OHA Investment Corporation
OHA Investment Corp (Form: 10-Q, Received: 05/08/2015 17:30:22)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

or

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _______________

 

Commission file number: 814-00672

 

 

OHA Investment Corporation

 

(Exact name of registrant as specified in its charter) 

 

 

Maryland   20-1371499
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     

1114 Avenue of the Americas,

27 th Floor

  10036
New York, New York   (Zip Code)
(Address of principal executive
offices)
   

(212) 852-1900

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
    (Do not check if smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

As of May 7, 2015, there were 20,342,483 shares of the registrant’s common stock outstanding.

 

 
 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION 1
   
Item 1. Financial Statements. 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations . 25
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 31
   
Item 4. Controls and Procedures. 31
   
PART II – OTHER INFORMATION 32
   
Item 1. Legal Proceedings. 32
   
Item 1A. Risk Factors. 32
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds . 32
   
Item 6. Exhibits. 32
   
SIGNATURES 33

 

 
 

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

 

OHA INVESTMENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

 

    March 31,     December 31,  
    2015     2014  
    (Unaudited)        
Assets                
Investments in portfolio securities at fair value                
Control investments                
(cost: $29,101 and $28,661, respectively)   $ 5,491     $ 6,275  
Affiliate investments                
(cost: $18,116 and $17,986, respectively)     17,928       17,430  
Non-affiliate investments                
(cost: $172,968 and $153,100, respectively)     169,149       152,458  
Total portfolio investments                
(cost: $220,185 and $199,747, respectively)     192,568       176,163  
Investments in U.S. Treasury Bills at fair value                
(cost: $30,601 and $30,600, respectively)     30,601       30,600  
Total investments     223,169       206,763  
Cash and cash equivalents     29,960       31,455  
Accounts receivable and other current assets     306       316  
Interest receivable     2,135       2,090  
Deferred loan costs and other prepaid assets     1,267       1,551  
Total current assets     33,668       35,412  
Total assets   $ 256,837     $ 242,175  
                 
Liabilities and net assets                
Current liabilities                
Accounts payable and accrued expenses   $ 2,123     $ 1,908  
Management fees payable     678       695  
Dividends payable     2,465       3,299  
Income taxes payable     131       109  
Short-term debt     30,000       30,000  
Total current liabilities     35,397       36,011  
Long-term debt     72,000       52,000  
Total liabilities     107,397       88,011  
Commitments and contingencies  (Note 6)                
Net assets                
Common stock, $.001 par value, 250,000,000 shares authorized;                
20,543,939 and 20,616,422 shares issued and outstanding     21       21  
Paid-in capital in excess of par     244,099       244,473  
Undistributed net investment income (loss)     (4,861 )     (4,565 )
Undistributed net realized capital gain (loss)     (65,319 )     (65,298 )
Net unrealized appreciation (depreciation) on investments     (24,500 )     (20,467 )
Total net assets     149,440       154,164  
Total liabilities and net assets   $ 256,837     $ 242,175  
Net asset value per share   $ 7.27     $ 7.48  

 

(See accompanying notes to consolidated financial statements)

 

1
 

 

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(Unaudited)

 

    For The Three Months Ended  
    March 31,  
    2015     2014  
Investment income                
Interest income:                
Control investments   $ -     $ 578  
Affiliate investments     602       518  
Non-affiliate investments     3,175       3,669  
Dividend income:                
Non-affiliate investments     988       983  
Royalty income, net of amortization:                
Control investments     13       21  
Non-affiliate investments     -       25  
Other income     38       64  
Total investment income     4,816       5,858  
Operating expenses                
Interest expense and bank fees     652       613  
Management fees     678       1,346  
Costs related to strategic alternatives review     -       457  
Professional fees, net of legal fees of $287 and $557,                
respectively, related to ATP bankruptcy (See Note 6)     531       286  
Other general and administrative expenses     764       1,223  
Total operating expenses     2,625       3,925  
Income tax provision, net     22       19  
Net investment income     2,169       1,914  
Net realized capital gain (loss) on investments                
Control investments     (21 )     (325 )
Affiliate investments     -       95  
Non-affiliate investments     -       (9,382 )
Total net realized capital gain (loss) on investments     (21 )     (9,612 )
Net unrealized appreciation (depreciation) on investments                
Control investments     (1,224 )     (3,428 )
Affiliate investments     368       (1,888 )
Non-affiliate investments     (3,177 )     6,635  
Total net unrealized appreciation (depreciation) on investments     (4,033 )     1,319  
                 
