QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State of Organization) |
(I.R.S. Employer Identification No.) |
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| N/A | N/A | N/A |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging Growth Company | ||||||
STEPSTONE PRIVATE CREDIT FUND LLC
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2023
Table of Contents
Item 1. |
Consolidated Financial Statements (Unaudited) |
June 30, 2023 |
||||
Assets |
||||
Investments at fair value (Cost $ |
$ | |||
Cash and cash equivalents |
||||
Interest receivable |
||||
Receivable from Advisor |
||||
Total assets |
$ | |||
Liabilities |
||||
Lines of credit (net of debt issuance costs of $ |
$ | |||
Payables for investments purchased |
||||
Interest payable |
||||
Acrued expenses |
||||
Total liabilities |
$ | |||
Commitments and contingencies (Note 8); Recoupments (Note 3) |
||||
Net assets |
||||
Shares, |
$ | |||
Total distributable earnings (loss) |
||||
Total net assets |
$ | |||
Total liabilities and net assets |
$ | |||
Net asset value per share |
$ | |||
For the Period from April 3, 2023 (commencement of operations) to June 30, 2023 |
||||
Investment Income |
||||
Interest income on investments |
$ | |||
Total investment income |
$ |
|||
Expenses |
||||
Interest expense |
$ | |||
Organizational costs |
||||
Income incentive fee |
||||
Management fee |
||||
Directors fee |
||||
Administration fee |
||||
Other expenses |
||||
Total expenses |
$ |
|||
Less expense support payments by the Advisor (Note 3) |
$ | |||
Waiver for management and incentive fees (Note 3) |
||||
Net expenses |
$ |
|||
Net investment income |
$ |
|||
Realized and unrealized gain (loss) allocated from investments in securites of unaffiliated issuers |
||||
Net realized gain (loss) from investments in securites of unaffiliated issuers |
$ | |||
Net gain (loss) from investments in securites of unaffiliated issuers |
$ |
|||
Net Increase (Decrease) in Net Assets Resulting from Operations |
$ |
|||
Weighted average shares outstanding |
||||
Net investment income (loss) per share |
$ | |||
Limited Liability Company Interests |
||||||||||||||||
Number of Shares |
Shares Transactions |
Total Distibutable Earnings (Loss) |
Total Net Assets |
|||||||||||||
| For the Period from April 3, 2023 (commencement of operations) to June 30, 2023 |
||||||||||||||||
| Balance, April 3, 2023 |
$ | $ | $ | |||||||||||||
| Net investment income |
— | |||||||||||||||
| Net realized gain (loss) from investments in securites of unaffiliated issuers |
— | |||||||||||||||
| Issuance of Shares |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Balance, June 30, 2023 |
$ |
$ |
$ |
|||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
For the Period from April 3, 2023 (commencement of operations) |
||||
to June 30, 2023 |
||||
Operating activities |
||||
Net Increase (Decrease) in Net Assets Resulting from Operations |
$ | |||
Adjustments to reconcile net increase (decrease) in net assets to net cash and cash equivalents provided by/(used in) operating activities: |
||||
Purchases of investments |
( |
) | ||
Proceeds from sales, exits and repayments of investments |
||||
Accretion of original issue discount on investments |
( |
) | ||
Net realized (gain)/loss from investments |
( |
) | ||
Amortization of deferred financing fees |
( |
) | ||
Changes in Assets and Liabilities: |
||||
(Increase)/decrease in interest receivable |
( |
) | ||
(Increase)/decrease in receivable from Advisor |
( |
) | ||
Increase/(decrease) in payables for investments purchased |
||||
Increase/(decrease) in interest payable |
||||
Increase/(decrease) in accrued expenses |
||||
Net cash and cash equivalents provided by/(used in) operating activities |
$ | ( |
) | |
Financing activities |
||||
Proceeds from issuance of shares |
$ | |||
Borrowings under lines of credit |
||||
Repayments to lines of credit |
( |
) | ||
Net cash and cash equivalents provided by/(used in) financing activities |
$ | |||
Net increase/(decrease) in cash and cash equivalents |
||||
Cash and cash equivalents at beginning of the period |
||||
Cash and cash equivalents at end of the period |
$ | |||
Supplemental disclosure of cash flow information |
||||
Interest paid on lines of credit |
$ | |||
Investments |
SPV Vehicle (10) |
Footnotes |
Industry |
Reference Rate Spread |
Interest Rate |
Maturity Date |
Outstanding Principal |
Amortized Cost |
Fair Value |
Percentage of Net Assets |
||||||||||||||||||||||||||
Non-Controlled, Non-Affiliated Debt Investments |
||||||||||||||||||||||||||||||||||||
First Lien Senior Secured |
||||||||||||||||||||||||||||||||||||
Accordion Partners Intermediate LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | $ | $ | $ | % | |||||||||||||||||||||||||||
Accordion Partners Intermediate LLC Third Amendment Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Industrials | % |
% | ( |
) | ( |
) | - |
% | |||||||||||||||||||||||||
Accordion Partners Intermediate LLC Third Amendment Revolving Credit |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Industrials | % |
% | ( |
) | ( |
) | - |
% | |||||||||||||||||||||||||
AIDC IntermediateCo. 2, LLC Initial Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
AMEX Holding III Corp |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Amex Holding III Corp Delayed Draw Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Anderson Group Holdings, LLC Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
Apex Service Partners, LLC Delayed Draw Term A Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Apex Service Partners, LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Arch Cutting Tools Corp. Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
BASYS LLC First Amendment Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
BBG, Inc. Initial Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Real Estate | % |
% | % | ||||||||||||||||||||||||||||||
BCI Burke Holding Corp. Closing Date Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
BCM One, Inc. Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Blades Buyer, Inc. Term A Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
Bobcat Purchaser, LLC Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Health Care | % |
% | ( |
) | ( |
) | % | ||||||||||||||||||||||||||
Bobcat Purchaser, LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
By Light Professional IT Services LLC Existing Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Cedar Services Group, LLC Delayed Draw Term B Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Information Technology |
|
% | % | ( |
) | ( |
) | - |
% | ||||||||||||||||||||||||
Cedar Services Group, LLC Fourth Amendment Requested Incremental Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Charkit Chemical Company, LLC Term Loan A |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Materials | % |
% | % | ||||||||||||||||||||||||||||||
Community Care Partners, LLC Closing Date Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
Community Care Partners, LLC Delayed Draw Term B Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Health Care | % |
% | ( |
) | ( |
) | % | ||||||||||||||||||||||||||
Convera International Financial S.a r.l. Incremental Term Loan |
SPV I Facility |
(1)(3)(5)(6)(7)(9) | Financials | % |
% | % | ||||||||||||||||||||||||||||||
Cvausa Management, LLC Primary Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Health Care | % |
% | ( |
) | ( |
) | - |
% | |||||||||||||||||||||||||
Cvausa Management, LLC Secondary Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Health Care | % |
% | ( |
) | ( |
) | - |
% | |||||||||||||||||||||||||
Cvausa Management, LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
Diverzify Intermediate LLC Second Amendment Incremental DDTL |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Diverzify Intermediate LLC Second Amendment Incremental Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Fortis Payment Systems, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Guy Chemical Company, LLC U.S. Delayed Draw Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Materials | % |
% | % | ||||||||||||||||||||||||||||||
Heads Up Technologies, Inc. Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Home Care Assistance, LLC Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
Improving Holdco, Inc. Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Integrity Marketing Acquisition, LLC Amendment No. 9 Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Financials | % |
% | % | ||||||||||||||||||||||||||||||
KSKI Holdings 2, Inc. Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
Lido Advisors, LLC Fourth Amendment Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Financials | % |
% | % | ||||||||||||||||||||||||||||||
Life Science Intermediate Holdings, LLC Delayed Draw Dollar Term Loan D |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
OIA Acquisition, LLC Effective Date Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % | % | % | ||||||||||||||||||||||||||||||
Orion Group HoldCo, LLC Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Painful Pleasures, LLC Term Loan fka Artifex |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
Painful Pleasures, LLC Third Incremental Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
Patriot Pickle Inc. Term Loan Sold Out 10/01/2021 |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Staples |
|
% |
% | % | |||||||||||||||||||||||||||||
PVI Holdings, Inc. Last Out Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
R.R. Donnelley & Sons Company Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
RCP TCT, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
REE Holdings III Corp. Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
Refresh Buyer, LLC Delayed Draw Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Staples |
|
% |
% | % | |||||||||||||||||||||||||||||
