $250 million. The ING Credit Facility is secured by a perfected first-
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priority interest in the unused commitments of the Company's investors and substantially all of the eligible portfolio investments held by the Company and each Guarantor, subject to certain exceptions.
The availability period with respect to the revolving credit facility under the ING Credit Facility will terminate on June 19, 2028 ("Commitment Termination Date") and the ING Credit Facility will mature on June 18, 2029 ("Maturity Date"). During the period from the Commitment Termination Date to the Maturity Date, the Company will be obligated to make mandatory prepayments under the ING Credit Facility out of the proceeds of certain asset sales and other recovery events.
The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the ING Credit Facility in U.S. dollars will bear interest at either (i) term SOFR plus margin of 2.70% per annum, or (ii) the alternate base rate plus margin of 1.70% per annum. In each case, the annual interest rate will be adjustable based on a sustainability linked loan pricing structure that directly references our 2030 Goals, with ING acting as the sole Sustainability Structuring Agent. The Company may elect either the term SOFR or alternate base rate at the time of drawdown, and loans denominated in U.S. dollars may be converted from one rate to another at any time at the Company's option, subject to certain conditions. Amounts drawn under the ING Credit Facility in other permitted currencies will bear interest at the relevant rate specified therein plus an applicable margin (including any applicable credit spread adjustment).
The ING Credit Facility includes customary affirmative and negative covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for revolving credit facilities of this nature.
As of September 30, 2024 and December 31, 2023, the Company had $147.0 million and $0.0 million, respectively, in outstanding borrowings from the ING Facility.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the ING Facility for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 888 $ - $ 1,103 $ -
Non-usage fee (1)
45 - 45 -
Amortization of financing costs 60 - 69 -
Weighted average stated interest rate 8.95 % - % 8.77 % - %
Weighted average outstanding balance $ 39,478 $ - $ 16,814 $ -
(1) Non-usage fee includes the portion of the facility agent fee applicable to the undrawn portion of the ING Credit Facility.
Subscription Facility
On February 2, 2022, the Company entered into a subscription-based credit agreement with Sumitomo Mitsui Banking Corporation, which was amended on June 28, 2022, December 21, 2022, and February 1, 2024 (and as may be further amended, modified or supplemented, the "Subscription Facility"). The Subscription Facility allowed the Company to borrow up to $38.4 million, subject to certain restrictions, including availability under a borrowing base that was based upon unused capital commitments made by investors in the Company. The amount of permissible borrowings under the Subscription Facility could be increased to up to $1 billion with the consent of the lenders. The Subscription Facility matured on May 2, 2024 and bore interest at an annual rate of: (i) with respect to reference rate loans, a reference rate for the period plus a margin equal to 2.50% (the "Applicable Margin") and (ii) with respect to alternative rate loans, the greatest of (a) the administrative agent's prime rate, (b) Term SOFR with a one-month term plus the Applicable Margin and (c) the federal funds rate plus 0.50%. Subject to certain exceptions, the Subscription Facility is secured by a first lien security interest in the Company's unfunded investor equity capital commitments. The Subscription Facility included
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customary covenants, certain limitations on the incurrence of additional indebtedness and liens, and other maintenance covenants, as well as usual and customary events of default for credit facilities of this nature. On May 2, 2024, the Subscription Facility and all obligations thereunder were terminated.
As of September 30, 2024 and December 31, 2023, the Company had $0.0 million and $27.5 million, respectively, in outstanding borrowings from the Subscription Facility.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Subscription Facility for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ - $ 76 $ 492 $ 375
Non-usage fee (1)
- 22 26 64
Amortization of financing costs - 97 218 266
Weighted average stated interest rate - % 7.49 % 7.83 % 7.17 %
Weighted average outstanding balance $ - $ 4,028 $ 8,397 $ 6,991
(1) Non-usage fee includes the portion of the facility agent fee applicable to the undrawn portion of the Subscription Facility.
SBA Debentures
SBIC LP is able to borrow funds from the SBA against its regulatory capital (which approximates equity capital in SBIC LP) that is paid in and is subject to customary regulatory requirements, including, but not limited to, periodic examination by the SBA. As of September 30, 2024 and December 31, 2023, the Company funded SBIC LP with $82.5 million and $82.5 million, respectively, of regulatory capital, and have $165.0 million and $31.0 million, respectively, in SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. Current SBA regulations limit the amount that SBIC LP may borrow to a maximum of $175.0 million, which is up to twice its potential regulatory capital.
The SBA-guaranteed debentures incurred an upfront commitment fee of 1.00% on the total commitment amount and a 2.435% issuance discount on drawdowns, which are amortized over the life of the SBA-guaranteed debentures. In addition, an annual fee is charged on the SBA-guaranteed debentures which are amortized over the period.
The following table summarizes the Company's SBA-guaranteed debentures as of September 30, 2024:
Issuance Date Maturity Date Debenture Amount Interest Rate SBA Annual Charge
September 15, 2023 March 1, 2034 $ 31,000 5.04% 0.047%
March 15, 2024 September 1, 2034 $ 5,960 4.38% 0.047%
June 14, 2024 September 1, 2034 $ 45,540 4.38% 0.129%
September 16, 2024 March 1, 2035 $ 82,505 5.09% 0.129%
The following table summarizes the interest expense and amortization of financing costs incurred on the SBA-guaranteed debentures for the three and nine months ended September 30, 2024 and September 30, 2023:
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For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 1,355 $ 84 $ 2,448 $ 84
Non-usage fee - - - -
Amortization of financing costs 131 28 235 28
Weighted average stated interest rate 5.62 % 6.10 % 5.64 % 6.10 %
Weighted average outstanding balance (1)
$ 95,952 $ 5,391 $ 57,983 $ 1,817
(1) The Company's initial borrowing under the SBA Debentures program occurred on September 15, 2023.
Repurchase Obligations
In order to finance certain investment transactions, the Company may, from time to time, enter into repurchase agreements with Macquarie US Trading LLC ("Macquarie"), whereby the Company sells to Macquarie an investment that it holds and concurrently enters into an agreement to repurchase the same investment (any such obligation, a "Repurchase Obligation") at an agreed-upon price at a future date, not to exceed 90-days from the date it was sold.
The Company entered into two repurchase agreements on May 1, 2024 which were collateralized by the Company's term loans to each of Salt Dental Collective (the "Salt Repurchase Obligation") and Med Learning Group, LLC (the "MLG Repurchase Obligation" and together with the Salt Repurchase Obligation, the "May 2024 Repurchase Obligations"). Interest under each of the May 2024 Repurchase Obligations was calculated as (a) the product of the funded amount of the loan and (b) the product of (i) the number of days the loan is outstanding (subject to number of minimum days per the agreement) and (ii) daily fee rate. The Company maintained effective control over the security because it is entitled and obligated to repurchase the security before its maturity. Therefore, the repurchase agreement was treated as a secured borrowing and not a sale. On July 30, 2024 the Company repurchased its obligation under the MLG Repurchase Obligation.
As of September 30, 2024, there was $11.0 million outstanding under these Repurchase Obligations. As of December 31, 2023, there was no outstanding loan and interest payable balance to Macquarie.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Repurchase Obligation for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 235 $ - $ 625 $ 376
Non-usage fee - - - -
Amortization of financing costs - - - -
Weighted average stated interest rate 6.68 % - % 9.05 % 8.67 %
Weighted average outstanding balance (1)
$ 13,946 $ - $ 9,214 $ 5,801
(1) The Company's initial borrowing occurred on March 15, 2023.
The facilities of the Company consist of the following:
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September 30, 2024 December 31, 2023
Aggregate
Principal
Amount
Available 		Principal
Amount
Outstanding 		Unused
Portion 		Aggregate
Principal
Amount
Available 		Principal
Amount
Outstanding 		Unused
Portion
Secured borrowings $ 150,000 $ 147,000 $ 3,000 $ 38,400 $ 27,500 $ 10,900
SBA-Guaranteed Debentures 165,005 165,005 - 36,960 31,000 5,960
Repurchase Obligation 10,996 10,996 - - - -
Total $ 326,001 $ 323,001 $ 3,000 $ 75,360 $ 58,500 $ 16,860
Note 6. Related Party Agreements and Transactions
Investment Advisory Agreement
Under the Investment Advisory Agreement, the Adviser manages the day-to-day operations of, and provides investment advisory services to the Company. The Board approved the Investment Advisory Agreement on April 26 2021 and most recently approved its renewal on June 4, 2024. The Adviser is a registered investment adviser with the SEC. The Adviser receives fees for providing services, consisting of two components, a base management fee and an incentive fee.
Base Management Fee:
The base management fee ("Management Fee") is payable quarterly in arrears beginning in the period during the Initial Drawdown at an annual rate of (i) prior to a Liquidity Event, 0.75%, and (ii) following a Liquidity Event, 1.0%, in each case of the average value of our gross assets (gross assets equal the total assets of the Company as set forth on the Company's Consolidated Statements of Assets and Liabilities) at the end of the two most recently completed calendar quarters. No Management Fee is charged on committed but undrawn capital commitments.
We define a "Liquidity Event" as the earliest to occur of: (1) a quotation or listing of our common stock on a national securities exchange, including an initial public offering or (2) a Sale Transaction. A "Sale Transaction" means (a) the sale of all or substantially all of our capital stock or assets to, or another liquidity event with, another entity or (b) a transaction or series of transactions, including by way of merger, consolidation, recapitalization, reorganization, or sale of stock in each case for consideration of either cash and/or publicly listed securities of the acquirer. Potential acquirers could include entities that are not BDCs that are advised by the Adviser or its affiliates.
For the three and nine months ended September 30, 2024, the Company incurred Management Fee expense of $1,147 and $2,761, respectively. For the three and nine months ended September 30, 2023, the Company incurred Management Fee expense of $431 and $1,035, respectively. As of September 30, 2024 and December 31, 2023, $1,147 and $605, respectively, remained payable as shown on the Consolidated Statements of Assets and Liabilities.
Incentive Fee:
The Company also pays the Adviser an incentive fee consisting of two parts: (i) an incentive fee based on pre-incentive fee net investment income (the "Income-Based Fee"), and (ii) the capital gains component of the incentive fee (the "Capital Gains Fee") of which is described in more detail below.
The Income-Based Fee, is based on Pre-Incentive Fee Net Investment Income Returns and is determined and payable in arrears as of the end of each calendar year. "Pre-Incentive Fee Net Investment Income Returns" means, as the context requires, either the dollar value of, or percentage rate of return on the value of our net assets at the end of the immediately preceding quarter from, 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 we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses accrued for the quarter (including the Management Fee, expenses payable under the Administration Agreement), and any interest
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expense or fees on any credit facilities or outstanding debt and distributions paid on any issued and outstanding preferred shares, but excluding the incentive fee.
Pre-Incentive Fee Net Investment Income Returns include, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-Incentive Net Investment Income Returns do not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-Incentive Fee Net Investment Income Returns, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, is compared to a "hurdle rate" of return of 1.25% per quarter (5.0% annualized).
Prior to a Liquidity Event, we pay the Adviser the Income-Based Fee as follows:
•no incentive fee based on Pre-Incentive Fee Net Investment Income Returns in any calendar quarter in which our Pre-Incentive Fee Net Investment Income Returns do not exceed the hurdle rate of 1.25%;
•100% of the dollar amount of our Pre-Incentive Fee Net Investment Income Returns with respect to that portion of such Pre-Incentive Fee Net Investment Income Returns, if any, that exceeds the hurdle rate but is less than a rate of return of 1.47% (5.88% annualized). We refer to this portion of our Pre-Incentive Fee Net Investment Income Returns (which exceeds the hurdle rate but is less than 1.47%) as the "catch-up." The "catch-up" is meant to provide the Adviser with approximately 15% of our Pre-Incentive Fee Net Investment Income Returns as if a hurdle rate did not apply if this net investment income exceeds 1.47% in any calendar quarter; and
•15% of the dollar amount of our Pre-Incentive Fee Net Investment Income Returns, if any, that exceed a rate of return of 1.47% (5.88% annualized). This reflects that once the hurdle rate is reached and the catch-up is achieved, 15% of all Pre-Incentive Fee Net Investment Income Returns thereafter are allocated to the Adviser.
Following a Liquidity Event, we will pay the Adviser the Income-Based Fee as follows:
•no incentive fee based on Pre-Incentive Fee Net Investment Income Returns in any calendar quarter in which our Pre-Incentive Fee Net Investment Income Returns do not exceed the hurdle rate of 1.25%;
•100% of the dollar amount of our Pre-Incentive Fee Net Investment Income Returns with respect to that portion of such Pre-Incentive Fee Net Investment Income Returns, if any, that exceeds the hurdle rate but is less than a rate of return of 1.47% (5.88% annualized). The "catch-up" is meant to provide the Adviser with approximately 17.5% of our Pre-Incentive Fee Net Investment Income Returns as if a hurdle rate did not apply if this net investment income exceeds 1.47% in any calendar quarter; and
•17.5% of the dollar amount of our Pre-Incentive Fee Net Investment Income Returns, if any, that exceed a rate of return of 1.47% (5.88% annualized). This reflects that once the hurdle rate is reached and the catch-up is achieved, 17.5% of all Pre-Incentive Fee Net Investment Income Returns thereafter are allocated to the Adviser.