Net decrease in net assets resulting from operations   $ (1,885 )   $ (6,379 )
                 
Net decrease in net assets resulting from operations per common share   $ (0.09 )   $ (0.31 )
                 
Dividends declared per common share   $ 0.12     $ 0.16  
Weighted average shares outstanding - basic and diluted     20,612       20,499  

 

(See accompanying notes to consolidated financial statements)

 

2
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(In Thousands, Except Per Share Data)

(Unaudited)

 

    For The Three Months Ended  
    March 31,  
    2015     2014  
Increase (decrease) in net assets from operations                
Net investment income   $ 2,169     $ 1,914  
Net realized capital loss on investments     (21 )     (9,612 )
Net unrealized appreciation (depreciation) on investments     (4,033 )     1,319  
Net decrease in net assets resulting from operations     (1,885 )     (6,379 )
Distributions to common stockholders                
Distributions from net investment income     (2,465 )     (2,329 )
Return of capital     -       (951 )
Net decrease in net assets from distributions     (2,465 )     (3,280 )
Capital transactions                
Acquisition of common stock under repurchase plan     (374 )     -  
Net decrease in net assets from capital transactions     (374 )     -  
Net decrease in net assets     (4,724 )     (9,659 )
Net assets, beginning of period     154,164       188,552  
Net assets, end of period   $ 149,440     $ 178,893  
Net asset value per common share at end of period   $ 7.27     $ 8.73  
Common shares outstanding at end of period     20,544       20,499  

 

(See accompanying notes to consolidated financial statements)

 

3
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

    For The Three Months Ended  
    March 31,  
    2015     2014  
Cash flows from operating activities                
Net decrease in net assets resulting from operations   $ (1,885 )   $ (6,379 )
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating activities:                
Payment-in-kind interest     (118 )     (310 )
Net amortization of premiums, discounts and fees     (106 )     (135 )
Net realized capital (gain) loss on investments     21       9,612  
Net unrealized depreciation (appreciation) on investments     4,033       (1,319 )
Amortization of deferred loan costs     283       244  
Effects of changes in operating assets and liabilities:                
Accounts receivable and other current assets     10       74  
Interest receivable     (45 )     47  
Prepaid assets     1       177  
Payables and accrued expenses     220       947  
Purchase of investments in portfolio securities     (21,108 )     (1,116 )
Proceeds from redemption of investments in portfolio securities     873       1,279  
Purchase of investments in U.S. Treasury Bills     (30,601 )     (46,001 )
Proceeds from redemption of investments in U.S. Treasury Bills     30,600       46,000  
Net cash provided by (used in) operating activities     (17,822 )     3,120  
Cash flows from financing activities                
Borrowings under revolving credit facilities     80,000       76,000  
Repayments on revolving credit facilities     (60,000 )     (72,000 )
Acquisition of common stock under repurchase plan     (374 )     -  
Dividends paid     (3,299 )     (3,280 )
Net cash provided by financing activities     16,327       720  
Net increase (decrease) in cash and cash equivalents     (1,495 )     3,840  
Cash and cash equivalents, beginning of period     31,455       29,298  
Cash and cash equivalents, end of period   $ 29,960     $ 33,138  

 

(See accompanying notes to consolidated financial statements)

 

4
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2015

(In Thousands, Except Share Amounts and Percentages)

(Unaudited)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS                                
Control Investments - (More than 25% owned)                                
Contour Highwall Holdings, LLC   Coal Mining   Senior Secured Term Loan   $ 10,757     $ 10,778     $ 4,500  
        (12%, due 10/14/2015) (6) (14)                        
        Unsecured Promissory Note     440       440       -  
        (6%, due 4/11/2016) (6)                        
        800 Membership Units representing             -       -  
        80% of the common equity (10)                        
                                 
Spirit Resources, LLC   Oil & Natural Gas   Tranche A - Senior Secured Term Loan     5,500       5,464       726  
     Production and Development   (The greater of 8% or LIBOR + 4%,                        
         due 4/28/2015) (6) (16)                        
        Tranche B - Senior Secured Term Loan     4,409       4,409       -  
        (The greater of 15% PIK or LIBOR + 11%,                        
         due 10/28/2015) (6)                        
        80,000 Preferred Units representing             8,000       -  
        100% of the outstanding equity                        
        3% Overriding Royalty Interest             10       265  
                                 