Sequon, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
Signature Brands, LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Staples |
|
% |
% | % | |||||||||||||||||||||||||||||
Investments |
SPV Vehicle (10) |
Footnotes |
Industry |
Reference Rate Spread |
Interest Rate |
Maturity Date |
Outstanding Principal |
Amortized Cost |
Fair Value |
Percentage of Net Assets |
||||||||||||||||||||||||||
Non-Controlled, Non-Affiliated Debt Investments |
||||||||||||||||||||||||||||||||||||
First Lien Senior Secured (continued) |
||||||||||||||||||||||||||||||||||||
SourceHOV Tax, LLC Initial Term A Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
Superjet Buyer, LLC Initial Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Information Technology |
|
% |
% | % | |||||||||||||||||||||||||||||
SureWerx Purchaser III, Inc. Delayed Draw Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7)(8) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
SureWerx Purchaser III, LLC Term Loan |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Industrials | % |
% | % | ||||||||||||||||||||||||||||||
TheKey, LLC Tranche B-1 Delayed Draw Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
TheKey, LLC Tranche B-1 Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
United Air Temp, Air Conditioning And Heating, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
US Fertility Enterprises, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Health Care | % |
% | % | ||||||||||||||||||||||||||||||
W.A. Kendall and Company, LLC Initial Term Loan |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% |
% | % | |||||||||||||||||||||||||||||
WF Enterprises, Inc. Term Loan A |
II Credit Facility |
(1)(2)(3)(4)(5)(6)(7) | Consumer Discretionary |
|
% | % | % | |||||||||||||||||||||||||||||
Total First Lien Senior Secured |
$ | $ | % | |||||||||||||||||||||||||||||||||
Second Lien Senior Secured |
||||||||||||||||||||||||||||||||||||
SageSure Holdings, LLC Delayed Draw Term Loan (Second Lien) |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Financials | % |
% | $ | $ | $ | % | |||||||||||||||||||||||||||
SageSure Holdings, LLC Term Loan (Second Lien ) |
SPV I Facility |
(1)(2)(3)(4)(5)(6)(7) | Financials | % | % | % | ||||||||||||||||||||||||||||||
Total Second Lien Senior Secured |
$ | $ | % | |||||||||||||||||||||||||||||||||
Total Non-Controlled, Non-Affiliated Debt Investments |
$ | $ | % | |||||||||||||||||||||||||||||||||
Total Investments |
$ | $ | % | |||||||||||||||||||||||||||||||||
(1) |
Investment is non-controlled/non-affiliated “non-controlled” when the Company owns “non-affiliated” when the Company owns less than |
(2) |
Investment is U.S. domiciled and no investment represents a |
(3) |
Income-producing debt investment and pays all cash interest. |
(4) |
Investment is treated as a qualifying asset under Section 55(a) of the 1940 Act. |
(5) |
The fair value of the investment was valued using significant unobservable inputs. |
(6) |
Investment has undrawn commitments. Unamortized fees are classified as unearned income which reduces cost basis, which may result in a negative cost basis. A negative fair value may result from the unfunded commitment being valued below par. No interest is being earned. The investment may be subject to an unused/letter of credit facility fee. |
(7) |
The majority of the investments bear interest at rates that may be determined by reference to Secured Overnight Financing Rate (“SOFR” or “S ”), as well as London Interbank Offered Rate (“LIBOR” or “L ”), which reset monthly or quarterly. For each such investment, the Company has provided the spread over SOFR and LIBOR and the current contractual interest rate in effect at June 30, 2023. The interest rate disclosed is based on the reference rate as of the last reset date which may differ from the reference rate as of 6/30/2023. As of June 30, 2023, effective rates for 1 Month (“M”) S, 3M S and 6M S, are L,3M L, and 6M L are SOFR or LIBOR floor. |
(8) |
Position is an unfunded delayed draw term loan with no rate setting. |
(9) |
Investment is domiciled in Jersey and not treated as a qualifying asset under Section 55(a) of the 1940 Act. |
(10) |
Designates that the investment is collateral for MassMutual SPV I Facility or BMO SPV |
| • | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities as of the measurement date. |
| • | Level 2 – Other significant observable inputs (including quoted prices for similar assets or liabilities, interest rates, prepayment speeds, credit risk, etc.). |
| • | Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments at the reporting date). |
| • | No Income Incentive Fee will be payable to the Advisor in any calendar quarter in which the Company’s Pre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate; |
| • | Pre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than or equal to Pre-Incentive Fee Net Investment Income when the Company’s Pre-Incentive Fee Net Investment Income reaches |
| • | Pre-Incentive Fee Net Investment Income, if any, that exceeds catch-up have been achieved (Pre-Incentive Fee Net Investment Income thereafter will be allocated to the Advisor). |
% of Total |
% of Total |
|||||||||||||||||||
Cost |
Investments |
Fair Value |
Investments |
% of Net Assets |
||||||||||||||||
| First Lien Senior Secured |
$ | % | $ | % | % | |||||||||||||||
| Second Lien Senior Secured |
% | % | % | |||||||||||||||||
| |
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| Total investments |
$ | % | $ | % | % | |||||||||||||||
| |
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% of total investments |
% of total investments |
% of total investments |
||||||||||
based on cost |
based on fair value |
based on net assets |
||||||||||
| Industrials |
% | % | % | |||||||||
| Consumer Discretionary |
% | % | % | |||||||||
| Information Technology |
% | % | % | |||||||||
| Real Estate |
% | % | % | |||||||||
| Health Care |
% | % | % | |||||||||
| Materials |
% | % | % | |||||||||
| Financials |
% | % | % | |||||||||
| Consumer Staples |
% | % | % | |||||||||
| |
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|||||||
| Total |
% | % | % | |||||||||
| |
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|
|||||||
| Assets |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| First Lien Senior Secured Debt |
$ | — | $ | — | $ | $ | ||||||||||
| Second Lien Senior Secured |
— | — | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total assets |
$ | — | $ | — | $ | $ | ||||||||||
| |
|
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|
|
|
|
|
|||||||||
Beginning Balance at 4/3/2023 |
Net Purchases |
In-Kind Contributions |
Net Sales |
Accrued Discounts/ Amortized Premiums |
Realized Gain/(Loss) |
Net Change in Unrealized Appreciation/ (Depreciation) |
Transfers into Level 3 |
Transfers out of Level 3 |
Balance 6/30/2023 |
|||||||||||||||||||||||||||||||
| First Lien Senior Secured Debt |
$ | $ | $ | — | $ | ( |
) | $ | $ | $ | — | $ | — | $ | — | $ | ||||||||||||||||||||||||
| Second Lien Senior Secured |
— | ( |
) | — | ||||||||||||||||||||||||||||||||||||
| |
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|
|||||||||||||||||||||
| Total |
$ | $ | $ | — | $ | ( |
) | $ | $ | $ | — | $ | — | $ | — | $ | ||||||||||||||||||||||||
| |
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|
|
|
|
|||||||||||||||||||||
Fair Value |
||||||||||||||||
as of |
Valuation |
Unobservable |
||||||||||||||
June 30, 2023 |
Techniques |
Input |
Range |
Weighted Average (1) |
||||||||||||
| First Lien Senior Secured Debt |
$ | Yield Method | ||||||||||||||
| First Lien Senior Secured Debt |
Recent Transaction | |||||||||||||||
| Second Lien Senior Secured |
Yield Method | |||||||||||||||
| |
|
|||||||||||||||
| Total Assets |
$ | |||||||||||||||
| |
|
|||||||||||||||
(1) |
Weighted average is calculated by weighing the significant unobservable input by the relative fair value of each investment in the category. |
Investments |
June 30, 2023 |
|||
Accordion Partners Intermediate LLC Third Amendment Delayed Draw Term Loan |
$ | |||
Accordion Partners Intermediate LLC Third Amendment Revolving Credit |
||||
Bobcat Purchaser, LLC Delayed Draw Term Loan |
||||
Cedar Services Group, LLC Delayed Draw Term B Loan |
||||
Community Care Partners, LLC Delayed Draw Term B Loan |
||||
Cvausa Management, LLC Primary Delayed Draw Term Loan |
||||
Cvausa Management, LLC Secondary Delayed Draw Term Loan |
||||
Integrity Marketing Acquisition, LLC Amendment No. 9 Delayed Draw Term Loan |
||||
Lido Advisors, LLC Fourth Amendment Delayed Draw Term Loan |
||||
Life Science Intermediate Holdings, LLC Delayed Draw Dollar Term Loan D |
||||
Signature Brands, LLC Term Loan |
||||
SureWerx Purchaser III, Inc. Delayed Draw Term Loan |
||||
SageSure Holdings, LLC Delayed Draw Term Loan (Second Lien) |
||||
Total unfunded commitments |
$ |
|||
For the Period from April 3, 2023 (commencement of operations) to June 30, 2023 |
||||
Per share data: |
||||
Net asset value, beginning of period |
$ | |||
Net investment income (loss) (1) |
||||
Impact of issuance of shares (2) |
( |
) | ||
Total from operations |
||||
Total increase (decrease) in net assets |
||||
Net asset value, end of period |
$ | |||
Shares outstanding, end of period |
||||
Total return (3) |
% | |||
Ratios / supplemental data |
||||
Ratio of gross expenses to average net assets (4)(5)(6) |
% | |||
Ratio of net expenses to average net assets (4)(5)(7) |
% | |||
Ratio of net investment income (loss) to average net assets (4)(5) |
% | |||
Net assets, end of period |
$ | |||
Weighted average shares outstanding |
||||
Portfolio turnover rate (8) |
% | |||
(1) |
Per share amounts are calculated based on the weighted average shares outstanding during the period. |
(2) |
Impact of issuance of shares in this caption are balancing amounts necessary to reconcile the change in NAV per share for the period. |
(3) |