For the three and nine months ended September 30, 2024, the Company incurred Income-Based Fee of $1,312 and $3,694, respectively. For the three and nine months ended September 30, 2023, the Company incurred Income-Based Fee of $535 and $1,050, respectively. As of September 30, 2024 and December 31, 2023, $1,312 and $565, respectively, remained payable as shown on the Consolidated Statements of Assets and Liabilities.
The second part of the incentive fee, the Capital Gains Fee, is determined and payable in arrears as of the end of each calendar year (or at the time of a Liquidity Event). The Capital Gains Fee is equal to 15% of (1) realized capital gains less (2) realized capital losses, less unrealized capital losses on a cumulative basis from inception through the day before the Liquidity Event, less the aggregate amount of any previously paid Capital Gains Fee.
Prior to a Liquidity Event, the Capital Gains Fee equals:
•15% of cumulative realized capital gains less all realized capital losses and unrealized capital depreciation on a cumulative basis from inception through the end of such calendar year (or upon a Liquidity Event), less the aggregate amount of any previously paid Capital Gains Fee as calculated in accordance with GAAP.
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Following a Liquidity Event, the amount payable equals:
•17.5% of cumulative realized capital gains from inception through the end of such calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid Capital Gains Fee as calculated in accordance with GAAP.
If a Liquidity Event occurs on a date other than the first day of a fiscal year, the Capital Gains Fee will be calculated as of the day before the Liquidity Event, with such Capital Gains Fee paid to the Adviser annually following the end of the fiscal year in which the Liquidity Event occurred. Solely for purposes of calculating the Capital Gains Fee after a Liquidity Event, the Company will be deemed to have previously paid a Capital Gains Fee prior to a Liquidity Event equal to the product obtained by multiplying (a) the actual aggregate amount of previously paid Capital Gains Fee for all periods prior to a Liquidity Event by (b) the percentage obtained by dividing (x) 17.5% by (y) 15%.
Each year, the Capital Gains Fee is calculated net of the aggregate amount of any previously paid Capital Gains Fee for all prior periods. We will accrue, but will not pay, a Capital Gains Fee with respect to unrealized appreciation because a Capital Gains Fee would be owed to the Adviser if we were to sell the relevant investment and realize a capital gain. In no event will the Capital Gains Fee payable pursuant to the Investment Advisory Agreement exceed the amount permitted by the Investment Advisers Act of 1940, as amended (the "Advisers Act"), including Section 205 thereof.
For the purpose of computing the Capital Gains Fee, the calculation methodology looks through derivative financial instruments or swaps as if we owned the reference assets directly.
For the three and nine months ended September 30, 2024 and September 30, 2023, there were no Capital Gains Fees incurred.
Administration Agreement
Pursuant to the administration agreement between the Company and LS Administration, LLC (the "Administration Agreement"), LS Administration, LLC (the "Administrator") furnishes the Company with office space, office services, and equipment. Under the Administration Agreement, our Administrator performs or oversees the performance of our required administrative services, which include providing assistance in accounting, legal, compliance, operations, technology, internal audit, and investor relations, and loan agency services (including any third party service providers related to the foregoing) and being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, our Administrator assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and disseminating reports to our stockholders, assessing our internal controls under the Sarbanes-Oxley Act, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.
Payments under the Administration Agreement are equal to an amount that reimburses our Administrator for its costs and expenses. Such payments include the Company's allocable portion of (i) the expenses incurred by our Administrator in performing its obligations under the Administration Agreement, (ii) the compensation paid to our Chief Compliance Officer and Chief Financial Officer and their respective staffs, and (iii) the cost of providing managerial assistance upon request to portfolio companies. The Administration Agreement may be terminated by either party without penalty upon 60 days' written notice to the other party. Additionally, we ultimately bear the costs of any sub-administration agreements that our Administrator may enter into. Our Administrator reserves the right to waive all or part of any reimbursements due from us at its sole discretion.
The Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, our Administrator and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it will be entitled to indemnification from us for any damages, liabilities, costs, and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of our Administrator's services under the Administration Agreement or otherwise as administrator for us.
For the three and nine months ended September 30, 2024, the Company incurred $500 and $1,506, respectively, in fees under the Administrative Agreement. For the three and nine months ended September 30, 2023, the Company incurred
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$251 and $600, respectively, in fees under the Administrative Agreement. These fees are included in administrative service fees in the accompanying Consolidated Statements of Operations. As of September 30, 2024, other assets in the accompanying Consolidated Statements of Assets and Liabilities included $553 in prepaid administrative services cost which will be amortized over remainder of the year ended December 31, 2024. As of September 30, 2024 and December 31, 2023, $0 and $885, respectively, were unpaid and included in administrative services fee payable in the accompanying Consolidated Statements of Assets and Liabilities. No administrative services fee was charged to the Company prior to the Company's commencement of operations.
Additionally, pursuant to a sub-administration agreement with SS&C Technologies, Inc. ("SS&C"), SS&C performs certain of the Company's required administrative services, which include providing assistance in accounting, legal, compliance, operations, investor relations and technology, being responsible for the financial records that the Company is required to maintain and preparing reports to the Company's stockholders and reports filed with the SEC. SS&C is also reimbursed for certain expenses it incurs on our behalf.
Our Administrator and Adviser have entered into staffing agreements with affiliates of Lafayette Square pursuant to which such Lafayette Square affiliates agree to provide our Administrator and Adviser with access to certain legal, operations, financial, compliance, accounting, internal audit (in their role of performing our Sarbanes-Oxley Act internal control assessment), clerical and administrative personnel.
Affiliated transactions
The Adviser's investment allocation policy seeks to ensure allocation of investment opportunities on a fair and equitable basis over time between the Company and other funds or investment vehicles managed by the Adviser or its affiliates. It is expected that the Company may have overlapping investment strategies with such affiliated funds and/or investment vehicles, but there are prohibitions under the 1940 Act from participating in certain transactions with such affiliates without prior approval of the directors who are not interested persons, and in some cases, the prior approval of the SEC. As a result, the Company, the Adviser and certain of their affiliates applied for, and have been granted, exemptive relief by the SEC for the Company to co-invest with other funds or investment vehicles managed by the Adviser or certain of its affiliates, in a manner consistent with the requirements of the Company's organizational documents and investment strategy as well as applicable laws and regulations and the Adviser's fiduciary duties. As a result of such exemptive relief, there could be significant overlap in the Company's investment portfolio and the investment portfolios of such other affiliated entities that avail themselves of such exemptive relief and that have an investment objective similar to the Company. In addition, any transaction fees (including break-up or commitment fees, but excluding transaction fees contemplated by Section 17(e) or 57(k) of the 1940 Act, as applicable, which are expected to be retained by the Adviser, to the extent permitted by applicable law) received in connection with a co-investment transaction among the Company and its affiliated entities will be distributed to the participating entities (including the Company) on a pro rata basis based on the amounts they invested or committed, as the case may be, in such transaction.
Due to Affiliate
The Administrator pays for certain unaffiliated third-party expenses incurred by the Company. These expenses are not marked-up and represent the same amount the Company would have paid had the Company paid the expenses directly. After the commencement of operations these expenses are reimbursed on an ongoing basis. As of September 30, 2024 and December 31, 2023, $97 and $123, respectively, were included in the Due to Affiliate line item in the Consolidated Statements of Assets and Liabilities for reimbursable expenses paid by the Administrator on behalf of the Company.
Expense Support and Conditional Reimbursement Agreement
On December 30, 2021, the Company entered into an expense support and conditional reimbursement agreement (the "Expense Support Agreement") with the Adviser. The Adviser may elect to pay certain Company expenses on the Company's behalf (each, an "Expense Payment"), provided that no portion of the payment will be used to pay any interest expense or shareholder servicing and/or distribution fees of the Company. Any Expense Payment that the Adviser has committed to pay must be paid by the Adviser to the Company in any combination of cash or other immediately available funds no later than 45 days after such commitment was made in writing, and/or offset against amounts due from the Company to the Adviser or its affiliates.
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Following any calendar quarter in which Available Operating Funds (as defined below) exceed the cumulative distributions accrued to the Company's shareholders based on distributions declared with respect to record dates occurring in such calendar quarter (the amount of such excess being hereinafter referred to as "Excess Operating Funds"), the Company will pay such Excess Operating Funds, or a portion thereof, to the Adviser until such time as all Expense Payments made by the Adviser to the Company within three years prior to the last business day of such calendar quarter have been reimbursed. Any payments required to be made by the Company are referred to herein as a "Reimbursement Payment". "Available Operating Funds" means the sum of (i) the Company's net investment company taxable income (including net short-term capital gains reduced by net long-term capital losses), (ii) the Company's net capital gains (including the excess of net long-term capital gains over net short-term capital losses) and (iii) dividends and other distributions paid to the Company on account of investments in portfolio companies (to the extent such amounts listed in clause (iii) are not included under clauses (i) and (ii) above).
The Company's obligation to make a Reimbursement Payment will automatically become a liability of the Company on the last business day of the applicable calendar quarter, except to the extent the Adviser has waived its right to receive such payment for the applicable quarter.
The following table presents a summary of Expense Payments and the related Reimbursement Payments since the Company's inception:
For the Period Ended Expense Payments by Adviser Reimbursement Payments to Adviser Unreimbursed Expense Payable
June 30, 2022 $ 227 $ - $ 227
September 30, 2022 225 - 452
June 30, 2023 - (329) 123
September 30, 2023 - (123) -
Total $ 452 $ (452) $ -
As of September 30, 2024, the Company has no Unreimbursed Expense Payable.
Note 7. Commitments and Contingencies
As of September 30, 2024, the Company was not subject to any legal proceedings, although the Company may, from time to time, be involved in litigation arising out of operations in the normal course of business or otherwise.
The Company has and may in the future become obligated to fund commitments such as revolving credit facilities, bridge financing commitments or delayed draw commitments. As of September 30, 2024 and December 31, 2023 the fair value of unfunded commitments held by the Company was $(96) and $(4), respectively, as shown on the Consolidated Schedule of Investments. The Company had the following unfunded commitments to fund investments as of the indicated dates:
Par Value as of Par Value as of
September 30, 2024 December 31, 2023
Unfunded debt securities $ 98,501 $ 73,977
Unfunded equity securities 12,500 -
Total unfunded commitments $ 111,001 $ 73,977
Note 8. Directors Fees
Our independent directors receive an annual fee of $100 (prorated for any partial year). In addition, the chair of the Audit Committee receives an additional annual fee of $20 (prorated for any partial year). We are also authorized to pay the reasonable out-of-pocket expenses for each independent director incurred in connection with the fulfillment of his or her
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duties as independent directors (provided that such compensation will only be paid if the committee meeting is not held on the same day as any regular meeting of the Board).
For the three and nine months ended September 30, 2024 and the fiscal year December 31, 2023, independent directors fees will be paid in the form of our common stock issued at a price per share equal to the greater of NAV or the market price, if any, at the time of payment. On April 29, 2024, the Company issued 21,333 shares of common stock to our directors as compensation for their services for the fiscal year ended December 31, 2023.
No compensation is paid to directors who are ''interested persons'' of the Company (as such term is defined in the 1940 Act). For the three and nine months ended September 30, 2024, the Company accrued $80 and $240 for directors' fees expense, respectively. For the three and nine months ended September 30, 2023, the Company accrued $80 and $240 for directors' fees expense, respectively.
Note 9. Share Data and Distributions
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Earnings (loss) per common share (basic and diluted):
Net increase (decrease) in net assets resulting from operations $ 4,603 $ 3,476 $ 18,952 $ 6,305
Weighted average common shares outstanding 22,614,966 13,053,832 22,126,853 10,254,893
Earnings (loss) per common share (basic and diluted): $ 0.20 $ 0.27 $ 0.86 $ 0.61
Capital Activity
The Company is authorized to issue 50,000,000 shares of preferred stock at a par value of $0.001 per share and 450,000,000 shares of common stock at a par value of $0.001 per share. The Company has entered into subscription agreements in which investors have made capital commitments to purchase shares of the Company's common stock (the "Subscription Agreements") with several investors, providing for the private placement of the Company's common stock. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase the Company's common stock at a price per share equal to the most recent NAV per share as determined by the Board (subject to the adjustment to the extent required by Section 23 of the 1940 Act) up to the amount of their respective capital subscriptions on an as-needed basis as determined by the Company with a minimum of ten business days prior notice.
As of September 30, 2024 and December 31, 2023, the Company had closed capital commitments totaling $408.2 million and $377.0 million, respectively, for the private placement of the Company's common stock, of which $65.3 million and $60.3 million, respectively, were uncalled.