Subtotal Control Investments - (More than 25% owned)                   $ 29,101     $ 5,491  
                                 
Affiliate Investments - (5% to 25% owned)                                
OCI Holdings, LLC   Home Health Services   Subordinated Note   $ 15,818     $ 15,616     $ 15,818  
        (The greater of 12% or LIBOR + 11% cash                        
        plus 3% PIK, due 8/15/2018) (13)                        
        OHA/OCI Investments, LLC Class A                        
        Units representing 20.8% diluted ownership                        
        of OCI Holdings, LLC             2,500       2,110  
                                 
Subtotal Affiliate Investments - (5% to 25% owned)                   $ 18,116     $ 17,928  
                                 
Non-affiliate Investments - (Less than 5% owned)                                
Castex Energy 2005, LP   Oil & Natural Gas   Redeemable Preferred LP Units   $ 50,000     $ 50,018     $ 55,475  
     Production and Development   (current pay 8% cash, due 7/1/2016) (9)                        
                                 
ATP Oil & Gas Corporation/   Oil & Natural Gas   Limited Term Royalty Interest             26,413       20,972  
 Bennu Oil & Gas, LLC    Production and Development   (Notional rate of 13.2%) (15)                        
                                 
Foundation Building Materials, LLC   Building Materials   Second Lien Term Loan     18,700       18,515       18,513  
        (The greater of 12% or LIBOR + 1%,                        
        due 4/30/2019)                        
                                 
Shoreline Energy, LLC   Oil & Natural Gas   Second Lien Term Loan     13,222       12,893       11,866  
     Production and Development   (The greater of 10.25% or LIBOR +                        
        9%, or the greater of 10.25% or                        
        Prime + 8%, due 3/30/2019)                        
                                 
Talos Production, LLC   Oil & Natural Gas   Senior Unsecured Notes     12,000       11,954       8,400  
     Production and Development   (9.75%, due 2/15/2018) (3)                        
                                 
Citadel Plastics Holdings, Inc.   Chemicals   Second Lien Term Loan     10,000       9,904       10,188  
        (The greater of 9% or LIBOR + 8%,                        
        due 11/5/2021) (3)                        

 

(See accompanying notes to consolidated financial statements)

 

5
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2015

(In Thousands, Except Share Amounts and Percentages)

(Unaudited — Continued)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS - Continued                                
Non-affiliate Investments - (Less than 5% owned) - Continued                                
Appriss Holdings, Inc.   Information Services   Second Lien Term Loan   $ 10,000     $ 9,856     $ 9,850  
        (The greater of 9.25% or LIBOR +                        
        8.25%, due 5/21/2021)                        
                                 
WP Mustang (Electronic   Financial Services   Second Lien Term Loan     10,000       9,830       9,791  
  Funds Services, LLC)       (The greater of 8.5% or LIBOR +                        
        7.5%, due 5/29/2022) (3)                        
                                 
KOVA International, Inc.   Medical Supplies   Senior Subordinated Notes     9,000       8,874       9,000  
    Manufacturing and Distribution   (12.75%, due 8/15/2018)                        
                                 
Gramercy Park CLO Ltd. (5)   Financial Services   Subordinated Notes, Residual Interest     9,000       6,892       7,605  
        (11.95%, based on cost, due 7/17/2023) (3)                        
                                 
Huff Energy Holdings, Inc.   Oil & Natural Gas   Senior Secured Term Loan     5,020       4,989       5,020  
     Production and Development   (The greater of 12.5% or LIBOR +                        
        8.5%, due 11/20/2015)                        
        3% Overriding Royalty Interest (11)             42       47  
        Warrants (12)             42       47  
                                 
Stardust Financial Holdings (Hanson)   Building Materials   Second Lien Term Loan     2,500       2,278       2,375  
        (The greater of 10.5% or LIBOR +                        
        1%, due 3/13/2023) (3)                        
                                 
Globe BG, LLC   Coal Production   Contingent earn-out related to July 2011 sale             -       -  
        of royalty interests in Alden Resources, LLC (8)                        
                                 
Myriant Corporation   Alternative Fuels and   131,741 shares of common stock, representing             419       -  
    Specialty Chemicals   0.56% of the outstanding common shares                        
        Warrants (7)             49       -  
                                 