Total return is calculated as the change in net asset value (“NAV”) per share during the period, plus distributions per share, if any, divided by the NAV per share at the beginning of the period. Total return is for the period indicated and has not been annualized. |
(4) |
Ratios have not been annualized. |
(5) |
Average net assets are computed using the average balance of net assets at the end of each month of the reporting period. |
(6) |
Ratio of gross expenses to average net assets is computed using expenses before waivers and expense support payments, if applicable. |
(7) |
Ratio of net expenses to average net assets is computed using total expenses net of waivers and expense support payments, if applicable. |
(8) |
Portfolio turnover rate is calculated using the lesser of total sales or total purchases over the average of the investments at fair value for the period reported and has not been annualized. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q (“Report”) contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors. These forward-looking statements (including those relating to current and future market conditions and trends in respect thereof) are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our and the Advisor’s beliefs and opinions and our and the Advisor’s assumptions. We are externally managed the Advisor, a registered investment adviser under the Advisers Act, which is affiliated with StepStone Group. For the avoidance of doubt, we are not a subsidiary of or consolidated with StepStone Group. Furthermore, StepStone Group does not have any obligation, contractual or otherwise, to financially support us. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “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:
The information contained in this section should be read in conjunction with “Item 1. Unaudited Consolidated Financial Statements” in this Report. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate; as a result, the forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Report should not be regarded as a representation by us that the Company’s plans and objectives will be achieved. This discussion contains forward-looking statements, which relate to future events or the Company’s future performance or financial condition and involves numerous risks and uncertainties, including, but not limited to, those set forth in “Risk Factors” in Part II, Item 1A of this Report and elsewhere in this Report. Investors should not place undue reliance on these forward-looking statements, which apply only as of the date of this Report. The Company does not undertake any obligation to update or revise any forward-looking statements or any other information contained herein, except as required by applicable law. The following factors are among those that may cause actual results to differ materially from the Company’s forward-looking statements:
| • | the Company’s future operating results; |
| • | conditions affecting the financial and capital markets, including with respect to changes from the impact of a global pandemic, including the COVID-19 pandemic; |
| • | general economic, political and industry trends and other external factors, including uncertainty surrounding the financial and political stability of the United States and other countries; |
| • | actual and potential conflicts of interest with the Advisor and its affiliates; |
| • | interest rate volatility, including volatility associated with the decommissioning of the London Interbank Offered Rate (“LIBOR”) and the transition to new reference rates; |
| • | the Company’s business prospects and the prospects of the Company’s prospective portfolio companies; |
| • | the impact of increased competition; |
| • | the Company’s contractual arrangements and relationships with third parties; |
| • | the dependence of the Company’s future success on the general economy and its impact on the industries in which the Company invests; |
| • | the ability of the Company’s portfolio companies to achieve their objectives; |
| • | the relative and absolute performance of the Advisors; |
| • | the ability of the Advisors and their affiliates to attract and retain talented professionals; |
| • | the Company’s use of borrowings and expected financings to fund investments; |
| • | the adequacy of the Company’s financing sources and working capital; |
| • | the timing and amount of cash flows, if any, from the operations of the Company’s portfolio companies; |
| • | the ability of the Advisors to locate suitable investments for the Company, to monitor and administer the Company’s investments and to implement plans to achieve the Company’s investment objectives; |
21
| • | the Company’s ability to pay dividends or make distributions; |
| • | the risks associated with possible disruptions due to terrorism in the Company’s operations or the economy generally; |
| • | the impact of future acquisitions and divestitures; |
| • | the Company’s ability to qualify and maintain our qualification as a RIC under the Code; and |
| • | future changes in laws or regulations, including tax laws and regulations and interpretations thereof, and conditions in the Company’s operating areas. |
Investors are advised to consult any additional disclosures that the Company makes directly to investors or through reports that the Company has filed or will file with the SEC, including Amendment No. 2 to our registration statement on Form 10, filled with the SEC on May 23, 2023 (the “Form 10”) and amendments thereto, and our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The Company is not able to rely on the safe harbor for forward-looking statements provided in Section 27A of the Securities Act and Section 21E of the Exchange Act.
Overview
The Company is a non-diversified, externally managed closed-end management investment company that was organized to achieve attractive risk-adjusted returns mainly by investing in various credit-related strategies. We have elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. federal income tax purposes, we intend to elect to be treated, and intend to comply with the requirements to qualify annually, as a RIC under the Code.
We are a non-exchange traded, perpetual-life BDC, which is a BDC whose shares are not listed for trading on a stock exchange or other securities market. We use the term “perpetual-life BDC” to describe an investment vehicle of indefinite duration, whose shares are intended to be sold by the BDC monthly on a continuous basis at a price generally equal to the BDC’s monthly NAV per share. In our perpetual-life structure, we may offer investors an opportunity to repurchase their shares on a quarterly basis at NAV, but we are not obligated to offer to repurchase any Shares in any particular quarter. We believe that our perpetual nature enables us to execute a patient and opportunistic strategy and be able to invest across different market environments. This may reduce the risk of the Company being a forced seller of assets in market downturns compared to non-perpetual funds. While we may consider a liquidity event at any time in the future, we currently do not intend to undertake a liquidity event, and we are not obligated by our Limited Liability Company Agreement (as amended, restated, and otherwise modified from time to time, the “Limited Liability Company Agreement”) or otherwise to effect a liquidity event at any time.
The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation, mainly by investing in various credit-related strategies. The Company intends to primarily use a “multi-lender” approach to achieve its investment objectives, whereby the Advisor utilizes a variety of non-bank or corporate lenders (“Lending Sources”) to source investment opportunities for the Company. There can be no assurance that the Company will achieve its investment objectives.
Under normal circumstances, we will invest at least 80% of our total assets (net assets plus borrowings for investment purposes) in Private Credit, primarily through our lending strategy and underlying funds strategy, each as discussed more fully in our Form 10. Except as otherwise disclosed in the Form 10, we may modify or waive our investment objectives and any of our investment policies, restrictions, strategies, and techniques without prior notice and without shareholder approval. However, absent requisite shareholder approval under the 1940 Act, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. If we change our 80% Private Credit test, we will provide shareholders with at least 60 days; advance notice of such change.
The Advisor expects that the direct loans to which we will have exposure will generally be made to middle-market companies, which we define as companies with an annual EBITDA of approximately $10 million to $100 million. The loans in which we expect to invest will generally pay floating interest rates based on a variable base rate. The secured debt (including first lien senior secured, unitranche and second lien debt) in which we will invest generally have stated terms of five to eight years, and the mezzanine, unsecured or subordinated debt investments that we may make will generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and five years. However, there is no limit on the maturity or duration of any security we may hold in our portfolio. Loans and securities purchased in the secondary market will generally have shorter remaining terms to maturity than newly issued investments. We expect most of our debt investments will be unrated. Our debt investments may also be rated by a nationally recognized statistical rating organization, and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service, Inc. or lower than “BBB” by Standard & Poor’s Ratings Services). We expect that our unrated debt investments will generally have credit quality consistent with below investment grade securities.