Share Issuance Date Shares Issued Amount Average Offering Price per Share
April 29, 2024 733,093 $ 10,996 $ 15.00
September 25, 2024 1,027,611 15,228 14.82
Total 1,760,704 $ 26,224 $ 15.00
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Share Issuance Date Shares Issued Amount Average Offering Price per Share
January 26, 2023 2,510,396 $ 37,129 $ 14.79
March 28, 2023 1,188,592 17,746 14.93
June 27, 2023 4,392,543 65,097 14.82
Total 8,091,531 $ 119,972 $ 14.83
Distributions
Distributions to common stockholders are recorded on the ex-dividend date. The Company elected to be taxed as a RIC under the Code for its taxable year ending December 31, 2023, and for future taxable years. As a RIC, the Company is required to distribute dividends each tax year as a RIC to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to be eligible for tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a distribution all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board and is based on management's estimate of the Company's annual taxable income. Net realized capital gains, if any, may be distributed to stockholders or retained for reinvestment.
The Company has adopted the DRIP that provides for the automatic reinvestment of all cash distributions declared by the Board of Directors, unless a stockholder elects to "opt out" of the DRIP. As a result, if the Board of Directors declares a cash distribution, then the stockholders who have not "opted out" of the DRIP will have their cash distributions automatically reinvested in additional shares of common stock, rather than receiving the cash distribution. The Company reserves the right to use primarily newly issued shares to implement the DRIP, whether the shares are trading at a price per share at or above NAV. NAV is determined as of the latest available quarter end before such distribution. However, the Company reserves the right to purchase shares in the open market in connection with the implementation of the DRIP. In the event the price per share is trading at a discount to NAV, the Company intends to purchase shares in the open market rather than issue new shares.
For the nine months ended September 30, 2024 the following table summarizes the distributions declared on shares of the Company's common stock and shares distributed pursuant to the DRIP to stockholders who had not opted out of the DRIP:
Date Declared Record Date Payment Date Amount Amount Per Share DRIP Shares Issued
March 26, 2024 March 22, 2024 May 6, 2024 $6,475 $0.30 140,902
June 28, 2024 June 25, 2024 August 6, 2024 $6,738 $0.30 147,220
September 24, 2024 September 24, 2024 November 04, 2024 $7,460 $0.33 164,271
For the nine months ended September 30, 2023 the following table summarizes the distributions declared on shares of the Company's common stock and shares distributed pursuant to the DRIP to stockholders who had not opted out of the DRIP:
Date Declared Record Date Payment Date Amount Amount Per Share DRIP Shares Issued
April 21, 2023 April 21, 2023 May 15, 2023 $1,292 $0.15 30,168
June 23, 2023 June 23, 2023 August 14, 2023 $1,297 $0.15 29,858
September 29, 2023 September 29, 2023 November 13, 2023 $2,614 $0.20 53,904
Note 10. Tax Matters
The Company is subject to the U.S. federal income tax rules and filing requirements. The Company has elected to be treated, and intends to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a result, the Company
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generally does not expect to be subject to U.S. federal income taxes on its RIC operations. However, there is no guarantee that the Company will qualify to make such an election for any taxable year.
The Company has not recorded a liability for any uncertain tax positions pursuant to the provisions of ASC 740, Income Taxes, as of September 30, 2024 and December 31, 2023.
In the normal course of business, the Company is subject to examination by federal and certain state and local tax regulators. The Company adopted a tax year-end of December 31.
The Company's taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income earned in each period and carried forward for distribution in the following period may be different than this estimate.
As of September 30, 2024, the Company had a $111 short-term limited capital loss carryforward from its prior C-corporation tax year end that it can use to offset future capital gains for 5.0 years. Such loss carryforward expires on December 31, 2027.
For U.S. federal income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions paid for the nine months ended September 30, 2024, and for the year ended December 31, 2023, were as follows:
For the nine months ended
September 30, 2024 		For the year ended
December 31, 2023
Ordinary Income
$ 20,673 $ 9,139
Long-term Capital Gain
$ - $ -
Return of Capital
$ - $ -
As of September 30, 2024 and December 31, 2023, the tax cost and estimated gross unrealized appreciation/(depreciation) from investments for federal income tax purposes are as follows.
September 30, 2024 December 31, 2023
Tax cost $ 461,102 $ 271,522
Gross unrealized appreciation $ 3,300 $ 2,217
Gross unrealized depreciation $ (3,248) (147)
Net unrealized investment appreciation / (depreciation) on investments $ 52 $ 2,070
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The Company has certain wholly-owned corporate subsidiaries that are consolidated for financial statement purposes. These entities ("taxable subsidiaries"); LS BDC Holdings, LLC; LS BDC Holdings (DN), LLC; LS BDC Holdings (160), LLC; and LS BDC Holdings (NGCF), LLC; have elected to be taxed as regular c-corporations for federal income tax purposes. These taxable subsidiaries recognize deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between the tax basis of certain assets and liabilities and the reported amounts included in the accompanying consolidated balance sheet using the applicable statutory tax rates in effect for the year in which any such temporary differences are expected to reverse.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. Components of the Company's deferred tax assets and liabilities as of September 30, 2024 are as follows:
Period Ended September 30, 2024
Deferred tax assets:
Net operating loss carryforward $ 135
Excess business interest expense carryforward $ 156
Charitable contributions carryforward $ 1
Valuation allowance $ (127)
Total deferred tax assets $ 165
Deferred tax liabilities:
Net unrealized gain on investments $ (165)
Total deferred tax liabilities $ (165)
Net deferred tax assets and liabilities $ -
The Company's income tax provision consists of the following as of September 30, 2024:
Period Ended September 30, 2024
Current tax (expense)/benefit
Federal $ (191)
State and Local $ (45)
Total current tax (expense)/benefit $ (236)
Deferred tax (expense)/benefit
Federal $ 104
State and Local $ 23
Valuation allowance $ (127)
Total deferred tax (expense)/benefit $ -
Total income tax (expense)/benefit $ (236)
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Total income tax (expense) benefit for the Company differs from the amount computed by applying the federal statutory income tax rate of 21% to net increase (decrease) in net assets from operations for the period January 1, 2024 through September 30, 2024, as follows:
Period Ended September 30, 2024
Income tax (expense)/benefit at federal statutory tax rate $ 967
Income attributable to the RIC and not subject to corporate tax $ (939)
State and local income tax (expense)/benefit (net of federal benefit) $ 6
Prior year net operating loss carryforward $ 135
Income estimate from partnership investment
$ (88)
Prior year provision to return adjustments
$ (148)
Non-deductible federal taxes paid $ (42)
Valuation allowance $ (127)
Total income tax (expense)/benefits $ (236)
At September 30, 2024, the taxable subsidiaries did not have any capital loss carryforwards.
Net operating loss carryforwards are available to offset future taxable income. These net operating loss carryforwards can be carried forward indefinitely and may offset up to 80% of taxable income in any given year. Any unused portion will continue to be carried forward. At September 30, 2024, the taxable subsidiaries had estimated net operating loss carryforwards as follows.
Entity
Period Ended September 30, 2024
Expiration
LS BDC Holdings (DN), LLC
$ 531
Indefinite
At September 30, 2024, the Company determined a partial valuation allowance of the Company's gross deferred tax asset was required. The Company's assessment considered, among other matters, the nature, frequency and severity of current and cumulative losses, the duration of statutory carryforward periods and the associated risk that operating loss and capital loss carryforwards are limited or are likely to expire unused, and unrealized gains and losses on investments. Through the consideration of these factors, the Company has determined that it is more likely than not that the Company's net deferred tax asset would not be realized in full. As a result, the Company recorded a partial valuation allowance with respect to its gross deferred tax asset for the quarter ended September 30, 2024. From time to time, the Company may modify its estimates or assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance as new information becomes available. Modifications to the Company's estimates or assumptions regarding its deferred tax liability and/or asset balances and any applicable valuation allowance, changes in generally accepted accounting principles or related guidance or interpretations thereof, limitations imposed on or expirations of the Company's net operating losses and capital loss carryovers (if any) and changes in applicable tax law could result in increases or decreases in the Company's NAV per share, which could be material.
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Note 11. Financial Highlights
Below is the schedule of financial highlights of the Company for the nine months ended September 30, 2024 and September 30, 2023:
Per Common Share Data:(1)
For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Net asset value, beginning of period $ 14.85 $ 14.60
Net investment income (loss) 0.95 0.54
Net realized and unrealized gain (loss) (0.09) 0.07
Net increase (decrease) in net assets resulting from operations 0.86 0.61
Initial issuance of Common Stock - -
Effect of offering price of subscriptions(2)
(0.02) 0.12
Distributions declared (0.93) (0.50)
Net asset value, end of period $ 14.76 $ 14.83
Total return based on NAV(3)
5.72 % 1.58 %
Common shares outstanding, end of period 23,633,167 13,068,112
Weighted average shares outstanding 22,126,853 10,254,893
Net assets, end of period $ 348,938 $ 193,744
Ratio/Supplemental data(4):
Ratio of net investment income (loss) to average net assets 8.46 % 5.21 %
Ratio of expenses to average net assets 6.88 % 6.96 %
Ratio of expenses (before management fees, incentive fees and interest and financing expenses) to average net assets 2.15 % 3.97 %
Weighted average debt outstanding $ 92,408 $ 14,609
Total debt outstanding $ 323,001 $ 54,400
Asset coverage ratio(5)
320.9 % 4561.0 %
Portfolio turnover 5 % - %
(1)The per share data were derived by using the weighted average shares from the date of the first issuance of shares, through September 30, 2024 and September 30, 2023.
(2)Increase (decrease) was due to the offering price of subscriptions during the period (See note 9).
(3)Total return was based upon the change in net asset value per share between the opening and ending net assets per share and the issuance of common stock in the period. Total return is not annualized.
(4)Annualized, except for organizational expenses, which are non-recurring.
(5)On September 30, 2024, the Company received exemptive relief from the SEC allowing the Company to modify the asset coverage requirement to exclude the SBA-guaranteed debentures from this calculation.
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Note 12. Subsequent Events
The Company's management evaluated subsequent events through the date of issuance of the consolidated financial statements. Other than the subsequent events disclosed below, there have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the consolidated financial statements.
On October 2, 2024, the Company repaid principal and interest on its outstanding balance on the ING Credit Facility in the amount of $60.0 million. Subsequent to this repayment and throughout the date of this report, the Company borrowed a total of $57.0 million in additional borrowings. As of the date of this Report, the outstanding principal balance on the ING Credit Facility is $144.0 million.
On October 2, 2024, the Company fully repurchased its obligation under the repurchase agreement with Macquarie that was collateralized by the Company's term loan to Salt Dental Collective, LLC. As of the date of this Report, the Company had no outstanding repurchase obligations to Macquarie.
On October 11, 2024, the Company elected to be treated, and intends to continue to comply with the requirement to qualify annually, as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended for the tax year ended December 31, 2023 concurrent with the filing of form 1120-RIC.
On October 23, 2024, SSBIC LP was awarded a commitment from the SBA in the form of debentures in an amount equal to $27.5 million. As of the date of this Report, SSBIC LP has not drawn any debentures on this commitment.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollar amounts in thousands, except per share data, unless otherwise indicated)
The following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. References to "we," "us," "our," and the "Company," means Lafayette Square USA, Inc., unless otherwise specified. The discussion and analysis contained in this section refers to our financial condition, results of operations and cash flows. The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. Please see "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with this discussion and analysis. Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under "Cautionary Statements Regarding Forward-Looking Statements" appearing elsewhere in this report.
Business Overview
The Company is an externally managed, non-diversified, closed-end investment company focused on lending to middle market businesses while offering them significant managerial assistance to strengthen their workforce, with the goal of creating and preserving jobs and stimulating economic growth in each of ten Target Regions across the United States. The Company believes that demand for capital investment and managerial assistance is particularly acute among middle market companies headquartered in overlooked places, given that we believe business development companies and other capital providers primarily focus on investments in businesses located in high income jurisdictions. We believe inflationary pressures and the increasing employee benefits gap exacerbate this demand, enabling us to utilize our investment approach to select favorable risk-adjusted return opportunities.
Our investment objective is to generate favorable risk-adjusted returns, including current income and capital appreciation, principally from investments in "non-sponsored" middle market businesses that are primarily domiciled, headquartered and/or have a significant operating presence in each of the Target Regions, with a goal to invest at least 5% of its assets in each region over time. We define middle market businesses as companies having annual revenues between $10 million and $1 billion and annual EBITDA of between $10 million and $100 million, although we may invest in larger or smaller companies. We expect to invest primarily in first and second lien loans and, to a lesser extent, in subordinated and mezzanine loans and equity and equity-like securities, including common stock, preferred stock, and warrants.