Subtotal Non-affiliate Investments - (Less than 5% owned)                   $ 172,968     $ 169,149  
 Subtotal Portfolio Investments (86.3% of total investments)                   $ 220,185     $ 192,568  
                                 
GOVERNMENT SECURITIES                                
U.S. Treasury Bills (4)           $ 30,601     $ 30,601     $ 30,601  
Subtotal Government Securities (13.7% of total investments)                   $ 30,601     $ 30,601  
                                 
TOTAL INVESTMENTS                   $ 250,786     $ 223,169  

 

(See accompanying notes to consolidated financial statements)

 

6
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

March 31, 2015

(Unaudited — Continued)

 

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

(1) All of our portfolio investments are pledged as collateral for obligations under our Investment Facility. Our investments in U.S. Treasury Bills are pledged as collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates. Warrants, common stocks, units and earn-outs are non-income producing securities, unless otherwise stated.

 

(2) Our Board of Directors determines, in good faith, the fair value of our investments. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated.

 

(3) Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(4) Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(5) We have determined that this investment is not a “qualifying asset” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.

 

(6) Investment on non-accrual status.

 

(7) Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.

 

(8) Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s ability to achieve certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.

 

(9) Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% IRR (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).

 

(10) The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes the value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.

 

(11) Huff Energy Holdings, Inc., or HEH, overriding royalty interests are effective the earlier of repayment in full of the Term Loan or the maturity date of the Term Loan. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(12) HEH warrants expire seven years after repayment of the Term Loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(13) Effective July 9, 2014, we executed a third amendment to our credit agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to the greater of 12% or LIBOR plus 11% cash, plus 3% payment-in-kind, or PIK.

 

(14) Contour has not made its September 2014 through March 2015 interest payments on the Senior Secured Term Loan. This investment was placed on non-accrual effective October 1, 2014.

 

(15) For more information, please refer to the discussion of the ATP litigation under the heading “Legal Proceedings” in Note 6 to the Consolidated Financial Statements.

 

(16) Spirit Resources, LLC, or Spirit, has not made its November 2014 through March 2015 interest payments on the Tranche A Senior Secured Term Loan. This investment was placed on non-accrual effective November 1, 2014.

 

(See accompanying notes to consolidated financial statements)

 

7
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2014

(In Thousands, Except Share Amounts and Percentages)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS                                
Control Investments - (More than 25% owned)                                
Contour Highwall Holdings, LLC   Coal Mining   Senior Secured Term Loan   $ 10,757     $ 10,778     $ 4,500  
        (12%, due 10/14/2015) (6) (14)                        
        800 Membership Units representing             -       -  
        80% of the common equity (10)                        
                                 
Spirit Resources, LLC   Oil & Natural Gas   Tranche A - Senior Secured Term Loan     5,500       5,464       1,450  
     Production and Development   (The greater of 8% or LIBOR + 4%,                        
         due 4/28/2015) (6) (16)                        
        Tranche B - Senior Secured Term Loan     4,409       4,409       -  
        (The greater of 15% PIK or LIBOR + 11%,                        
         due 10/28/2015) (6)                        
        80,000 Preferred Units representing             8,000       -  
        100% of the outstanding equity                        
        3% Overriding Royalty Interest             10       325  
                                 
Subtotal Control Investments - (More than 25% owned)                   $ 28,661     $ 6,275  
                                 
Affiliate Investments - (5% to 25% owned)                                
OCI Holdings, LLC   Home Health Services   Subordinated Note   $ 15,700     $ 15,486     $ 15,700  
        (The greater of 12% or LIBOR + 11% cash                        
        plus 3% PIK, due 8/15/2018) (13)                        
        OHA/OCI Investments, LLC Class A                        
        Units representing 20.8% diluted ownership                        
        of OCI Holdings, LLC             2,500       1,730  
                                 
Subtotal Affiliate Investments - (5% to 25% owned)                   $ 17,986     $ 17,430  
                                 
Non-affiliate Investments - (Less than 5% owned)                                
Castex Energy 2005, LP   Oil & Natural Gas   Redeemable Preferred LP Units   $ 50,000     $ 50,021     $ 54,906  
     Production and Development   (current pay 8% cash, due 7/1/2016) (9)                        
                                 
ATP Oil & Gas Corporation/   Oil & Natural Gas   Limited Term Royalty Interest             26,767       23,700  
 Bennu Oil & Gas, LLC    Production and Development   (Notional rate of 13.2%) (15)                        
                                 