The Company generates revenues primarily in the form of interest income from debt investments it holds. In addition, the Company generates income from dividends or distributions of income on any direct equity investments, capital gains on the sale of loans and equity securities and various other loan origination and other fees, including commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees.
22
As a BDC regulated under the 1940 Act, the Company is subject to certain limitations relating to co-investments and joint transactions with affiliates, which, in certain circumstances, likely may limit the Company’s ability to make investments or enter into other transactions alongside other clients. The Advisor intends to apply for an exemptive order from the SEC that will permit the Company, among other things, to co-invest with certain other persons, including certain affiliates of the Advisor and certain funds managed and controlled by the Advisor and its affiliates, subject to certain terms and conditions. There is no assurance that the co-investment exemptive order will be granted by the SEC.
Please refer to the Form 10 for more information on the Company and its investment objectives and strategy.
We are externally managed by the Advisor, which manages our day-to-day operations and provides us with investment advisory and administrative services pursuant to the terms of the Advisory Agreement and the Administration Agreement. The Advisor is registered as investment adviser with the SEC under the Advisers Act. We are not a subsidiary of, or consolidated with, the Advisor. The Advisor oversees (subject to the oversight of the Board) the management of our operations and is responsible for making investment decisions with respect to our portfolio pursuant to the terms of the Advisory Agreement. Under the Advisory Agreement, we have agreed to pay the Advisor an annual management fee as well as an incentive fee based on our investment performance.
The Advisor has also entered into the Resource Sharing Agreement with StepStone Group, under which certain designated employees of StepStone Group will provide services, including investment advisory, portfolio management and other services, to the Advisor. The Resource Sharing Agreement (i) provides the Company with access to deal flow generated by StepStone Group in the ordinary course of its business; and (ii) provides the Advisor with access to StepStone Group’s investment professionals and non-investment employees. The Advisor is responsible for determining if the Company will participate in deal flow generated by StepStone Group. StepStone Group will also make available its premises, facilities and systems to the Advisor in order for the Advisor to conduct its daily operations. In return for personnel provided and services rendered under the Resource Sharing Agreement, the Advisor will pay StepStone Group on a cost-plus basis.
By virtue of the Resource Sharing Agreement, our Advisor is served by experienced investment professionals within StepStone Group, including the members of the Investment Committee, which has primary responsibility for portfolio management regarding the Company’s investment portfolio.
The Advisor also serves as the Company’s administrator pursuant to the Administration Agreement and performs certain administrative, accounting and other services for the Company. In consideration of these administrative services, the Company pays the Advisor the Administration Fee in an amount up to 0.30% on an annualized basis of the Company’s net assets. The Administration Fee is calculated based on the Company’s month-end NAV (as of the close of business on the last calendar day of the applicable month) and payable monthly in arrears. The Administration Fee is an expense paid out of the Company’s net assets. The Advisor may delegate or sub-contract certain of its services under the Administration Agreement to other entities, including a sub-administrator, and has done so as described below.
From the proceeds of the Administration Fee, the Advisor pays the Sub-Administrator a sub-administration fee to provide certain outsourced administration and outsourced accounting services for the Company.
The Advisor has engaged SGEAIL to act as our sub-advisor pursuant to the Sub-Advisory Agreement to provide certain ongoing, non-discretionary investment advice and services to the Advisor in regard to the Advisor’s management of the Company. Under the Sub-Advisory Agreement, SGEAIL is responsible for providing certain ongoing investment advice and services to the Advisor in respect of the Company’s investments.
Private Offering
We are conducting the continuous Private Offering of Shares in reliance on the exemption provided by Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder, in connection with which we have entered into, and expect to continue to enter into, Subscription Agreements with investors. Investors whose subscriptions for Shares are accepted by the Company will be admitted as members of the Company following payment of their capital contribution to the Company, pursuant to the terms of the Limited Liability Company Agreement. The Initial Closing of the Private Offering occurred on April 3, 2023, in connection with which we sold 741,800 Shares in exchange for gross proceeds of $18.5 million. We used the proceeds from the Initial Closing, along with borrowings under the MassMutual SPV I Facility, to purchase the Initial Portfolio on April 3, 2023, shortly prior to our election to be regulated as a BDC. As of June 30, 2023, we had sold an aggregate of 2,876,101 Shares in the Private Offering for total consideration of approximately $72.3 million.
In connection with the Private Offering, we intend to hold monthly closings in connection with which we will issue Shares to investors for immediate cash investment; provided that we retain the right, if determined by us in our sole discretion, to accept subscriptions and issue Shares, in amounts to be determined by us, more or less frequently to one or more investors for regulatory, tax or other reasons as we may determine to be appropriate. We reserve the right to conduct additional offerings of securities in the future in addition to this Private Offering. Each prospective investor in the Private Offering will be required to represent that it (i) is an “accredited investor” as defined in Rule 501(a) of Regulation D under the Securities Act and (ii) is acquiring the Shares purchased by it for investment and not with a view to resale or distribution.
23
We are initially offering to sell one class of Shares and may offer additional classes of Shares in the future. We and our investment adviser may apply for exemptive relief from the SEC that, if granted, will permit us to issue multiple classes of shares of Shares with varying sales loads, contingent deferred sales charges, and/or asset-based service and/or distribution fees, the details for which will be finalized at a later date in our discretion (the “Multi-Class Exemptive Relief”). The SEC has not yet granted the Multi-Class Exemptive Relief, and there is no assurance that the relief will be granted.
Initial Portfolio Acquisition
On April 3, 2023, shortly prior to our election to be regulated as a BDC, and in order to avoid the blind pool-aspects typically associated with the launch of a new fund, we, through our wholly-owned subsidiary, SPV Facility I, acquired the Initial Portfolio from the Seller, which comprised of a select portfolio of first lien, senior secured Private Credit investments in, and funding obligations to, well-established middle-market businesses that operate across a wide range of industries. We used the proceeds from the Initial Closing, in connection with which we received approximately $18.5 million of gross proceeds, along with borrowings under the MassMutual SPV I Facility, to purchase the Initial Portfolio. SPV Facility I purchased the Initial Portfolio pursuant to the terms of the Initial Portfolio Transfer Agreement.
The Initial Portfolio was comprised of U.S. dollar-denominated investments that we believe reflect attractive spreads and fundamentals as compared to the broader direct lending market and provide us with a sound foundation for the start of our business. The investments and unfunded obligations in the Initial Portfolio are consistent with our investment objectives and the investment requirements set forth under the 1940 Act.
The aggregate Purchase Price for the Initial Portfolio was $37.4 million, which is equal to the sum of the fair values of each asset and unfunded commitment in the Initial Portfolio as of the time immediately prior to closing under the Initial Portfolio Transfer Agreement. For purposes of determining the Purchase Price, the assets and unfunded commitments in the Initial Portfolio were valued as of February 28, 2023 by an independent third-party valuation firm. In connection with the closing under the Initial Portfolio Transfer Agreement and the acquisition of the Initial Portfolio, the Advisor conducted certain valuation procedures to confirm whether there had been any material changes to the fair value of the investments and obligations in the Initial Portfolio since February 28, 2023 and adjusted the Purchase Price in accordance with the terms of the Initial Portfolio Transfer Agreement to reflect the fair value of the investments and obligations in the Initial Portfolio as of the time immediately prior to closing under the Initial Portfolio Transfer Agreement.
Key Components of Our Results of Operations
Investments
The Company’s level of investment activity can, does, and will 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 the Company makes.
Revenue
The Company generates revenue primarily in the form of interest income on debt investments it holds. In addition, the Company generates income from dividends or distributions of income on any direct equity investments, capital gains on the sales of loans and equity securities and various loan origination and other fees. The secured debt (including first lien senior secured, unitranche and second lien debt) in which the Company invests generally has stated terms of five to eight years, and the mezzanine, unsecured or subordinated debt investments that the Company may make will generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and five years. The Company’s debt investments typically bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR or SOFR. Interest on these debt investments is paid quarterly. In some instances, the Company receives payments on its debt investments based on scheduled amortization of the outstanding balances. In addition, the Company may receive repayments of some of its debt investments prior to their scheduled maturity date. The frequency or volume of these repayments is expected to fluctuate significantly from period to period. The Company’s portfolio activity also reflects the proceeds of sales of securities. The Company may also generate revenue in the form of commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees.