We will primarily focus our origination efforts on "non-sponsored" businesses, which we define as companies substantially owned by people rather than funds or financial institutions where we can establish a direct lending relationship without the involvement or backing of a traditional buyout fund sponsor. We believe this focus will enable us to source investments through a less competitive lending process, allowing us to achieve favorable economic and structural terms for our investments. We intend to complement this investment strategy with robust risk management practices and rigorous ongoing portfolio monitoring. For a discussion of the risks inherent in our portfolio investments, please see the discussion under "Item 1A. Risk Factors." While we are generally industry agnostic with respect to our focus on investment sectors, we tend to primarily invest in the business services, franchising, technology & telecommunications, transportation & logistics, and healthcare sectors. In addition, we opportunistically look for exposures in the real-estate industry (including with companies that manage real estate and with real estate-related projects that advance our 2030 goals as further described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 ("2023 Form 10-K")) and the solar power industry (including with companies working to strategically enact energy transition plans).
We were formed as a Delaware limited liability company on February 19, 2021. Prior to the Effective Date, we elected to be regulated as a BDC under the 1940 Act. For U.S. federal income tax purposes, we were taxed as a corporation for the period from February 19, 2021 (date of inception) through December 31, 2022. The Company intends to elect to be treated, and qualify annually thereafter, as a RIC under Subchapter M of the Code. As a result, the company generally does not expect to be subject to U.S. federal income taxes. However, there is no guarantee that the company will qualify to make such an election for any taxable year. Prior to the Effective Date and to our election to be regulated as a BDC, we completed a conversion under which Lafayette Square USA, Inc. (then known as Lafayette Square Empire BDC, Inc.) succeeded to the business of Lafayette Square Empire BDC, LLC, and the sole member of Lafayette Square Empire BDC, LLC became the stockholder of Lafayette Square Empire BDC, Inc. On May 16, 2022, Lafayette Square Empire BDC, Inc. filed with the Secretary of State of the State of Delaware a Certificate of Amendment to its Certificate of Incorporation to change its corporate name from "Lafayette Square Empire BDC, Inc." to "Lafayette Square USA, Inc.," effective May 16, 2022. As a BDC, we must comply with certain regulatory requirements. When we qualify as a RIC there will be additional
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regulatory requirements we must comply with as well. See "Item 1. Business - Regulation as a Business Development Company" and "Item1. Business - Certain U.S. Federal Income Tax Considerations."
We are managed by our Adviser, a Delaware limited liability company and an affiliate of Lafayette Square. The Adviser is a limited liability company that is registered as an investment adviser under the Advisers Act. The Adviser oversees the management of the Company's activities and is responsible for making investment decisions with respect to the Company's portfolio.
We generally expect to hold our investments until maturity or until such investments are refinanced by the portfolio company. From time to time, we may invest in loans with other lenders, or "club loans," and may serve as agent in connection with any such loans. In our capacity as agent, we act as the servicer of the loan. We may also participate in loans in the broadly syndicated loan market. Our debt investments in our portfolio companies typically have principal amounts of up to $50 million, bear interest at floating rates of interest tied to a widely available risk-free rate such as the U.S. Prime Rate or SOFR, and generally are not guaranteed by the federal government or otherwise. The debt instruments in which we invest are typically not rated by any rating agency, but we believe that if they were, they would be rated below investment grade (rated lower than "Baa3" by Moody's Investors Service, lower than "BBB-" by Fitch Ratings or lower than "BBB-" by Standard & Poor's Ratings Services). Under the guidelines established by these rating agencies, such ratings are an indication of such debt instruments having predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Debt instruments that are rated below investment grade are sometimes referred to as "high yield bonds" or "junk bonds."
The Company currently has two wholly owned subsidiaries, Lafayette Square SBIC, LP ("SBIC LP") and Lafayette Square SSBIC, LP ("SSBIC LP"), that each have an SBIC license from the SBA. Each SBIC license provides the Company an incremental source of long-term capital by permitting it to issue up to $175 million of SBA-guaranteed debentures, for a total of $350 million in SBA-guaranteed debentures available to the SBIC funds under common control of the Company, subject to the SBA's approval. These debentures have maturities of ten years and have fixed interest rates tied to the U.S. 10 Year Treasury rate, which are generally lower than comparable bank and other forms of debt.
We believe that investment capital does not flow to working class communities and to lower middle market companies. As (i) reflected in the SEC's Electronic Data Gathering, Analysis, and Retrieval database, only 6,000 BDC portfolio companies out of a total of 240,000 BDC portfolio companies have revenues less than $1 billion annually and (ii) reflected in research reports by FactSet and Raymond James, 80% of BDC portfolio companies are headquartered in high-income areas and 50% of companies in which BDCs invest are held by more than one BDC, suggesting that working class communities are overlooked by traditional capital markets investors. U.S. private companies, which are typically smaller than public companies, experience average annual employee turnover of 48.2%. This instability contributes to marginal economic prospects for working class employees. For example, an estimated 64% of U.S. workers live paycheck to paycheck, and 70% of working class employees do not enjoy healthcare or retirement benefits. As described in our 2023 Form 10-K, we aim to promote public welfare and community development in working class communities by deploying at least 51% of our invested capital to borrowers (i) located in and/or with a majority of operations in Working Class Areas1or (ii) that provide Substantial Employment2to LMI individuals. In addition to such targeted investing, we seek to improve the retention, well-being, and productivity of employees by connecting our portfolio companies with third-party service providers that deliver workplace benefits and/or advisory support ("Third-Party Solution Providers") through Lafayette Square's services platform, "Worker Solutions®" (such platform is described in more detail in our 2023 Form 10-K). This platform is consistent with the mandate that BDCs offer "significant managerial assistance" to their portfolio companies upon request, and we believe these curated services have the potential to (i) positively affect employee well-being and (ii) enhance the risk-adjusted financial returns of the portfolio companies (including by increasing employee retention, morale and productivity).
In line with the aims set forth above, and as described in more detail in our 2023 Form 10-K, we have set 2030 goals to (1) increase employment opportunities by assisting our portfolio companies in creating and/or retaining 100,000 working class
1"Working Class Areas" refers to low- and moderate- income ("LMI") areas, Empowerment Zones, as defined in the Empowerment Zones and Enterprise Communities Act of 1993, as amended ("Empowerment Zones"), Opportunity Zones, as defined in the U.S. Tax Cut and Jobs Act of 2017 ("Opportunity Zones"), and/or areas targeted by a government entity for redevelopment or to revitalize or stabilize designated disaster areas. LMI is defined under applicable CRA regulation as (i) an individual, family or household, if their income is less than 80% of the Area Median Income as reported by the Federal Financial Institutions Examination Council at https://www.ffiec.gov/Medianincome.htm [ffiec.gov] (or such other industry recognized source as may be determined by the Adviser) and (ii) a census tract, if it is identified as low-to-moderate income by the Federal Financial Institutions Examination Council at https://geomap.ffiec.gov/ffiecgeomap/ (or such other industry recognized source as may be determined by the Adviser). Throughout this Form 10-Q, we may use the terms "LMI", "underserved" and "working class" interchangeably.
2 "Substantial Employment" means more than 50% of the portfolio company's workforce, measured by W-2 forms or 1099 forms filed by workers with the Internal Revenue Service.
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jobs, and 150,000 jobs overall, (2) provide significant managerial assistance to small and middle-market companies in which we invest by incentivizing at least 50% of our borrowers to adopt Worker Solutions®) and (3) encourage economic growth in working class communities by investing at least 50% of our assets in companies which are either located in working class communities or are substantial employers of working class people.) To measure our progress towards these goals and understand the demographic data of employees in our portfolio companies, we track the locations of our portfolio companies and the LMI status of their employees. For these purposes, we rely on feedback from our portfolio companies to obtain information about the status and well-being of their employees. We cannot guarantee the accuracy of the information provided to us by our portfolio companies, and the metrics used by different portfolio companies to calculate such information varies significantly. However, based on our analysis, we believe that deployment of our capital and the utilization of services provided by Worker Solutions by our portfolio companies can improve the lives of their employees as reflected through a variety of statistical measures.
As of September 30, 2024, 60.8% percent of our portfolio (and 61.4% of the transactions where we were lead agent) were invested in borrowers who are either located in Working Class Areas or are Substantial Employers of LMI people, with 6,992 LMI individuals employed out of a total of 17,378 employees.3In addition, with respect to engagement by our portfolio companies with our Third-Party Solution Providers and/or recommended human resources ("HR") policy changes, as of September 30, 2024, 37% of the transactions where we were lead agent (28% of our overall Portfolio Companies) had adopted our Third-Party Solution Providers and/or recommended HR policy changes (for a total of six Third-Party Solution Providers and six HR policy changes deployed. Of the 17,378 workers employed through our portfolio companies, 2,480 workers have participated in third-party solutions and/or covered by qualifying policy changes. Overall, a total of 4,545 workers have access to improved benefits through third-party solutions or HR policy changes.
By comparison, as of September 30, 2023, 48.7% percent of our portfolio (and 62.9% of the transactions where we were lead agent) were invested in borrowers who were either located in Working Class Areas or were Substantial Employers of LMI people, with 2,081 LMI individuals employed out of a total of 9,363 employees. In addition, with respect to engagement by our portfolio companies with our Third-Party Solution Providers, as of September 30, 2023, 54.5% of the transactions where we were lead agent (and 42.2% of our overall Portfolio Companies) had adopted our Third-Party Solution Providers (for a total of five Third-Party Solution Providers), with 52 workers served and a total of 2,163 workers with access to services.
As of September 30, 2024, among our portfolio companies that have adopted Third-Party Solution Provider services, 118 total workers across two portfolio companies have cumulatively saved $15,449 in emergency savings, 142 workers across two portfolio companies combined have prevented an estimated $100,846 in debt4through small-dollar, zero-interest loans, 43 workers from one portfolio company are building their credit scores through monthly rent reporting, and seven workers from one portfolio company have cumulatively participated in 42 one-on-one financial coaching sessions to better their financial wellness. Additionally, two portfolio companies have each adopted three recommended HR policy changes to expand benefits access and participation for employees, serving 2,264 workers combined.
The Company rewards portfolio companies with an interest rate stepdown when they adopt services from Third-Party Solution Providers and/or implement policy changes to existing workplace benefits (defined as "Qualifying Human Capital Investments") that we believe will enhance employee well-being and improve retention. As of September 30, 2024, we have rewarded a combined total of $187,403 to portfolio companies through interest rate stepdown savings for their adoption of Third-Party Solution Providers and/or implementation of HR policy changes.
Over time, we believe our portfolio companies' uptake of Third-Party Solution Providers, in combination with our capital, will contribute to an improvement in below metrics, shown over the past two years:
3 Portfolio Company Human Capital Data is reflective of the portfolio companies participating in quarterly KPI reporting, nine in total as of September 30, 2024. For those portfolio companies who did not agree to provide census data, job totals are based on data provided by such portfolio companies at time of transaction.
4Savings relative to high-cost lending products calculated by using the average payday loan APR (~400%), average loan amount of $215, and an assumed 5-month repayment period (the average time it takes to repay payday loans). https://www.incharge.org/debt-relief/how-payday-loans-work/
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Lafayette Square USA, Inc.'s
Portfolio Company Human Capital Data
September 30, 2024 September 30, 2023
Employee Turnover5
Portfolio Company Average (Quarterly)
11% 8%
National Average (Quarterly)
12% 4%
Change Since Initial Investment Average (Quarterly)6
2% 1%
Participation in Medical Care Benefits7
Portfolio Company Average (Quarterly)
36% 35%
National Average (Annually, As of March 2024)
45%
Change Since Initial Investment Average (Quarterly)
5% 2%
Participation in Retirement Benefits8
Portfolio Company Average (Quarterly)
42% 26%
National Average (Annually, As of March 2024)
53%
Change Since Initial Investment Average (Quarterly)
4% (1)%
Median Employee Income
LMI Employee Median Income (Quarterly)
$41,600 $46,000
Non-LMI Employee Median Income (Quarterly)
$120,000 $86,000
National Median Family Income (Annually, As of 2023)9
$96,401
In addition to supporting human capital investments and outcomes at our portfolio companies, Worker Solutions® has provided managerial assistance to companies and projects affiliated with our portfolio companies. This effort includes providing credit building through rent reporting services to 1 residential property where 433 tenants have enrolled in credit building services out of a total of 436 residents (99.3% uptake). Of the 433 residents who are participating in the rent reporting program, 10 of these residents newly established a credit file or became "credit visible" to the consumer credit bureaus. These newly credit visible residents posted an average credit score of 683 at the end of the recent reporting period. Prior to participating in the rent reporting program, most residents (423) had previously established a credit file or who were already "credit visible". Since enrollment in the rent reporting program, these residents have posted an average credit score improvement of 24 points, an average credit score of 647; overall, 55% of these residents improved their credit score, with 5% of the overall resident group increasing their credit score above 660--typically considered the subprime-prime threshold.
Key Components of Operations
Investments
Our level of investment activity may vary substantially from period to period depending on many factors, including the amount of debt available to middle market companies, the general economic environment and the competitive environment for the type of investments we make.