Shoreline Energy, LLC   Oil & Natural Gas   Second Lien Term Loan     13,417       13,071       11,985  
     Production and Development   (The greater of 10.25% or LIBOR +                        
        9%, or the greater of 10.25% or                        
        Prime + 8%, due 3/30/2019)                        
                                 
Talos Production, LLC   Oil & Natural Gas   Senior Unsecured Notes     12,000       11,951       10,920  
     Production and Development   (9.75%, due 2/15/2018) (3)                        
                                 
Citadel Plastics Holdings, Inc.   Chemicals   Second Lien Term Loan     10,000       9,901       9,900  
        (The greater of 9% or LIBOR + 8%,                        
        due 11/5/2021) (3)                        

 

(See accompanying notes to consolidated financial statements)

 

8
 

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2014

(In Thousands, Except Share Amounts and Percentages)

(Continued)

 

Portfolio Company   Industry Segment   Investment (1)   Principal     Cost     Fair Value (2)  
PORTFOLIO INVESTMENTS - Continued                                
Non-affiliate Investments - (Less than 5% owned) - Continued                                
Appriss Holdings, Inc.   Information Services   Second Lien Term Loan   $ 10,000     $ 9,852     $ 9,850  
        (The greater of 9.25% or LIBOR +                        
        8.25%, due 5/21/2021)                        
                                 
WP Mustang (Electronic   Financial Services   Second Lien Term Loan     10,000       9,826       9,675  
  Funds Services, LLC)       (The greater of 8.5% or LIBOR +                        
        7.5%, due 5/29/2022) (3)                        
                                 
KOVA International, Inc.   Medical Supplies   Senior Subordinated Notes     9,000       8,867       9,000  
    Manufacturing and Distribution   (12.75%, due 8/15/2018)                        
                                 
Gramercy Park CLO Ltd. (5)   Financial Services   Subordinated Notes, Residual Interest     9,000       7,014       7,110  
        (11.95%, based on cost, due 7/17/2023) (3)                        
                                 
Huff Energy Holdings, Inc.   Oil & Natural Gas   Senior Secured Term Loan     5,320       5,278       5,320  
     Production and Development   (The greater of 12.5% or LIBOR +                        
        8.5%, due 11/20/2015)                        
        3% Overriding Royalty Interest (11)             42       46  
        Warrants (12)             42       46  
                                 
Globe BG, LLC   Coal Production   Contingent earn-out related to July 2011 sale             -       -  
        of royalty interests in Alden Resources, LLC (8)                        
                                 
Myriant Corporation   Alternative Fuels and   131,741 shares of common stock, representing             419       -  
    Specialty Chemicals   0.56% of the outstanding common shares                        
        Warrants (7)             49       -  
                                 
Subtotal Non-affiliate Investments - (Less than 5% owned)                   $ 153,100     $ 152,458  
 Subtotal Portfolio Investments (85.2% of total investments)                   $ 199,747     $ 176,163  
                                 
GOVERNMENT SECURITIES                                
U.S. Treasury Bills (4)           $ 30,600     $ 30,600     $ 30,600  
 Subtotal Government Securities (14.8% of total investments)                   $ 30,600     $ 30,600  
                                 
TOTAL INVESTMENTS                   $ 230,347     $ 206,763  

 

(See accompanying notes to consolidated financial statements)

 

9
 

  

OHA INVESTMENT CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2014

(Continued)

 

NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS

 

(1) All of our portfolio investments are pledged as collateral for obligations under our Investment Facility. Our investments in U.S. Treasury Bills are pledged as collateral for obligations under our Treasury Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect at the end of the period and due dates represent the contractual maturity dates. Warrants, common stocks, units and earn-outs are non-income producing securities, unless otherwise stated.

 

(2) Our Board of Directors determines, in good faith, the fair value of our investments. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated.

 

(3) Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(4) Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

 

(5) We have determined that this investment is not a “qualifying asset” under Section 55(a) of the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.

 

(6) Non-accrual status.

 

(7) Myriant Corporation warrants expire on August 15, 2015 and provide us the right to purchase 32,680 shares of Myriant Corporation common stock at a purchase price of $10.00 per share.

 

(8) Contingent payment of up to $6.8 million is dependent upon Alden Resources, LLC’s ability to achieve certain sales volume and operating efficiency levels during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.

 

(9) Upon redemption, we will receive the outstanding face amount plus an option to elect to receive either: a) a cash payment resulting in a total 12% IRR (inclusive of the 8% cash distributions) or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex Energy 2005, LP (0.67% net to us).