Expenses
The Advisor bears all of its own costs incurred in providing investment advisory services to the Company. As described below, however, the Company bears all other expenses related to its investment program. The Advisor provides or arranges for certain administrative services to be provided to the Company. Among those services are: providing office space, adequate personnel, and communications and other facilities necessary for administration of the Company, performing certain administrative functions to support the Company and its service providers, supporting the Board and providing it with information, providing accounting and legal services in support of the Company, compliance testing services (not including any compliance services performed by an outsourced CCO) analyzing the value of the Company’s assets, and reviewing and arranging for payment of the Company’s expenses and other support services. Such administrative services are included in the Administration Fee. In addition to the services above, the Advisor is responsible for overseeing the Sub-Administrator.
24
The Company’s primary operating expenses include the payment of: (i) investment advisory fees to the Advisor pursuant to the Advisory Agreement (unless waived); (ii) the Administration Fee to the Advisor in performing its administrative obligations under the Administration Agreement; and (iii) and other expenses necessary for its operations, including the below:
| • | all expenses related to its investment program, including, but not limited to, expenses borne indirectly through the Company’s investments in the underlying assets, including any fees and expenses charged by the investment managers or general partners of the underlying funds (including management fees, performance or incentive fees and redemption or withdrawal fees, however titled or structured), all costs and expenses directly related to due diligence of portfolio transactions for the Company such as direct and indirect expenses associated with the Company’s investments (whether or not consummated), and enforcing the Company’s rights in respect of such investments, transfer taxes and premiums, taxes withheld on non-U.S. dividends, fees for data and software providers, research expenses, professional fees (including, without limitation, the fees and expenses of consultants, attorneys and experts) and, if applicable, brokerage commissions, origination or similar fees on investments sourced through Lending Sources or underlying funds, interest and commitment fees on loans and debit balances, borrowing charges on securities sold short, dividends on securities sold but not yet purchased and margin fees; |
| • | attorneys’ fees and disbursements associated with preparing and updating the Company’s registration statement on Form 10 and other regulatory filings, and with reviewing potential investments to be made and executing the Company’s investments; |
| • | attorneys’ fees and disbursements associated with preparing and filing exemptive applications with the SEC in respect of certain co-investment transactions and the ability to offer multiple classes of shares; |
| • | fees and disbursements of all accountants or auditors engaged by the Company, expenses related to the annual audit of the Company, expenses related to the financial statements of the Company and expenses related to the preparation, review, approval and filing of the Company’s tax information; |
| • | recordkeeping, custody and transfer agency fees and expenses; |
| • | the costs of errors and omissions/directors’ and officers’ liability insurance and a fidelity bond; |
| • | the Base Management Fee and the Administration Fee; |
| • | the Incentive Fee; |
| • | fees paid to third-party consultants or service providers relating to the Company’s establishment or operations and fees paid to third-party providers for due diligence and valuation services; |
| • | the costs of preparing and mailing reports and other communications, including proxy, tender offer correspondence, annual reports or similar materials, to shareholders; |
| • | fees of directors who are not “interested persons” and travel and administrative expenses of directors who are not “interested persons” relating to meetings of the Board and committees thereof; |
| • | costs and charges related to electronic platforms through which investors may access, complete and submit subscription and other fund documents or otherwise facilitate activity with respect to their investment in the Company; |
| • | all costs and charges for equipment or services used in communicating information regarding the Company’s transactions among the Advisor and any custodian or other agent engaged by the Company; |
| • | any extraordinary expenses (as defined below), including indemnification expenses as provided for in the Company’s organizational documents; |
| • | the allocable portion of cost, including the rent and overhead, of our Chief Compliance Officer and their administrative support staff, including costs of any outsourced third-party Chief Compliance Officer; and |
| • | other expenses not explicitly borne by the Advisor associated with the investment operations of the Company and its subsidiaries; and all reasonable costs and expenses incurred in connection with the formation and organization of, and offering and sale of Shares in, the Company, as determined by the Advisor, including all out-of-pocket legal, accounting, registration and filing fees and expenses will be borne by the Company. The Company will also bear certain administrative costs. |
We reimburse the Advisor, subject to the Expense Limitation Agreement, for amounts paid or costs borne that properly constitute Company expenses as set forth in the Administration Agreement and Advisory Agreement or otherwise. 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 during periods of asset declines.
25
Portfolio and Investment Activity
As of June 30, 2023, the Company had 62 investments in 47 portfolio companies across 8 industries. Based on fair value as of June 30, 2023, 100% of the Company’s debt portfolio was invested in debt bearing a floating interest rate. The weighted average interest rate across the Company’s portfolio investments was approximately 10.8% as of June 30, 2023.
Portfolio Asset Quality
We utilize an internally developed investment rating system to rate the performance of each portfolio company and to monitor our expected level of returns on each of our investments in relation to our expectations for the portfolio company. The investment rating system takes into consideration various factors, including each investment’s expected level of returns, the collectability of our debt investments and the ability to receive a return of the invested capital in our equity investments, comparisons to competitors and other industry participants, the portfolio company’s future outlook and other factors that are deemed to be significant to the portfolio company.
As of June 30, 2023, our investment portfolio had no investments on non-accrual status.
The operating results of our portfolio companies are impacted by changes in the broader fundamentals of the United States economy. In periods during which the United States economy contracts, it is likely that the financial results of small to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements, to an increase in defaults on our debt investments or in realized losses on our investments and to difficulty in maintaining historical dividend payment rates and unrealized appreciation on our equity investments. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by future economic cycles or other conditions, which could also have a negative impact on our future results.
Consolidated Results of Operations
The Company was formed on September 26, 2022 and commenced investment operations on April 3, 2023. The following table represents our operating results for the period from April 3, 2023 (commencement of operations) to June 30, 2023:
| For the Period from April 3, 2023 (commencement of | ||||
| operations) to June 30, 2023 | ||||
| Total investment income |
$ | 3,546,896 | ||
| Less: Net expenses |
(1,733,766 | ) | ||
|
|
|
|||
| Net investment income (loss) |
1,813,130 | |||
|
|
|
|||
| Net realized gain (loss) |
4,695 | |||
|
|
|
|||
| Net increase (decrease) in Net Assets resulting from operations |
$ | 1,817,825 | ||
|
|
|
|||
Net increases (decreases) in net assets resulting from operations can vary substantially from period to period due to various factors, including recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, comparisons of net changes in net assets resulting from operations may not be meaningful.
| For the Period from April 3, 2023 (commencement of | ||||
| operations) to June 30, 2023 | ||||
| Investment income: |
||||
| Interest income |
$ | 3,546,896 | ||
|
|
|
|||
| Total Investment Income |
$ | 3,546,896 | ||
|
|
|
|||
26
For the period from April 3, 2023 (commencement of operations) to June 30, 2023, total investment income was driven by the Company’s deployment of capital and increasing invested balance of investments. The size of the Company’s investment portfolio at fair value was $193.1 million as of June 30, 2023 and, as of such date, all of the Company’s debt investments were income-producing.
Interest income on the Company’s debt investments is dependent on the composition and credit quality of the portfolio. Generally, the Company expects the portfolio to generate predictable quarterly interest income based on the terms stated in each loan’s credit agreement. As of June 30, 2023, all of the Company’s debt investments were performing and current on their interest payments.
Expenses
Expenses were as follows:
| For the Period from April 3, 2023 (commencement of | ||||
| Expenses | operations) to June 30, 2023 | |||
| Interest expense |
$ | 1,603,075 | ||
| Organizational costs |
1,296,462 | |||
| Income incentive fee |
135,985 | |||
| Management fee |
130,692 | |||
| Interest expense |
50,000 | |||
| Administration fee |
40,824 | |||
| Other expenses |
303,433 | |||
|
|
|
|||
| Total expenses |
$ | 3,560,471 | ||
|
|
|
|||
| Less expense support payments by the Advisor |
1,560,028 | |||
| Waiver for management and incentive fees |
266,677 | |||
|
|
|
|||
| Net expenses |
$ | 1,733,766 | ||
|
|
|
|||
Other expenses include valuation, insurance, filing, research, subscriptions, professional fees and other costs. Organization costs include all of the fees, costs, charges, expenses, liabilities and obligations incurred in relation to or in connection with the establishment of the Company, the marketing and offering of the Shares (including, among other things, legal, accounting, subscription processing and filing fees and expenses and other expenses pertaining to this offering), and the establishment, organization and creation of the operational structure of the Company and its special purpose vehicle subsidiaries, including travel, lodging, meals, entertainment, legal, accounting, regulatory compliance, fees of professional advisors, printing, postage, regulatory and tax filing fees, and other costs of establishment.