Revenues
We generate revenue primarily in the form of interest and fee income on debt investments we hold and capital gains, if any, on our investments. We generally expect our debt investments to have a stated term of five to eight years and typically to bear interest at a floating rate usually determined on the basis of a benchmark such as the SOFR. Interest on these debt
5Turnover rates are calculated by dividing the total terminations for the period by the average number of employees who worked during or received pay for the same period. National turnover data is based on private employee data from the U.S. Bureau of Labor Statistics - Job Openings and Labor Turnover Survey and Current Employment Statistics Survey.
6Change Since Initial Investment Average is taken as the average of all portfolio companies' change in turnover, medical care participation or retirement participation since the BDC's initial investment, otherwise known as deal close date, with the portfolio company. Where data wasn't available in the same quarter as the initial investment, the next available quarter's data was used. Based on 9 of 29 portfolio companies' current human capital data made available to Lafayette Square.
7Medical Care Benefits are plans that provide services or payments for services rendered in the hospital or by a qualified medical care provider. Participation is calculated from the unrounded percentage of workers who participate in the plan. 71 employees from portfolio companies who did not provide medical care benefits data to the Company were not included in this calculation. National average is private industry from the U.S. Bureau of Labor Statistics - National Compensation Survey.
8Retirement Benefit plans includes defined benefit pension plans and defined contribution retirement plans. Participation is calculated from the unrounded percentage of workers who participate in the plan. The national average is private industry from the U.S. Bureau of Labor Statistics - National Compensation Survey.
9National median income 1-year data is from the U.S. Census Bureau - American Community Survey. This is the most recent data available as of Oct 2024. Median family income is used to calculate individual LMI per CRA guidelines. The metric is included at the national level to serve as a similar-but not exact-comparison.
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investments are generally payable quarterly. In some instances, we may receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we may receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantly from period to period. Our portfolio activity reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees.
Expenses
We expect our primary annual operating expenses to include advisory fees and the reimbursement of expenses under our investment advisory and management agreement between the Company and the Adviser, dated April 26, 2021 and approved by the Board for renewal on June 4, 2024 (and as may be further amended, the "Investment Advisory Agreement") and our Administration Agreement, respectively. We also bear other expenses, which include:
•our initial organization costs and operating costs incurred prior to the filing of our election to be regulated as a BDC (in connection with our formation and the initial closing of the private offering of shares of our Common Stock);
•the costs associated with our private offering and any subsequent offerings of our securities;
•calculating individual asset values and our net asset value (including the cost and expenses of third-party valuation services);
•out-of-pocket expenses, including travel expenses, incurred by the Adviser, or members of its investment team, or payable to third parties, performing due diligence on prospective portfolio companies, dead deal or broken deal expenses and, if necessary, enforcing our rights;
•certain costs and expenses relating to distributions paid by us;
•administration fees payable under the Administration Agreement and related expenses;
•debt service and other costs of borrowings or other financing arrangements;
•the allocated costs incurred in connection with providing services to employees of portfolio companies (of the type described in Item I. "Business-Investment Strategy") and/or managerial assistance (including any services offered to portfolio companies) to those portfolio companies that request it (whether such costs are incurred by the Adviser or Administrator or through payments to third party service providers);
•amounts payable to third parties relating to, or associated with, making or holding investments;
•transfer agent and custodial fees;
•costs of hedging;
•commissions and other compensation payable to brokers or dealers;
•federal and state registration fees;
•any stock exchange listing fees and fees payable to rating agencies;
•the cost of effecting any sales and repurchases of our Common Stock and other securities;
•U.S. federal, state and local taxes;
•independent director fees and expenses;
•costs of preparing consolidated financial statements and maintaining books and records, costs of preparing tax returns, costs of compliance with Sarbanes-Oxley Act, and attestation and costs of filing reports or other documents with the SEC (or other regulatory bodies) and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing;
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•the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders' meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;
•the costs of specialty and custom software expense for monitoring risk, compliance and overall investments;
•our fidelity bond;
•any necessary insurance premiums;
•extraordinary expenses (such as litigation or indemnification payments or amounts payable pursuant to any agreement to provide indemnification entered into by the Company);
•direct fees and expenses associated with independent audits, agency, consulting and legal costs; costs of winding up;
and other expenses incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement based upon our allocable portion of the compensation paid to our Chief Financial Officer and Chief Compliance Officer and their respective staffs. We also include the cost of providing managerial assistance upon request to portfolio companies, and reimbursements of third-party expenses incurred by the Administrator in carrying out its administrative services, including providing assistance in accounting, legal, compliance, operations, technology, internal audit, investor relations, and loan agency services (including any internal and third party service providers and/or software solutions related to the foregoing), and being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, our Administrator assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, our internal control assessment under the Sarbanes-Oxley Act, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase proportionally when our asset value declines.
Leverage
The amount of leverage we use in any period depends on a number of factors, including cash on-hand available for investing, the cost of financing and general economic and market conditions. Prior to the Small Business Credit Availability Act being signed into law, a BDC generally was not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage for total borrowings of at least 200%. The Small Business Credit Availability Act, signed into law on March 23, 2018, contains a provision that grants a BDC the option, subject to certain conditions and disclosure obligations, to reduce the asset coverage requirement to 150%. In April 2021, our Board and initial stockholder approved the reduced asset coverage ratio.
On September 30, 2024, we received an exemptive relief from the SEC to permit us to exclude the debt of SBIC LP that is guaranteed by the SBA from the 150% asset coverage ratio we are required to maintain under the 1940 Act. With this exemptive relief, we will have increased capacity to fund up to $175.0 million (the maximum amount of SBA-guaranteed debentures an SBIC may currently have outstanding once certain conditions have been met) of investments with SBA-guaranteed debentures in addition to being able to fund investments with borrowings up to the maximum amount of debt that the 150% asset coverage ratio limitation would allow us to incur.
Portfolio and Investment Activity
The following table summarizes our portfolio and investment activity during the three months ended September 30, 2024 and September 30, 2023:
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For the three months ended September 30, 2024 For the three months ended September 30, 2023
Total Investments, beginning of period $ 419,466 $ 113,666
New investments purchased 49,147 56,688
Net accretion of discount on investments 296 210
Net realized gains (losses) on investments - -
Investments sold or repaid (7,807) (884)
Total Investments, end of period $ 461,102 $ 169,680
Portfolio companies, at beginning of period 26 11
Number of new portfolio companies 3 1
Portfolio companies, at end of period 29 12
As of September 30, 2024 and December 31, 2023, the Company's investments consisted of the following:
September 30, 2024
Amortized Cost Fair Value
First lien senior secured loans $ 445,356 96.5 % $ 445,332 96.5 %
Equity 7,340 1.6 % 7,459 1.6 %
Subordinated debt 1,703 0.4 % 1,660 0.4 %
Preferred equity 1,652 0.4 % 1,652 0.4 %
Bonds 5,051 1.1 % 5,051 1.1 %
Warrants - - % - - %
Total $ 461,102 100.0 % $ 461,154 100.0 %
December 31, 2023
Amortized Cost Fair Value
First lien senior secured loans $ 263,118 96.9 % $ 265,287 97.0 %
Equity 4,881 1.8 % 4,901 1.8 %
Subordinated debt 1,872 0.7 % 1,753 0.6 %
Preferred equity 1,652 0.6 % 1,652 0.6 %
Warrants - - % - - %
Total $ 271,523 100.0 % $ 273,593 100.0 %
The tables below describe investments by industry composition based on fair value as of September 30, 2024 and December 31, 2023:
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September 30, 2024
Amortized Cost Fair Value
Commercial Services & Supplies $ 66,291 14.4 % $ 66,617 14.5 %
Construction & Engineering 57,329 12.4 % 57,569 12.5 %
Specialized Consumer Services 31,555 6.8 % 31,963 6.9 %
Professional Services 41,955 9.1 % 42,322 9.2 %
Road & Rail 41,603 9.0 % 39,900 8.7 %
Leisure Facilities 36,557 7.9 % 36,808 8.0 %
Media 28,135 6.1 % 26,916 5.8 %
Health Care Equipment & Services 19,762 4.3 % 19,972 4.3 %
Software 17,946 3.9 % 18,063 3.9 %
Health Care Providers & Services 17,632 3.8 % 17,678 3.8 %
Consumer Discretionary 15,455 3.4 % 15,610 3.4 %
Health Care Services 13,696 3.0 % 13,803 3.0 %
Utilities 13,367 2.9 % 13,466 2.9 %
Industrials 12,277 2.7 % 12,500 2.7 %
Restaurants 10,931 2.4 % 11,034 2.4 %
Environmental & Facilities Services 9,782 2.1 % 10,047 2.2 %
Consumer Services 9,494 2.1 % 9,494 2.1 %
Independent Power & Renewable Electricity Producer 5,051 1.1 % 5,051 1.1 %
Real Estate Management & Development 4,962 1.1 % 4,962 1.1 %
IT Services 3,394 0.7 % 3,425 0.7 %
Education 2,459 0.5 % 2,459 0.5 %
Hotels, Restaurants & Leisure 999 0.2 % 1,000 0.2 %
Food & Staples Retailing 470 0.1 % 495 0.1 %
Food Retail - - % - - %
Total $ 461,102 100.0 % $ 461,154 100.0 %
December 31, 2023
Amortized Cost Fair Value
Construction & Engineering $ 57,458 21.3 % $ 58,360 21.2 %
Commercial Services & Supplies 45,747 16.8 % 45,828 16.8 %
Professional Services 34,254 12.6 % 34,254 12.5 %
Leisure Facilities 33,439 12.3 % 33,789 12.4 %
Media 28,467 10.5 % 28,594 10.5 %
Specialized Consumer Services 15,566 5.7 % 15,625 5.7 %
Health Care Services 13,773 5.1 % 13,773 5.0 %
Environmental & Facilities Services 9,795 3.6 % 9,922 3.6 %
Restaurants 8,683 3.2 % 8,722 3.2 %
Health Care Equipment & Services 8,175 3.0 % 8,391 3.1 %
Health Care Providers & Services 7,840 2.9 % 7,940 2.9 %
IT Services 3,380 1.2 % 3,425 1.3 %
Real Estate Management & Development 2,952 1.1 % 2,970 1.1 %
Hotels, Restaurants & Leisure 1,994 0.7 % 2,000 0.7 %
Total $ 271,523 100.0 % $ 273,593 100.0 %
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The weighted average yields at amortized cost and fair value of our portfolio as of September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024 December 31, 2023
Amortized Cost Fair Value Amortized Cost Fair Value
First lien senior secured debt(2)
11.8% 11.8% 12.8% 12.8%
Subordinated debt 14.0% 14.4% 14.0% 15.0%
Bonds 12.4% 12.4% 14.0% 15.0%
Weighted Average Yield(1)
11.8% 11.8% 13.1% 12.8%
(1) The weighted average yield of our portfolio does not represent the total return to our stockholders.
(2) Computed based on (a) the annual actual interest rate or yield earned plus amortization of fees and discounts on the performing debt and other income producing investments as of the reporting date, divided by (b) the total investments (including investments on non-accrual and non-income producing investments) at amortized cost or fair value. This calculation excludes exit fees that are receivable upon repayment of certain loan investments. As of September 30, 2024and December 31, 2023, there were no exit fees.
September 30, 2024 December 31, 2023
Number of portfolio companies 29 19
Percentage of performing debt bearing a floating rate (1)
96.6% 99.3%
Percentage of performing debt bearing a fixed rate (1)(2)
3.4% 0.7%
Weighted average spread over SOFR or LIBOR of all accruing floating rate investments 6.7% 7.0%
Weighted average EBITDA (in millions) (3)
$24.9 $22.8
Weighted average leverage (net debt/EBITDA)(4)
3.8x 3.0x
Weighted average interest coverage(4)
2.4x 2.8x
(1) Measured as a percentage of total portfolio investments at fair value. Excludes all equity based investments and debt investments, if any, placed on non-accrual.
(2) Includes all equity based investments and income producing preferred stock investments, if applicable.
(3) Figures are based on portfolio company financial statements available to the Company at period end.
(4) To calculate net debt, we include debt that ranks both senior and equally with to the tranche of debt owned by us but exclude debt that is legally and contractually subordinated in ranking to the debt owned by us. Weighted average net debt to EBITDA is weighted based on the fair value of our debt investments, excluding investments where net debt to EBITDA may not be the appropriate measure of credit risk. Weighted average interest coverage is weighted based on the fair value of our performing debt investments, excluding investments where interest coverage may not be the appropriate measure of credit risk.
Ongoing monitoring and risk management of each asset is conducted by the Adviser's Portfolio Monitoring team under the supervision of our Chief Risk Officer. The Portfolio Monitoring team is separate and distinct from the Adviser's investment team, and has as its primary responsibilities to:
•formally monitor portfolio companies post-investment on an ongoing basis;
•perform quarterly valuations of all assets in partnership with third-party valuation agent(s);
•maintain and update internal and external asset ratings;
•oversee BDC-level monitoring; and
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•lead amendment, "work out," and restructurings processes.