 

(10) The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes the value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.

 

(11) Huff Energy Holdings, Inc., or HEH, overriding royalty interests are effective the earlier of repayment in full of the Term Loan or the maturity date of the Term Loan. HEH has the right to purchase the overriding royalty interests on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(12) HEH warrants expire seven years after repayment of the Term Loan and entitle us to purchase 30% of the outstanding equity at $0.01 per share. HEH has the right to purchase these warrants on, or before, the maturity date of the Term Loan for $50,000, provided that the Term Loan is repaid by the maturity date.

 

(13) Effective July 9, 2014, we executed a third amendment to our credit agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to the greater of 12% or LIBOR plus 11% cash, plus 3% payment-in-kind, or PIK.

 

(14) Contour has not made its September 2014 through December 2014 interest payments on the Senior Secured Term Loan.

 

(15) For more information, please refer to the discussion of the ATP litigation under the heading “Legal Proceedings” in Note 6 to the Consolidated Financial Statements.

 

(16) Spirit Resources, LLC, or Spirit, has not made its November 2014 through December 2014 interest payments on the Tranche A Senior Secured Term Loan.

 

(See accompanying notes to consolidated financial statements)

 

10
 

 

OHA INVESTMENT CORPORATION

CONSOLIDATED FINANCIAL HIGHLIGHTS

(Unaudited)

 

    For the Three Months Ended March 31,  
Per Share Data  (1)     2015       2014  
Net asset value, beginning of period   $ 7.48     $ 9.20  
Net investment income     0.11       0.09  
Net realized and unrealized loss on investments (2)     (0.20 )     (0.40 )
Net decrease in net assets resulting from operations     (0.09 )     (0.31 )
Distributions to common stockholders                
Distributions from net operating income     (0.12 )     (0.11 )
Return of capital     -       (0.05 )
Net decrease in net assets from distributions     (0.12 )     (0.16 )
Net asset value, end of period   $ 7.27     $ 8.73  
                 
Market value, beginning of period   $ 4.69     $ 7.47  
Market value, end of period   $ 5.27     $ 6.76  
Market value return  (3)     14.9 %     (7.3 )%
Net asset value return (3)     (0.6 )%     (2.8 )%
                 
Ratios and Supplemental Data                
($ and shares in thousands)                
Net assets, end of period   $ 149,440     $ 178,893  
Average net assets   $ 153,219     $ 186,856  
Common shares outstanding, end of period     20,544       20,499  
Net investment income/average net assets (4)     5.7 %     4.2 %
Portfolio turnover rate     0.5 %     0.5 %
Total operating expenses/average net assets (4) (5)     7.0 %     8.5 %
Net decrease in net assets resulting from operations/average net assets (4)     (5.0 )%     (13.9 )%
                 
Expense Ratios (as a percentage of average net assets) (4)                
Interest expense and bank fees     1.7 %     1.3 %
Management fees     1.8 %     2.9 %
Costs related to strategic alternatives review     0.0 %     1.0 %
Other operating expenses (5)     3.5 %     3.3 %
Total operating expenses (5)     7.0 %     8.5 %

 

(1) Per Share Data is based on weighted average number of common shares outstanding for the period.
(2) May include a balancing amount necessary to reconcile the change in net asset value per share with other per share information presented. This amount may not agree with the aggregate gains and losses for the period because the difference in the net asset value at the beginning and end of the period may not equal the per share changes of the line items disclosed.
(3) Return calculations assume reinvestment of dividends and are not annualized.
(4) Annualized.
(5) Net of legal fee reimbursements of $0.3 million and $0.6 million in 2015 and 2014, respectively. Excluding these legal fee reimbursements, other operating expense ratio and total operating expense ratios would have been 4.3% and 7.7% and 4.5% and 9.7%, respectively, for the three months ended March 31, 2015 and 2014.

 

(See accompanying notes to consolidated financial statements)

 

11
 

  

OHA INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(Unaudited)

 

Note 1: Organization and Recent Developments

 

These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries. The terms “we,” “us,” “our” and “OHAI” refer to OHA Investment Corporation and its consolidated subsidiaries. We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments with certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or a BDC, under the Investment Company Act of 1940, or the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single-member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.

 

On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our new investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Investment Advisers Act of 1940. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively (see Note 4).