Waivers include organizational costs, income incentive fee, management fee and other operating expenses.
Income Taxes, Including Excise Taxes
The Company intends to elect to be treated as a RIC under Subchapter M of the Code, and the Company intends to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, the Company must, among other things, distribute to the Company’s shareholders in each taxable year generally at least 90% of the sum of (i) its investment company taxable income for that year (without regard to the deduction for dividends paid), which is generally its ordinary income plus the excess, if any, of its realized net short-term capital gains over its realized net long-term capital losses and (ii) its net tax-exempt income. To maintain the Company’s tax treatment as a RIC, the Company, among other things, intends to make the requisite distributions to its shareholders, which generally relieve the Company from corporate-level U.S. federal income taxes.
In addition, based on the excise tax distribution requirements, the Company is subject to a 4% nondeductible federal excise tax on undistributed income unless the Company distributes in a timely manner in each taxable year an amount at least equal to the sum of (1) 98% of its ordinary income for the calendar year, (2) 98.2% of capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in prior years. For this purpose, however, any ordinary income or capital gain net income retained by the Company that is subject to corporate income tax is considered to have been distributed. For the period from April 3, 2023 (commencement of operations) to June 30, 2023, we did not incur any excise tax.
Financial Condition, Liquidity and Capital Resources
The Company generates cash from the net proceeds from the Private Offering and from cash flows from interest and fees earned from its investments and principal repayments and proceeds from sales of its investments. The Company also funds a portion of its investments through borrowings from banks and issuances of senior securities, and intends to continue to do so during times prior to when the Company has fully invested the proceeds of any closing on Shares in the Private Offering. The Company’s primary use of cash will be to make investments in portfolio companies, payments of Company expenses, payment of cash distributions to shareholders and repurchases of Shares under the Company’s discretionary share repurchase program.
We believe that our available borrowing capacity under the MassMutual SPV I Facility and the BMO SPV II Credit Facility and our anticipated cash flows from the net proceeds from the Private Offering and from cash flows from interest and fees earned from its investments and principal repayments and proceeds from sales of its investments, will be adequate to meet our cash needs for our daily operations, including to fund our unfunded commitment obligations.
27
Cash Flows
As of June 30, 2023 we had $7.6 million in cash. During the period from April 3, 2023 (commencement of operations) to June 30, 2023, we used $164.0 million in cash for operating activities, primarily as a result of funding of portfolio investments of $198.8 million, partially offset by repayment of portfolio investments of $5.8 million, and other operating activities of $29.0 million. Cash provided by financing activities was $171.6 million during the period, which was primarily the result of proceeds from the issuance of Shares in the Private Offering of $72.3 million and borrowings of $100.8 million, partially offset by repayments of borrowings of $1.5 million.
Financing Transactions
The Company intends to utilize leverage (including through the establishment of wholly-owned financing subsidiaries), to finance its investments and operations. The amount of leverage that the Company employs will be subject to the restrictions of the 1940 Act and the supervision of the Board. At the time of any proposed borrowing, the amount of leverage the Company employs will also depend on the Advisor’s assessment of market and other factors.
The Company is subject to limitations on leverage applicable to BDCs under the 1940 Act. As a BDC, with certain limited exceptions, the Company is only permitted to borrow amounts such that the Company’s asset coverage ratio, as defined in the 1940 Act, equals at least 150% after such borrowing. As of June 30, 2023, our asset coverage ratio, as defined under the 1940 Act as the ratio of our total assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, was 174.0%.
The Company intends to use leverage in the form of borrowings, including loans from certain financial institutions and the issuance of debt, and may form one or more wholly-owned financing subsidiaries in the future in connection therewith. The Company may also use leverage in the form of the issuance of preferred shares, but does not currently intend to do so, or by using reverse repurchase agreements or similar transactions and derivatives. The Company may use leverage for investments, working capital, expenses and general corporate purposes (including to pay dividends or distributions).
In determining whether to borrow money or issue debt on behalf of the Company, the Advisor will analyze, as applicable, the maturity, covenant package and rate structure of the proposed borrowings as well as the risks of such borrowings compared to the Company’s investment outlook. Any such leverage, if incurred, would be expected to increase the total capital available for investment by the Company.
On April 3, 2023, in connection with the acquisition of the Initial Portfolio, the Company, through SPV Facility I as borrower, entered into the MassMutual SPV I Facility with MassMutual, as the administrative agent and facility servicer, and the lenders party thereto from time to time. Under the MassMutual SPV I Facility, the lenders have made commitments of $200.0 million. The MassMutual SPV I Facility is secured by all of the assets of SPV Facility I and a pledge over 100% of the equity interest the Company holds in SPV Facility I. See “Note 4. Borrowings” in “Item 1. Unaudited Consolidated Financial Statements” in this Report for more information.
On May 1, 2023, the Company, through SPV Facility II as borrower, entered into the BMO Loan and Security Agreement with BMO to provide SPV Facility II with the BMO SPV II Credit Facility. As of June 30, 2023 BMO had made an initial commitment of $81.25 million under the BMO SPV II Credit Facility, with an accordion provision to permit increases to the total facility amount up to $100 million, subject to the satisfaction of certain conditions. The BMO SPV II Credit Facility is secured by a first priority security interest substantially all of the assets of SPV Facility II and a pledge over 100% of our equity interest in SPV Facility II. See “Note 4. Borrowings” in “Item 1. Unaudited Consolidated Financial Statements” in this Report for more information.
Subsequent to June 30, 2023, the Company amended the BMO Loan and Security Agreement, which increased the funded amount from the lenders under the BMO Loan and Security Agreement to $100,750,000 as of the amendment effective date and increased the maximum total commitments of the lenders under the accordion provision in the BMO Loan and Security Agreement to $125,000,000, in each case, subject to the satisfaction of certain conditions. See “– Recent Developments” below for more information.
As of June 30, 2023, the Company had outstanding borrowings of $99,500,135.
The Company may also from time to time enter into new credit facilities, increase the size of existing credit facilities or issue debt securities. Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.
Distributions and Distribution Reinvestment
There were no distributions declared or paid during the period from April 3, 2023 (commencement of operations) through June 30, 2023.
We expect to pay regular quarterly distributions commencing with the quarter ending September 30, 2023. Any distributions we make will be at the discretion of our Board, considering factors such as our earnings, cash flow, capital needs and general financial condition and the requirements of Delaware law. As a result, our distribution rates and payment frequency may vary from time to time.
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Our Board’s discretion as to the payment of distributions will be directed, in substantial part, by its determination to cause us to comply with the RIC requirements. To maintain our treatment as a RIC, we generally are required to make aggregate annual distributions to our shareholders of at least 90% of our investment company taxable income.
There is no assurance we will pay distributions in any particular amount, if at all. We may fund any distributions from sources other than cash flow from operations, including the sale of assets, borrowings, return of capital or offering proceeds, and although we generally expect to fund distributions from cash flow from operations, we have not established limits on the amounts we may pay from such sources. The extent to which we pay distributions from sources other than cash flow from operations will depend on various factors, including the level of participation in our distribution reinvestment plan, how quickly we invest the proceeds from this and any future offering and the performance of our investments. Funding distributions from the sales of assets, borrowings, return of capital or proceeds of the Private Offering will result in us having less funds available to acquire investments. As a result, the return investors realize on their investment may be reduced. Doing so may also negatively impact our ability to generate cash flows. Likewise, funding distributions from the sale of additional securities will dilute investors’ interest in us on a percentage basis and may impact the value of their investment especially if we sell these securities at prices less than the price an investor paid for their Shares. We believe the likelihood that we pay distributions from sources other than cash flow from operations will be higher in the early stages of the offering.
We have not established limits on the amount of funds we may use from any available sources to make distributions. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. The Advisor and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.
Consistent with the Code, shareholders will be notified of the source of our distributions. Our distributions may exceed our earnings and profits, especially during the period before we have substantially invested the proceeds from the Private Offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes. The tax basis of Shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of Shares.