Portfolio Monitoring monitors the financial trends of each portfolio company to determine if it is meeting its respective business plan and to assess the appropriate course of action with respect to investments in each portfolio company. Portfolio Monitoring has several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:
•periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and variants from approved budgets and internal projections;
•assessment of performance relative to business plan and key operating metrics and compliance with financial covenants;
•assessment of performance relative to industry benchmarks or portfolio comparables, if any;
•attendance at and participation in board meetings and lender calls; and
•review of monthly, quarterly and annual audited financial statements and financial projections of portfolio companies.
As part of the monitoring process, our Adviser employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Adviser rates the credit risk of all investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors. The rating system is as follows:
Investment Rating Description
1 Involves the least amount of risk to our initial cost basis. The borrower is performing above expectations, and the trends and risk factors for this investment since the time of origination or acquisition are generally favorable which may include the performance of the portfolio company or a potential exit.
2 Involves an acceptable level of risk that is similar to the risk at the time of origination or acquisition. The borrower is generally performing as expected and the risk factors are neutral to favorable. All investments or acquired investments in new portfolio companies are initially assessed a rating of 2.
3 Involves a borrower performing below expectations and indicates that the loan's risk has increased since origination or acquisition. The borrower could be out of compliance with debt covenants; however loan payments are generally not past due.
4 Involves a borrower performing materially below expectations and indicates that the loan's risk has increased materially since origination or acquisition. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 120 days past due)
5 Involves a borrower performing substantially below expectations and indicates that the loan's risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Loans rated 5 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we anticipate will be recovered.
The following table shows the distribution of the Company's investments on the 1 to 5 internal risk rating scale as of September 30, 2024 and December 31, 2023:
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September 30, 2024 December 31, 2023
Investment Rating Investments at
Fair Value 		Percentage of
Total Investments 		Investments at
Fair Value 		Percentage of
Total Investments
1 $ - - % $ - - %
2 394,338 85.5 % 273,593 100.0 %
3 66,816 14.5 % - -
4 - - - -
5 - - - -
Total $ 461,154 100.0 % $ 273,593 100.0 %
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Fair Value Measurements
We value investments for which market quotations are readily available at their market quotations. However, a readily available market value is not expected for many of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by the Advisor and our valuation policy and process.
The valuation process is a multi-step endeavor, which includes the following:
•the quarterly valuation process commences with each portfolio company or investment being initially evaluated by the investment professionals of the Advisor responsible for the monitoring of the portfolio investment;
•the Advisor's Valuation Committee reviews the valuations provided by the independent third-party valuation firm (other than immaterial investments, which are internally valued quarterly unless otherwise deemed appropriate by the Valuation Committee, and subsequently corroborated by an independent valuation firm on an annual basis) and develops a valuation recommendation;
•the Adviser's Valuation Committee reviews each valuation recommendation to confirm they have been calculated in accordance with our valuation policy and compares such valuations to the independent valuation firms' valuation ranges to ensure the Adviser's valuations are reasonable;
•the Adviser's Valuation Committee then determines fair value marks for each of our portfolio investments; and
•the Board and Audit Committee periodically reviews the valuation process and provides oversight in accordance with the requirements of Rule 2a-5 under the 1940 Act.
The Company applies Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement (ASC 820), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value.
The three-tier hierarchy of inputs is summarized below.
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•Level 1 - Quoted prices are available in active markets/exchanges for identical investments as of the reporting date.
•Level 2 - Pricing inputs are observable inputs including, but not limited to, prices quoted for similar assets or liabilities in active markets/exchanges or prices quoted for identical or similar assets or liabilities in markets that are not active, and fair value is determined through the use of models or other valuation methodologies.
•Level 3 - Pricing inputs are unobservable for the investment and include activities where there is little, if any, market activity for the investment. The inputs into determination of fair value require significant management judgment and estimation.
Investments
Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the Consolidated Statements of Operations in Part I, Item 1 of this Form 10-Q reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Revenue Recognition
Investment and Related Investment Income
The Company records interest income, including amortization of premium and accretion of discount on the accrual basis to the extent that such amounts are expected to be collected. The Company records amortized or accreted discounts or premiums as interest income using the effective interest method or straight-line interest method, as applicable, and adjusted only for material amendments or prepayments. Dividend income, which represents dividends from equity investments and distributions from subsidiaries, if any, is recognized on an accrual basis to the extent that the Company expect to collect such amount. PIK interest, computed at the contractual rate specified in each loan agreement, is periodically added to the principal balance of the loan, rather than being paid to us in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment. Origination fees received are recorded as deferred income and recognized as investment income over the term of the loan. Upon prepayment of a loan, any unamortized origination fees are recorded as investment income. The Company receives certain fees from portfolio companies, which are non-recurring in nature. Such fees include loan prepayment penalties, structuring fees, covenant waiver fees and loan amendment fees, and are recorded as investment income when earned.
Non-accrual loans
A loan can be left on accrual status during the period the Company is pursuing repayment of the loan. Management reviews all loans that become 90 days or more past due on principal and interest, or when there is reasonable doubt that principal or interest will be collected, for possible placement on non-accrual status. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans are recognized as income or applied to principal depending upon management's judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid, and, in management's judgment, payments are likely to remain current.
Income Taxes
The Company intends to elect to be treated as a RIC under Subchapter M of the Code for the tax year ended December 31, 2023, as well as maintain such election in future taxable years. However, there is no guarantee that the Company will qualify to make such an election for any taxable year. In order to qualify and be subject to tax as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute dividends for U.S. federal income tax purposes to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. As a RIC, the Company would intend to make the requisite distributions to its
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stockholders, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to its stockholders. The Company may be subject to regular federal and state corporate income tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that the Company elects to recognize upon RIC election or when recognized over the next five taxable years.
The Company is subject to a nondeductible 4% U.S. federal excise tax on its undistributed income, unless it timely distributes (or is deemed to have timely distributed) an amount equal to the sum of (1) 98% of ordinary income for each calendar year, (2) 98.2% of the amount by which capital gains exceeds capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31 of the calendar year, and (3) any income and gains recognized, but not distributed, from the previous years. While the Company intends to distribute any income and capital gains to avoid imposition of this 4% U.S. federal excise tax, it may not be successful in avoiding entirely the imposition of this tax. In that case, the Company will be liable for the tax only on the amount by which it does not meet the foregoing distribution requirement.
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Results of Operations
The following table represents the operating results for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Total investment income $ 14,564 $ 5,741 $ 38,019 $ 13,331
Net expenses 7,114 2,823 17,049 7,826
Net investment income (loss) 7,450 2,918 20,970 5,505
Net realized gains (losses) on investments - - - -
Net change in unrealized gains (losses) (2,847) 558 (2,018) 800
Net increase (decrease) in net assets resulting from operations $ 4,603 $ 3,476 $ 18,952 $ 6,305
Investment Income
The composition of the Company's investment income was as follows:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Investment income
Interest income $ 13,827 $ 4,999 $ 34,976 $ 12,034
Fee income 219 18 772 28
Interest from cash and cash equivalents 518 724 2,271 1,269
Total investment income $ 14,564 $ 5,741 $ 38,019 $ 13,331
The increase in total investment income from $5,741 for the three months ended September 30, 2023 to $14,564 for the three months ended September 30, 2024 was primarily driven by our deployment of capital and invested balance of investments. The increase in total investment income from $13,331 for the nine months ended September 30, 2023 to $38,019 for the nine months ended September 30, 2024 was primarily driven by our deployment of capital and invested balance of investments.
Expenses
The following table summarizes the Company's expenses for the three and nine months ended September 30, 2024 and September 30, 2023:
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For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest and financing expenses $ 2,714 $ 307 $ 5,261 $ 1,193
Incentive fee 1,312 535 3,694 1,050
Management fee 1,147 431 2,761 1,035
General and administrative expenses 346 601 1,449 1,922
Administrative services fee 500 251 1,506 600
Legal fees 366 - 929 -
Professional fees 349 449 757 851
Directors' fees 80 80 240 240
Income tax expense 236 - 236 -
Placement fees 64 - 216 -
Organizational costs - 46 - 332
Offering expenses - - - 151
Total expenses 7,114 2,700 17,049 7,374
Total expenses before expense support increased to $7.1 million for the three months ended September 30, 2024 from $2.7 million for the three months ended September 30, 2023. Total expenses before expense support increased to $17.0 million for the nine months ended September 30, 2024 from $7.4 million for the nine months ended September 30, 2023.
Interest and financing expenses increased to $2,714 for the three months ended September 30, 2024 compared to $307 for the three months ended September 30, 2023 primarily due to an increase in the average principal amount of borrowings on our ING Credit Facility, draw down in SBA-guaranteed debentures and Repurchase Obligations. Interest and financing expenses increased to $5,261 for the nine months ended September 30, 2024 compared to $1,193 for the nine months ended September 30, 2023 primarily due to an increase in the average principal amount of borrowings on our Subscription Facility, draw down in SBA-guaranteed debentures, ING Credit Facility and Repurchase Obligations.
The increase in management fees for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023 was driven by our deployment of capital and an increase in average gross assets. The increase in management fees for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023 was driven by our deployment of capital and an increase in average gross assets.
Incentive fees increased to $1,312 for the three months ended September 30, 2024 when compared to $535 for the three months ended September 30, 2023 due to the increase in Net Investment Income. Incentive fees increased to $3,694 for the nine months ended September 30, 2024 when compared to $1,050 for the nine months ended September 30, 2023 due to the increase in Net Investment Income. Refer to Note 6 Investment Advisory Agreement of the Form 10-Q for a discussion of how the incentive fee is calculated.
The increase in administrative services fee to $500 for the three months ended September 30, 2024 when compared to $251 for the three months ended September 30, 2023 was due to the Company's allocable portion of overhead compensation, rent, office services and equipment, under the Company's Administration Agreement. The increase in administrative services fee to $1,506 for the nine months ended September 30, 2024 when compared to $600 for the nine months ended September 30, 2023 was due to the Company's allocable portion of overhead compensation, rent, office services and equipment, under the Company's Administration Agreement.
General and administrative expenses, legal fees, professional fees and placement fees increased to $1,125 during the three months ended September 30, 2024 when compared to $1,050 for the three months ended September 30, 2023 in connection with independent audit services, external legal services, third-party valuation services for our portfolio, insurance premiums, accounting, financial preparation and reporting services, and fees paid to the placement agent for the additional commitment closes and capital draws. General and administrative expenses, legal fees, professional fees and placement fees increased to $3,351 during the nine months ended September 30, 2024 when compared to $2,773 for the nine months
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ended September 30, 2023 in connection with independent audit services, external legal services, third-party valuation services for our portfolio, insurance premiums, accounting, financial preparation and reporting services, and fees paid to the placement agent for the additional commitment closes and capital draws.
The decrease in organizational costs to $- for the three months ended September 30, 2024 when compared to $46 for the three months ended September 30, 2023 was primarily related to the formation of the Company and/or the Company's subsidiaries. Refer to Note 1 of the Form 10-Q on details regarding organizational costs. The decrease in organizational costs to $0 for the nine months ended September 30, 2024 when compared to $332 for the nine months ended September 30, 2023 was primarily related to the formation of the Company and/or the Company's subsidiaries. Refer to Note 1 of the Form 10-Q on details regarding organizational costs.
Offering expenses decreased for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023 in connection with the offering of shares of the Company's common stock, including out-of-pocket expenses of the Adviser and its agents and affiliates. Offering expenses decreased for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023 in connection with the offering of shares of the Company's common stock, including out-of-pocket expenses of the Adviser and its agents and affiliates. Refer to Note 1 of the Form 10-Q on details regarding offering costs.
Financial Condition, Liquidity and Capital Resources
We intend to generate cash primarily from the net proceeds of any private offering of our Common Stock and from cash flows from interest and fees earned from our investments and principal repayments and proceeds from sales of our investments. We expect our primary use of cash will be investments in portfolio companies, payments of our expenses and cash distributions to our stockholders.
Contractual Obligations
We have entered into the Investment Advisory Agreement with our Adviser. Our Adviser agreed to serve as our investment adviser in accordance with the terms of our Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of the base management fee equal to a percentage of the value of our gross assets as well as an incentive fee based on our performance.
Under the Investment Advisory Agreement, the Adviser manages the day-to-day operations of, and provides investment advisory services to, the Company. The Board approved the renewal of the Investment Advisory Agreement on June 4, 2024. The Adviser is a registered investment adviser with the SEC. The Adviser receives fees for providing services, consisting of two components, a base management fee and an incentive fee.
We define a "Liquidity Event" as any of: (1) a quotation or listing of our common stock on a national securities exchange, including an initial public offering or (2) a Sale Transaction. A "Sale Transaction" means (a) the sale of all or substantially all of our capital stock or assets to, or another liquidity event with, another entity or (b) a transaction or series of transactions, including by way of merger, consolidation, recapitalization, reorganization, or sale of stock in each case for consideration of either cash and/or publicly listed securities of the acquirer. Potential acquirers could include entities that are not BDCs that are advised by the Adviser or its affiliates.
Base Management Fee
The base management fee ("Management Fee") is payable quarterly in arrears beginning in the period during its initial capital drawdown from its non-affiliated investors (the "Initial Drawdown") at an annual rate of (i) prior to a Liquidity Event, 0.75%, and (ii) following a Liquidity Event, 1.0%, in each case of the average value of our gross assets (gross assets equal the total assets of the Company as set forth on the Company's balance sheet) at the end of the two most recently completed calendar quarters. No Management Fee is charged on committed but undrawn capital commitments.
For the three and nine months ended September 30, 2024, the Company incurred Management Fees of $1,147 and $2,761, respectively. For the three and nine months ended September 30, 2023, the Company incurred Management Fees of $431 and $1,035, respectively. As of September 30, 2024 and December 31, 2023, there was $1,147 and $605 Management Fee payable to the Adviser, respectively.
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Incentive Fee
The Company also pays the Adviser an incentive fee consisting of two parts: (i) an incentive fee based on pre-incentive fee net investment income (the "Income-Based Fee"), and (ii) the capital gains component of the incentive fee (the "Capital Gains Fee"). For more information regarding the Income-Based Fee and the Capital Gains Fee, see Note 6 - Related Party Agreements and Transactions.
For the three and nine months ended September 30, 2024, the Company incurred Income-Based Fee of $1,312 and $3,694, respectively. For the three and nine months ended September 30, 2023, the Company incurred Income-Based Fee of $535 and $1,050, respectively. As of September 30, 2024 and December 31, 2023, $1,312 and $565, respectively, remained payable.
Administration Agreement
We have entered into an Administration Agreement with the Administrator pursuant to which the Administrator furnishes us with administrative services necessary to conduct our day-to-day operations. The Administrator is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse our Administrator for any services for which it receives a separate fee.
If any of our contractual obligations discussed above were terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we receive under our Investment Advisory Agreement and Administration Agreement.
For the three and nine months ended September 30, 2024 and September 30, 2023, our expenses were paid by a related party of the Adviser and will be reimbursed by us. As of September 30, 2024 and December 31, 2023, the total amount owed to the affiliates of the Adviser is included in the Due to Affiliate line item in the Consolidated Statements of Assets and Liabilities.
For the three and nine months ended September 30, 2024, the Company incurred $500 and $1,506, respectively, in fees under the Administrative Agreement. For the three and nine months ended September 30, 2023, the Company incurred $251 and $600, respectively, in fees under the Administrative Agreement. These fees are included in administrative service fees in the accompanying Consolidated Statements of Operations. As of September 30, 2024, other assets in the accompanying Consolidated Statements of Assets and Liabilities included $553 in prepaid administrative services cost which will be amortized over remainder of the year ended December 31, 2024. As of September 30, 2024 and December 31, 2023, $0 and $885, respectively, were unpaid and included in administrative services fee payable in the accompanying Consolidated Statements of Assets and Liabilities. No administrative services fee was charged to the Company prior to the Company's commencement of operations.
Expense Support and Conditional Reimbursement Agreement
On December 30, 2021, we entered into an expense support and conditional reimbursement agreement (the "Expense Support Agreement") with the Adviser. The Adviser may elect to pay certain of our expenses on our behalf (each, an "Expense Payment"), so long as no portion of the payment will be used to pay any interest expense or shareholder servicing and/or distribution fees. Any Expense Payment that the Adviser has committed to pay must be paid by the Adviser to us in any combination of cash or other immediately available funds no later than forty-five days after such commitment was made in writing, and/or offset against amounts due from us to the Adviser or its affiliates.
Following any calendar quarter in which Available Operating Funds (as defined below) exceed the cumulative distributions accrued to our shareholders based on distributions declared with respect to record dates occurring in such calendar quarter (the amount of such excess being hereinafter referred to as "Excess Operating Funds"), we will pay such Excess Operating Funds, or a portion thereof, to the Adviser until such time as all Expense Payments made by the Adviser to us within three years prior to the last business day of such calendar quarter have been reimbursed. Any payments required to be made by us will be referred to herein as a "Reimbursement Payment." "Available Operating Funds" means the sum of (i) our net investment company taxable income (including net short-term capital gains reduced by net long-term capital losses), (ii) our net capital gains (including the excess of net long-term capital gains over net short-term capital losses) and (iii) dividends and other distributions paid to us on account of investments in portfolio companies (to the extent such amounts listed in clause (iii) are not included under clauses (i) and (ii) above).
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Our obligation to make a Reimbursement Payment shall automatically become a liability of ours on the last business day of the applicable calendar quarter, except to the extent the Adviser has waived its right to receive such payment for the applicable quarter.
The following table presents a summary of Expense Payments and the related Reimbursement Payments since our inception:
For the Period Ended Expense Payments by Adviser Reimbursement Payments to Adviser Unreimbursed Expense Payable
June 30, 2022 $ 227 $ - $ 227
September 30, 2022 225 - 452
June 30, 2023 - (329) 123
September 30, 2023 - (123) -
Total $ 452 $ (452) $ -
As of September 30, 2024, the Company has no Unreimbursed Expense Payable.
Capital Resources and Borrowings
As a BDC, we are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to shares of our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150%, subject to receipt of certain approvals and compliance with certain disclosure requirements, immediately after each such issuance. Section 61(a) of the 1940 Act reduces the asset coverage requirements applicable to BDCs from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. In April 2021, our Board and initial stockholder approved the reduced asset coverage ratio. The reduced asset coverage requirements permit us to increase the maximum amount of leverage that we are permitted to incur by reducing the asset coverage requirements applicable to us from 200% to 150%. As defined in the 1940 Act, asset coverage of 150% means that for every $100 of net assets we hold, we may raise $200 from borrowing and issuing senior securities as compared to $100 from borrowing and issuing senior securities for every $100 of net assets under a 200% asset coverage requirement. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. As of
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September 30, 2024 and December 31, 2023, the Company's asset coverage ratio based on the aggregate amount outstanding of senior securities was 320.9% and 645.7%.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Company's total debt for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 2,478 $ 160 $ 4,668 $ 835
Non-usage fee (1)
45 22 71 64
Amortization of financing costs 191 125 522 294
Weighted average stated interest rate 6.60 % 6.74 % 6.75 % 7.64 %
Weighted average outstanding balance $ 149,376 $ 9,419 $ 92,408 $ 14,609
(1) Non-usage fee is applicable to the undrawn portion of the credit facilities.
Credit Facilities
ING Credit Facility
On June 18, 2024, Lafayette Square USA, Inc. (the "Company") entered into a Senior Secured Revolving Credit Agreement (as amended, restated, supplemented, or otherwise modified from time to time, the "ING Credit Facility") with ING Capital, LLC, as Administrative Agent, Lead Arranger, Bookrunner and Sustainability Structuring Agent.
On September 20, 2024, the Company entered into Amendment No. 1 to the Senior Secured Revolving Credit Agreement (the "First Amendment"), which amends the ING Credit Facility. The parties to the First Amendment include the Company, the lenders party thereto, Subsidiary Guarantors party thereto and ING Capital LLC, as Administrative Agent. The First Amendment provides for, among other things, an upsize in the total commitments from lenders under the credit facility from $75,000,000 to $150,000,000.
The ING Credit Facility is guaranteed by certain subsidiaries of the Company in existence as of the closing date of the ING Credit Facility, and will be guaranteed by certain subsidiaries of the Company that are formed or acquired by the Company in the future (collectively, the "Guarantors"). Proceeds of the ING Credit Facility may be used for general corporate purposes, including the funding of portfolio investments.
The ING Credit Facility allows the Company to borrow up to $150 million, subject to certain restrictions, including availability under a borrowing base, which is based upon unused capital commitments made by investors in the Company and the value of eligible portfolio investments. The amount of permissible borrowings under the ING Credit Facility may be increased through an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing up to an aggregate of $250 million. The ING Credit Facility is secured by a perfected first-priority interest in the unused commitments of the Company's investors and substantially all of the eligible portfolio investments held by the Company and each Guarantor, subject to certain exceptions.
The availability period with respect to the revolving credit facility under the ING Credit Facility will terminate on June 19, 2028 ("Commitment Termination Date") and the ING Credit Facility will mature on June 18, 2029 ("Maturity Date"). During the period from the Commitment Termination Date to the Maturity Date, the Company will be obligated to make mandatory prepayments under the ING Credit Facility out of the proceeds of certain asset sales and other recovery events.
The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the ING Credit Facility in U.S. dollars will bear interest at either (i) term SOFR plus margin of 2.70% per annum, or (ii) the alternate base rate plus margin of 1.70% per annum. In each case, the annual interest rate will be adjustable based on a sustainability linked loan pricing structure that directly references our 2030 Goals, with ING acting as the sole Sustainability Structuring Agent. The Company may elect either the term SOFR or alternate base rate at the time of drawdown, and loans denominated in U.S. dollars may be converted from one rate to another at any time at the Company's
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option, subject to certain conditions. Amounts drawn under the ING Credit Facility in other permitted currencies will bear interest at the relevant rate specified therein plus an applicable margin (including any applicable credit spread adjustment).
The ING Credit Facility includes customary affirmative and negative covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for revolving credit facilities of this nature.
As of September 30, 2024 and December 31, 2023, the Company had $147.0 million and $0.0 million, respectively, in outstanding borrowings from the ING Facility.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the ING Facility for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 888 $ - $ 1,103 $ -
Non-usage fee (1)
45 - 45 -
Amortization of financing costs 60 - 69 -
Weighted average stated interest rate 8.95 % - % 8.77 % - %
Weighted average outstanding balance $ 39,478 $ - $ 16,814 $ -
(1) Non-usage fee is applicable to the undrawn portion of the credit facilities.
Subscription Facility
On February 2, 2022, the Company entered into a subscription-based credit agreement with Sumitomo Mitsui Banking Corporation, which was amended on June 28, 2022, December 21, 2022, and February 1, 2024 (and as may be further amended, modified or supplemented, the "Subscription Facility"). The Subscription Facility allowed the Company to borrow up to $38.4 million, subject to certain restrictions, including availability under a borrowing base that was based upon unused capital commitments made by investors in the Company. The amount of permissible borrowings under the Subscription Facility could be increased to up to $1 billion with the consent of the lenders. The Subscription Facility matured on May 2, 2024 and bore interest at an annual rate of: (i) with respect to reference rate loans, a reference rate for the period plus a margin equal to 2.50% (the "Applicable Margin") and (ii) with respect to alternative rate loans, the greatest of (a) the administrative agent's prime rate, (b) Term SOFR with a one-month term plus the Applicable Margin and (c) the federal funds rate plus 0.50%. Subject to certain exceptions, the Subscription Facility was secured by a first lien security interest in the Company's unfunded investor equity capital commitments. The Subscription Facility included customary covenants, certain limitations on the incurrence of additional indebtedness and liens, and other maintenance covenants, as well as usual and customary events of default for credit facilities of this nature. On May 2, 2024, the Subscription Facility and all obligations thereunder were terminated.
As of September 30, 2024 and December 31, 2023, the Company had $0.0 million and $27.5 million, respectively, in outstanding borrowings from the Subscription Facility.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Subscription Facility for the three and nine months ended September 30, 2024 and September 30, 2023:
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For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ - $ 76 $ 492 $ 375
Non-usage fee (1)
- 22 26 64
Amortization of financing costs - 97 218 266
Weighted average stated interest rate - % 7.49 % 7.83 % 7.17 %
Weighted average outstanding balance $ - $ 4,028 $ 8,397 $ 6,991
(1) Non-usage fee includes the portion of the facility agent fee applicable to the undrawn portion of the Subscription Facility.
SBA Debentures
SBIC LP is able to borrow funds from the SBA against its regulatory capital (which approximates equity capital in SBIC LP) that is paid in and is subject to customary regulatory requirements, including, but not limited to, periodic examination by the SBA. As of September 30, 2024 and December 31, 2023, the Company funded SBIC LP with $82.5 million and $82.5 million, respectively, of regulatory capital, and have $165.0 million and $31.0 million, respectively, in SBA-guaranteed debentures outstanding. SBA debentures are non-recourse to us, have a 10-year maturity, and may be prepaid at any time without penalty. The interest rate of SBA debentures is fixed at the time of issuance, often referred to as pooling, at a market-driven spread over 10-year U.S. Treasury Notes. Current SBA regulations limit the amount that SBIC LP may borrow to a maximum of $175.0 million, which is up to twice its potential regulatory capital.
The SBA-guaranteed debentures incurred an upfront commitment fee of 1.00% on the total commitment amount and a 2.435% issuance discount on drawdowns, which are amortized over the life of the SBA-guaranteed debentures. In addition, an annual fee is charged on the SBA-guaranteed debentures which are amortized over the period.