For a period of time following commencement of the Private Offering, which time period may be significant, we expect substantial portions of our distributions may be funded indirectly through the reimbursement of certain expenses by the Advisor and its affiliates, including through the waiver of certain investment advisory fees by the Advisor, that are subject to conditional reimbursement by us within three years. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or the Advisor or its affiliates continues to advance such expenses or waive such fees. Our future reimbursement of amounts advanced or waived by the Advisor and its affiliates will reduce the distributions that you would otherwise receive in the future. Other than as set forth in this Registration Statement, the Advisor and its affiliates have no obligation to advance expenses or waive advisory fees.
We have adopted a distribution reinvestment plan, pursuant to which we will reinvest all cash dividends declared by the Board on behalf of our shareholders who do not elect to receive their dividends in cash. As a result, if the Board authorizes, and we declare, a cash dividend or other distribution, then our shareholders who have not opted out of our distribution reinvestment plan will have their cash distributions automatically reinvested in additional Shares, rather than receiving the cash dividend or other distribution. Shares will be issued pursuant to the distribution reinvestment plan at their NAV per Share for such Shares at the time the distribution is payable. There is no sales load or other charge for reinvestment, but shareholder servicing fees and distribution fees will be charged where applicable. The Company may terminate the distribution reinvestment plan at any time upon 30 days’ notice to shareholders. Any expenses of the distribution reinvestment plan will be borne by the Company. The reinvestment of dividends and distributions pursuant to the distribution reinvestment plan will increase the Company’s assets on which the Base Management Fee is payable to the Advisor.
Generally, for U.S. federal income tax purposes, shareholders receiving Shares under the distribution reinvestment plan will be treated as having received a distribution equal to the amount payable to them in cash as a distribution had the shareholder not participated in the distribution reinvestment plan.
Discretionary Share Repurchase Program
We do not intend to list our Shares on a securities exchange and we do not expect there to be a public market for our shares. As a result, if you purchase our Shares, your ability to sell your shares will be limited.
Beginning no later than the quarter ending December 31, 2023, and subject to market conditions and the discretion of the Board, we intend to commence a share repurchase program in which we intend to offer to repurchase, in each quarter, up to 5% of our Shares outstanding (either by number of shares or aggregate NAV) as of the close of the previous calendar quarter. Our Board may amend or suspend the share repurchase program at any time if in its reasonable judgment it deems such action to be in our best interest and the best interest of our shareholders. As a result, share repurchases may not be available each quarter, such as when a repurchase offer would place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the Company that would outweigh the benefit of the repurchase offer. We intend to conduct such repurchase offers in accordance with the requirements of Rule 13e-4 promulgated under the Exchange Act and the 1940 Act. All Shares purchased by us pursuant to the terms of each tender offer will be retired and thereafter will be authorized and unissued Shares.
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Under the share repurchase program, to the extent we offer to repurchase Shares in any particular quarter, we expect to repurchase Shares using a purchase price equal to the NAV per share as of the last calendar day of the applicable quarter (the “Valuation Date”). Shareholders should keep in mind that if they tender Shares in a tender offer with a Valuation Date that is within the 12-month period following the initial issue date of their tendered Shares, the Company may repurchase such Shares subject to an “early repurchase deduction” of 2% of the aggregate NAV of the Shares repurchased (an “Early Repurchase Deduction”). The Early Repurchase Deduction will be retained by the Company for the benefit of remaining shareholders.
You may tender all of the Shares that you own. In the event the amount of Shares tendered exceeds the repurchase offer amount, Shares will be repurchased on a pro rata basis. All unsatisfied repurchase requests must be resubmitted in the next quarterly tender offer, or upon the recommencement of the share repurchase program, as applicable. We will have no obligation to repurchase Shares, including if the repurchase would violate the restrictions on distributions under federal law or Delaware law. The limitations and restrictions described above may prevent us from accommodating all repurchase requests made in any quarter. Our share repurchase program has many limitations, including the limitations described above, and should not in any way be viewed as the equivalent of a secondary market.
Repurchases of Shares from shareholders by the Company will be paid in cash within 65 days of the expiration of the applicable tender offer, after the determination of the relevant NAV per share is finalized. Repurchases will be effective after receipt and acceptance by the Company of eligible written tenders of Shares from shareholders by the applicable repurchase offer deadline. The Company does not intend to impose any charges in connection with repurchases of Shares other than as stated above.
We did not repurchase any Shares during the period from April 3, 2023 (commencement of operations) through June 30, 2023.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Management will utilize available information, which includes our history, industry standards and the current economic environment, among other factors, in forming the estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our consolidated financial statements.
Critical accounting estimates are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. We will evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We have identified the valuation of portfolio investments, specifically the valuation of Level 3 investments, as critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. We have also identified revenue recognition as a critical accounting estimate. See “Note 2. Significant Accounting Policies” in “Item 1. Unaudited Consolidated Financial Statements” in this Report for more information regarding the Company’s most significant accounting policies, including those relating to the valuation of its investment portfolio and revenue recognition. These significant accounting policies should be read in conjunction with the Company’s consolidated financial statements in “Item 1. Unaudited Consolidated Financial Statements” of Part I of this Report, “Item 1A. Risk Factors” in Part II of this Report, and “Item 1A. Risk Factors” in the Form 10.
As of June 30, 2023, our investment portfolio, valued at fair value in accordance with the Board-approved valuation policies, represented approximately 260.5% of our total net assets.
Contractual Obligations and Other Liquidity Considerations
We have entered into certain contracts under which we may have material future commitments. We have entered into each of the Advisory Agreement and the Administration Agreement with the Advisor to provide us with investment advisory services and administrative services. Payments for investment advisory services under the Advisory Agreement and payment of the Administration Fee under the Administration Agreement are described in “Note 3. Related Party Transactions” in “Item 1. Unaudited Consolidated Financial Statements” in this Report.
We are also party to the Sub-Advisory Agreement, under which the Advisor has engaged SGEAIL to provide certain ongoing, non-discretionary investment advice and services to the Advisor in regard to the Advisor’s management of the Company, in exchange for which the Sub-Advisor will receive from the Advisor 20% of the Base Management Fee and Incentive Fee payable to the Advisor by the Company.
In addition, we have entered into the Expense Limitation Agreement with the Advisor for a one-year term, the Limitation Period, which may be extended for a period of one year on an annual basis. Under the Expense Limitation Agreement, the Company has no obligation to reimburse or pay the Advisor for any Expense Payment unless the Company has reached the $100 million Offering Proceeds
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Threshold, following which time, any Expense Payments will be subject to recoupment by the Advisor to the extent that such recoupment would not cause the Company to exceed the Expense Cap. Calculation of the Offering Proceeds Threshold excludes gross proceeds from Shares purchased by the Advisor and by the Company’s directors and officers. See Note 3. Related Party Transactions” in “Item 1. Unaudited Consolidated Financial Statements” in this Report for more information.
If any of our contractual obligations are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we receive under the Advisory Agreement, the Sub-Advisory Agreement and the Administration Agreement.
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, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in our balance sheet. Our investment portfolio may contain debt investments that are in the form of revolving lines of credit and unfunded delayed draw commitments, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. Unfunded portfolio company commitments and funded debt investments are presented on our consolidated schedule of investments at fair value. Unrealized appreciation or depreciation, if any, is included in our consolidated statement of assets and liabilities and consolidated statement of operations.
As of June 30, 2023, we had the following outstanding commitments to fund investments. As of June 30, 2023, we believe we have adequate financial resources to satisfy such commitments.
| Investments |
June 30, 2023 | |||
| Accordion Partners Intermediate LLC Third Amendment Delayed Draw Term Loan |
$ | 436,773 | ||
| Accordion Partners Intermediate LLC Third Amendment Revolving Credit |
291,182 | |||
| Bobcat Purchaser, LLC Delayed Draw Term Loan |
476,190 | |||
| Cedar Services Group, LLC Delayed Draw Term B Loan |
1,000,000 | |||
| Community Care Partners, LLC Delayed Draw Term B Loan |
297,901 | |||
| Cvausa Management, LLC Primary Delayed Draw Term Loan |
1,241,661 | |||
| Cvausa Management, LLC Secondary Delayed Draw Term Loan |
519,765 | |||
| Integrity Marketing Acquisition, LLC Amendment No. 9 Delayed Draw Term Loan |
30,890 | |||
| Lido Advisors, LLC Fourth Amendment Delayed Draw Term Loan |
1,433,858 | |||
| Life Science Intermediate Holdings, LLC Delayed Draw Dollar Term Loan D |
2,390,625 | |||
| Signature Brands, LLC Term Loan |
518,016 | |||
| SureWerx Purchaser III, Inc. Delayed Draw Term Loan |
430,010 | |||
| SageSure Holdings, LLC Delayed Draw Term Loan (Second Lien) |
1,041,211 | |||
|
|
|
|||
| Total unfunded commitments |
$ | 10,108,082 | ||
|
|
|
|||
Recent Developments
On July 3, 2023, we, through SPV Facility II, entered into the First Amendment to the BMO Loan and Security Agreement. The First Amendment provides for, among other things, (1) a funded amount from the lenders under the BMO Loan and Security Agreement of $100,750,000 as of the amendment effective date and (2) an increase in the maximum total commitments of the lenders under the accordion provision in the BMO Loan and Security Agreement to $125,000,000, in each case, subject to the satisfaction of certain conditions.