The following table summarizes the Company's SBA-guaranteed debentures as of September 30, 2024:
Issuance Date Maturity Date Debenture Amount Interest Rate SBA Annual Charge
September 15, 2023 March 1, 2034 $ 31,000 5.04% 0.047%
March 15, 2024 September 1, 2034 $ 5,960 4.38% 0.047%
June 14, 2024 September 1, 2034 $ 45,540 4.38% 0.129%
September 16, 2024 March 1, 2035 $ 82,505 5.09% 0.129%
The following table summarizes the interest expense and amortization of financing costs incurred on the SBA-guaranteed debentures for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 1,355 $ 84 $ 2,448 $ 84
Non-usage fee - - - -
Amortization of financing costs 131 28 235 28
Weighted average stated interest rate 5.62 % 6.10 % 5.64 % 6.10 %
Weighted average outstanding balance (1)
$ 95,952 $ 5,391 $ 57,983 $ 1,817
(1) The Company's initial borrowing under the SBA Debentures program occurred on September 15, 2023.
Repurchase Obligations
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In order to finance certain investment transactions, the Company may, from time to time, enter into repurchase agreements with Macquarie US Trading LLC ("Macquarie"), whereby the Company sells to Macquarie an investment that it holds and concurrently enters into an agreement to repurchase the same investment (any such obligation, a "Repurchase Obligation") at an agreed-upon price at a future date, not to exceed 90-days from the date it was sold.
The Company entered into two repurchase agreements on May 1, 2024 which were collateralized by the Company's term loans to each of Salt Dental Collective (the "Salt Repurchase Obligation") and Med Learning Group, LLC (the "MLG Repurchase Obligation" and together with the Salt Repurchase Obligation, the "May 2024 Repurchase Obligations"). Interest under each of the May 2024 Repurchase Obligations was calculated as (a) the product of the funded amount of the loan and (b) the product of (i) the number of days the loan is outstanding (subject to number of minimum days per the agreement) and (ii) daily fee rate. The Company maintained effective control over the security because it is entitled and obligated to repurchase the security before its maturity. Therefore, the repurchase agreement was treated as a secured borrowing and not a sale. On July 30, 2024 the Company repurchased its obligation under the MLG Repurchase Obligation.
As of September 30, 2024, there was $11.0 million outstanding under these Repurchase Obligations. As of December 31, 2023, there was no outstanding loan and interest payable balance to Macquarie.
The following table summarizes the interest expense, non-usage fees and amortization of financing costs incurred on the Repurchase Obligation for the three and nine months ended September 30, 2024 and September 30, 2023:
For the three months ended September 30, 2024 For the three months ended September 30, 2023 For the nine months ended
September 30, 2024 		For the nine months ended
September 30, 2023
Interest expense $ 235 $ - $ 625 $ 376
Non-usage fee - - - -
Amortization of financing costs - - - -
Weighted average stated interest rate 6.68 % - % 9.05 % 8.67 %
Weighted average outstanding balance (1)
$ 13,946 $ - $ 9,214 $ 5,801
(1) The Company's initial borrowing occurred on March 15, 2023.
The facilities of the Company consist of the following:
September 30, 2024 December 31, 2023
Aggregate
Principal
Amount
Available 		Principal
Amount
Outstanding 		Unused
Portion 		Aggregate
Principal
Amount
Available 		Principal
Amount
Outstanding 		Unused
Portion
Secured borrowings $ 150,000 $ 147,000 $ 3,000 $ 38,400 $ 27,500 $ 10,900
SBA-Guaranteed Debentures 165,005 165,005 - 36,960 31,000 5,960
Repurchase Obligation 10,996 10,996 - - - -
Total $ 326,001 $ 323,001 $ 3,000 $ 75,360 $ 58,500 $ 16,860
Off-Balance Sheet Arrangements
We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve,
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to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of September 30, 2024 and December 31, 2023, we were not party to any off-balance sheet arrangements.
Recent Developments
On October 1, 2024, the Company invested in a new senior secured first lien term loan in C Speed LLC, with a term loan funded commitment of $15.3 million, bearing an interest rate of 1M Term SOFR + 6.00%, maturing on October 1, 2029. In addition, the Company had a total commitment of $5.0 million in a senior secured first lien revolver of which $1.6 million was funded, bearing an interest rate of 1M Term SOFR + 6.00%, maturing on October 1, 2029.
On October 2, 2024, the Company repaid principal and interest on its outstanding balance on the ING Credit Facility in the amount of $60.0 million. Subsequent to this repayment and through to the date of this report, the Company borrowed an additional total of $57.0 million. As of the date of this Report, the outstanding principal balance on the ING Credit Facility is $144.0 million.
On October 2, 2024, the Company fully repurchased its obligation under the repurchase agreement with Macquarie that was collateralized by the Company's term loan to Salt Dental Collective, LLC. As of the date of this Report, the Company had no outstanding repurchase obligations to Macquarie.
On October 7, 2024, the Company invested in a new senior secured first lien term loan in Xpect Solutions LLC, with a term loan funded commitment of $22.5 million, bearing an interest rate of 3M Term SOFR + 5.75%, maturing on October 7, 2029. In addition, the Company had unfunded commitments of $10.0 million and $2.0 million in a senior secured first lien delayed draw term loan and revolver, respectively, maturing on October 7, 2029.
On October 7, 2024 through October 29, 2024, the Company invested in a senior secured first lien delayed draw term loan in Best Friends Pet Care Holdings Inc, with additional funding of $8.4 million, bearing an interest rate of 3M Term SOFR + CSA + 6.45%, maturing on June 21, 2028.On October 11, 2024, the Company elected to be treated, and intends to continue to comply with the requirement to qualify annually, as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended for the tax year ended December 31, 2023 concurrent with the filing of form 1120-RIC.
On October 11, 2024, the Company invested in a new senior secured first lien term loan in Core Capital Partners II-S LP, with a term loan funded commitment of $28.0 million, bearing an interest rate of 3M Term SOFR + 7.50%, maturing on October 11, 2027. In addition, the Company had an unfunded commitment of $12.0 million in a senior secured first lien revolver maturing on October 11, 2027.
On October 15, 2024, the Company invested in a senior secured first lien revolver in Dance One Holdings LLC, with additional funds of $0.4 million, bearing an interest rate of 3M Term SOFR + CSA + 6.95%, maturing on August 24, 2024.
On October 15, 2024, the Company invested in a senior secured first lien revolver in Trilon Group LLC, with additional funds of $0.1 million, bearing an interest rate of 3M Term SOFR + CSA + 5.50%, maturing on May 25,2029.
On October 21, 2024, the Company invested in a new senior secured first lien term loan in ZRG Partners LLC with a term loan funded commitment of $11.4 million, bearing an interest rate of 3M Term SOFR + 6.00%, maturing on June 14, 2029. In addition, the Company had a total commitment of $6.0 million in a senior secured first lien delayed draw term loan of which $2.6 million was funded, bearing an interest rate of 3M Term SOFR + 6.00%, maturing on June 14, 2029. In addition, the Company had a total commitment of $2.5 million in a senior secured first lien revolver of which $0.5 million was funded, bearing an interest rate of P + 5.00%, maturing on June 14, 2029.
On October 23, 2024, SSBIC LP was awarded a commitment from the SBA in the form of debentures in an amount equal to $27.5 million. As of the date of this Report, SSBIC LP has not drawn any debentures on this commitment.
On October 24, 2024, the Company invested in a senior secured first lien delayed draw term loan in Cafe Zupas, L.C., with additional funds of $0.4 million, bearing an interest rate of 1M Term SOFR + 7.00%, maturing on December 30, 2027.
In addition, as of this Report date, we had an investment backlog and pipeline of approximately $90.0 million and $415.6 million, respectively. Investment backlog includes transactions approved by the Adviser's investment committee and/or for which a formal mandate, letter of intent or a term sheet have been issued, and therefore we believe have a strong likelihood of closing. Investment pipeline includes transactions where initial due diligence has begun and/or analysis is in process, but no formal mandate, letter of intent or term sheets have been issued. The consummation of any of the investments in this
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backlog and pipeline depends upon, among other things, one or more of the following: satisfactory completion of our due diligence investigation of the prospective portfolio company, our acceptance of the terms and structure of such investment and the negotiation, execution, and delivery of satisfactory transaction documentation. In addition, we may sell all or a portion of these investments and certain of these investments may result in the repayment of existing investments. We cannot assure you that we will make any of these investments or that we will sell all or any portion of these investments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, most significantly changes in interest rates. Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we expect to fund a portion of our investments with borrowings, our net investment income is expected to be affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.
In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.
The following table estimates the potential changes in net cash flow generated from interest income, should interest rates increase or decrease by 100, 200 or 300 basis points. These hypothetical interest income calculations are based on a model of the settled debt investments in our portfolio, held as of September 30, 2024, and are only adjusted for assumed changes in the underlying base interest rates and the impact of that change on interest income. As of September 30, 2024, approximately 96.6% of investments at fair value (excluding investments on non-accrual, unfunded debt investments and non-bearing equity investments) represent floating-rate investments with a LIBOR or SOFR floor (including investments bearing a prime interest rate contracts) and approximately 3.4% of investments at fair value represent non floating-rate investments. Additionally, our subscription-based credit facility is also subject to a floating interest rate and currently paid on a floating SOFR rates. Interest expense is calculated based on outstanding secured borrowings as of September 30, 2024 and based on the terms of our Subscription Facility. Interest expense on our Subscription Facility is calculated using the stated interest rate as of September 30, 2024, adjusted for the hypothetical changes in rates, as shown below. We continue to finance a portion of our investments with borrowings and the interest rates paid on our borrowings may impact significantly our net interest income.
We regularly measure exposure to interest rate risk. We assess interest rate risk and manage interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.
Based on our Consolidated Statements of Assets and Liabilities as of September 30, 2024, the following table shows the annual impact on net investment income of base rate changes in interest rates for our settled debt investments (considering interest rate floors for variable rate instruments), and outstanding secured borrowings assuming no changes in our investment and borrowing structure:
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September 30, 2024
Basis point increase (decrease) Interest Income Interest Expense Net Interest Income
Up 300 basis points $ 13,586 $ (9,360) $ 4,226
Up 200 basis points $ 9,040 $ (6,240) $ 2,800
Up 100 basis points $ 4,495 $ (3,120) $ 1,375
Down 100 basis points $ (4,495) $ 3,120 $ (1,375)
Down 200 basis points $ (8,990) $ 6,240 $ (2,750)
Down 300 basis points $ (13,484) $ 9,360 $ (4,124)
We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options, swaps and forward contracts and credit hedging contracts, such as credit default swaps, in each case, 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 benefits of lower interest rates with respect to our portfolio of investment with fixed interest rates.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of September 30, 2024, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness and design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective at a reasonable assurance level in timely alerting management, including the Chief Executive Officer and Chief Financial Officer, of material information about us required to be included in periodic SEC filings. However, in evaluation of the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can 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 possible controls and procedures.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is a process designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published consolidated financial statements.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions recorded necessary to permit the preparation of consolidated financial statements in accordance with U.S. generally accepted accounting principles. Our policies and procedures also provide reasonable assurance that receipts and expenditures are being made only in accordance with authorizations of management and our directors, and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to consolidated financial statement preparation and presentation. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2024. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework issued in 2013. Based on the assessment, management believes that, as of September 30, 2024, our internal control over financial reporting is effective based on those criteria.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during our most recently completed fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
Neither we nor our Adviser or Administrator is currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding that would affect our business threatened against us, or against our Adviser or Administrator.
From time to time, we, our Adviser or Administrator 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. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The risks described in our Annual Report on Form 10-K are not the only risks facing us. 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. There have been no material changes known to us during the three months ended September 30, 2024, to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2023 .
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All sales of unregistered securities during the nine months ended September 30, 2024 were reported in our current reports on Form 8-K filed with the SEC.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the quarter ended September 30, 2024, none of our officers or directors adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement."
Item 6. Exhibits
The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the nine months ended September 30, 2024 (and are numbered in accordance with Item 601 of Regulation S-K).
(a)(1) and (2) Consolidated Financial Statements and Schedules
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No. Description
3.1
3.2
3.3
3.4
10.1
10.1
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(1) Previously filed as part of the Registrant's Registration Statement on Form 10 (File No. 000-56289) filed on May 28, 2021 and incorporated herein by reference.
(2) Previously filed as part of Registrant's Current Report on Form 8-K filed on May 19, 2022 and incorporated herein by reference.
(3) Previously filed as part of Registrant's Current Report on Form 8-K filed on June 8, 2023 and incorporated herein by reference.
*Filed herewith
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SIGNATURES
Pursuant to the requirements 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.
Lafayette Square USA, Inc.
Date: November 7, 2024
By: /s/ Damien Dwin
Name: Damien Dwin
Title: President and Chief Executive Officer
Date: November 7, 2024
By: /s/ Seren Tahiroglu
Name: Seren Tahiroglu
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on November 7, 2024.
Name Title
/s/ Damien Dwin President, Chief Executive Officer and Chairman of the
Damien Dwin Board of Directors
/s/ Seren Tahiroglu Chief Financial Officer
Seren Tahiroglu
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