As of July 3, 2023, the Company sold 3,006,929.52 Shares in the Private Offering pursuant to subscription agreements entered into with the participating investors for aggregate consideration of approximately $77.5 million. This brings the gross proceeds received from the sale of Shares to greater than $100.0 million which results in Expense Payments being subject to recoupment by the Advisor subject to the terms of the Expense Limitation Agreement.
On August 3, 2023, the Board declared a distribution on Shares equal to an aggregate amount up to the Company’s (i) taxable earnings, including net investment income (if positive) and (ii) capital gains, for the period April 3, 2023 (commencement of operations) through September 30, 2023, which is payable on November 1, 2023 to stockholders of record as of September 29, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we may hold and to declines in the value of any fixed rate investments we may hold. A rise in interest rates would also be expected to lead to higher cost on our floating rate borrowings, including under the MassMutual SPV I Facility and the BMO SPV II Credit Facility, which may reduce our net investment income.
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
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We plan to invest primarily in illiquid debt securities of private middle-market companies. Most of our investments will not have a readily available market price, and we will value these investments at fair value as determined in good faith pursuant to procedures adopted by the Advisor and overseen by the Board in accordance with the Advisor’s valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
Because we expect that most of our investments will bear interest at floating rates, we anticipate that an increase in interest rates would have a corresponding increase in our interest income that would likely offset any increase in our cost of funds and, thus, net investment income would not be reduced. However, there can be no assurance that a significant change in market interest rates will not have an adverse effect on our net investment income.
Assuming that the consolidated statement of assets and liabilities as of June 30, 2023, were to remain constant and that the Company took no actions to alter its existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.
| Increase (Decrease) in | Increase (Decrease) in | Net Increase (Decrease) in | ||||||||||
| Change in Interest Rates |
Interest Income | Interest Expense | Net Income | |||||||||
| Down 25 basis points |
(887 | ) | 401 | (486 | ) | |||||||
| Up 100 basis points |
3,547 | (1,603 | ) | 1,944 | ||||||||
| Up 200 basis points |
7,094 | (3,206 | ) | 3,888 | ||||||||
| Up 300 basis points |
10,641 | (4,809 | ) | 5,831 | ||||||||
This analysis is indicative of the potential impact on our net investment income as of June 30, 2023, assuming an immediate and sustained change in interest rates as noted. It should be noted that we anticipate growth in our portfolio funded in part with additional borrowings under the MassMutual SPV I Facility and the BMO SPV II Credit Facility and potentially other borrowings, and such borrowings, to the extent they are floating rate borrowings, all else being equal, will increase our investment income sensitivity to interest rates, and such changes could be material. In addition, this analysis does not adjust for potential changes in our portfolio or our borrowing facilities after June 30, 2023 nor does it take into account any changes in the credit performance of our loans that might occur should interest rates change.
Because it is our intention to hold loans to maturity, the fluctuating relative value of these loans that may occur due to changes in interest rates may have an impact on unrealized gains and losses during quarterly reporting periods. Based on our assessment of the interest rate risk, as of June 30, 2023, we had no hedging transactions in place as we deemed the risk acceptable, and we did not believe it was necessary to mitigate this risk at that time.
From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as amounts translated into U.S. dollars for inclusion in our consolidated financial statements. We may use derivative instruments from time to time, including foreign currency forward contracts and cross currency swaps, to manage the impact of fluctuations in foreign currency exchange rates. In addition, we may have the ability to borrow in foreign currencies under any credit facilities or enter into other financing arrangements, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and U.S. dollar and reduces our exposure to foreign exchange rate differences. We expect to typically be a net receiver of these foreign currencies as related for our international investment positions, and, as a result, our investments denominated in foreign currencies, to the extent not hedged, are expected to benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be disclosed by the Company in the reports it files or submits under the Exchange Act.
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Changes in Internal Control Over Financial Reporting
Management has not identified any changes in the Company’s internal control over financial reporting that occurred during the period from April 3, 2023 (commencement of operations) to June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company, the Advisor nor the Company’s subsidiaries are currently subject to any material legal proceedings, nor, to the Company’s knowledge, are any material legal proceedings threatened against the Company, the Advisor or the Company’s subsidiaries. From time to time, the Company, the Advisor, and/or the Company’s subsidiaries may be party to certain legal proceedings in the ordinary course of business or otherwise, including, without limitation, proceedings relating to the enforcement of the Company’s or its subsidiaries’ rights under contracts with portfolio companies. The Company’s and the Advisor’s respective businesses are also subject to extensive regulation, which may result in regulatory proceedings against the Company and/or the Advisor. The outcome of any legal proceedings cannot be predicted with certainty, and there can be no assurance whether any legal proceedings will have a material adverse effect on the Company’s or the Advisor’s financial condition or results of operations in any future reporting period.
Item 1A. Risk Factors
Before making a decision to transact in our securities, you should carefully consider the risks discussed in “Item 1A. Risk Factors” in the Company’s Form 10, and all other information set forth in this Report, which could materially affect the Company’s business, financial condition and/or operating results, as well as the value of the Company’s securities. The risks described in the Company’s Form 10 are not the only risks the Company faces. Additional risks and uncertainties that are not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results, as well as the value of the Company’s securities.
There have been no material changes since the filing of the Form 10 with the SEC on May 23, 2023 to the risk factors previously disclosed therein. If any of such risks actually occur, the Company’s business, financial condition and/or operating results could be materially adversely affected. If that happens, the value of the Company’s securities could decline, and you may lose all or part of your investment.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Sales of Unregistered Equity Securities
On January 4, 2023, the Advisor, StepStone Group Private Debt LLC, invested $10,000 in Shares as a seed investment in the Company. In addition, the Initial Closing of the Private Offering occurred on April 3, 2023, in connection with which the Company issued and sold 741,800 Shares in exchange for gross proceeds of $18.5 million. All Shares were issued and sold in reliance on exemptions from the registration requirements of the Securities Act, including the exemption provided by Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
We expect to enter into additional Subscription Agreements with a number of investors in connection with the Private Offering, pursuant to which we expect to issue and sell Shares in reliance on the exemption provided by Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
Except as disclosed above or as previously reported by the Company on its current reports on Form 8-K, the Company did not sell any equity securities during the period covered by this Report that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the three months ended June 30, 2023.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
34
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document* | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document)* | |
| ^ | Schedules and/or exhibits to this Exhibit have been omitted in accordance with Item 601 of Regulation S-K. The registrant agrees to furnish supplementally a copy of all omitted schedules to the SEC upon its request. |
| * | Filed herewith |
| ** | Furnished herewith |
| (1) | Previously filed as part of Amendment No. 1 to the Company’s Registration Statement on Form 10 (File No. 000-56505) filed on April 19, 2023 and incorporated herein by reference. |
| (2) | Previously filed as part of the Company’s Registration Statement on Form 10 (File No. 000-56505) filed on December 30, 2022 and incorporated herein by reference. |
| (3) | Previously filed as part of Amendment No. 2 to the Company’s Registration Statement on Form 10 (File No. 000-56505) filed on May 23, 2023 and incorporated herein by reference. |
| (4) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 000-56505) filed on May 5, 2023 and incorporated herein by reference. |
| (5) | Previously filed as an exhibit to the Company’s Current Report on Form 8-K (File No. 000-56505) filed on July 3, 2023 and incorporated herein by reference. |
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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.
| STEPSTONE PRIVATE CREDIT FUND LLC | ||||||
| Date: August 11, 2023 | By: | /s/ Darren Friedman | ||||
| Darren Friedman | ||||||
| Chief Executive Officer | ||||||
| Date: August 11, 2023 | By: | /s/ Joseph Cambareri | ||||
| Joseph Cambareri | ||||||
| Chief Financial Officer | ||||||