 

Note 2: Basis of Presentation

 

These interim unaudited consolidated financial statements include the accounts of OHAI and its subsidiaries. We eliminate all significant intercompany accounts and transactions. Certain prior period amounts have been reclassified to conform to current period presentation.

 

We prepare the interim consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, pursuant to such rules and regulations. We believe we include all adjustments, which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year. You should read these unaudited consolidated financial statements in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ from these estimates.

 

Distributions

 

We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis that total substantially all of our net taxable income for the year. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our dividends each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:

 

12
 

  

    Per Share          
Declaration Date   Amount     Record Date   Payment Date
March 18, 2014   $ 0.16     March 31, 2014   April 7, 2014
June 10, 2014     0.16     June 30, 2014   July 7, 2014
September 11, 2014     0.16     September 30, 2014   October 7, 2014
December 17, 2014     0.16     December 31, 2014   January 9, 2015
March 3, 2015     0.12     March 31, 2015   April 8, 2015

 

Note 3: Credit Facilities and Borrowings

 

On May 23, 2013, we entered into the $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, which replaced our previous credit facility. The total amounts outstanding under the Investment Facility were $72.0 million and $52.0 million as of March 31, 2015 and December 31, 2014, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Investment Facility. The Investment Facility matures on May 23, 2016, and bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of March 31, 2015, the average interest rate on our outstanding balance of $72.0 million was 3.9%, and there was no additional amount available for borrowing under the Investment Facility. We repaid $25.0 million of the balance outstanding under the Investment Facility in early April 2015.

 

On March 31, 2011, we entered into a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, that can only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments. The Treasury Facility has been amended from time to time, generally to extend the expiration date and, in some cases, to revise the size of the facility. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility which extended the expiration date to September 24, 2015, reduced the size of the Treasury Facility to $30.0 million, and permitted the appointment of OHA as our investment advisor. Borrowings under the Treasury Facility bear interest, at our option, at either (i) LIBOR plus 150 basis points or (ii) the base rate plus 50 basis points. We have the right at any time to prepay the amounts outstanding under the Treasury Facility, in whole or in part, without premium or penalty. As of March 31, 2015, we had $30.0 million outstanding and no additional amount available for borrowing under the Treasury Facility, and the interest rate on our outstanding balance was 1.7%. We repaid the entire balance outstanding under the Treasury Facility in April 2015 with proceeds from the sale of U.S. Treasury Bills.

 

Both the Investment Facility and the Treasury Facility contain affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2015 and 2014 and had no existing defaults or events of default under either facility. The most restrictive covenants, with terms as defined in the credit agreements, are:

 

· maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
· maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
· maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
· maintaining a ratio of collateral to the aggregate principal amount of loans under the Treasury Facility of not less than 1.02:1.0.

 

Note 4: Investment Management

 

Investment Advisory Agreement

 

On September 30, 2014, we entered into an Investment Advisory Agreement with OHA, an investment adviser registered under the 1940 Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The initial term of the Investment Advisory Agreement is for two years, with automatic, one-year renewals, subject to approval by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us, subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.

 

13
 

  

Base Management Fee: The base management fee is paid quarterly in arrears, and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014.

 

Incentive Fee: The incentive fee consists of two parts. The first part, the investment income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities at the end of the immediately preceding fiscal quarter) is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA receives no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA receives an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets. We have not incurred any investment income incentive fees since the Investment Advisory Agreement went into effect on September 30, 2014.

 

The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains fee is equal to 20% of our cumulative aggregate realized capital gains from the date of the Investment Advisory Agreement through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation. We have not incurred any capital gains fees since the Investment Advisory Agreement went into effect on September 30, 2014.

 

The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or the holders of a majority of our shares on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). Either party may terminate the Investment Advisory Agreement without penalty upon not more than 60 days’ written notice to the other. Pursuant to the Investment Advisory Agreement, OHA pays the compensation expense of its investment professionals, who provide management and investment advisory services to us. We bear all other costs and expenses of our operations and transactions.

 

Previous Investment Advisory Agreement

 

Prior to the September 30, 2014 appointment of OHA as our investment advisor, we had a similar investment advisory agreement with our previous investment advisor, NGP Investment Advisor, LP. The fee structure under our previous investment advisory agreement consisted of two components — a base management fee and an incentive fee.

 

Base Management Fee : Under the previous investment advisory agreement, we calculated the quarterly base management fee as 0.45% (1.8% annualized) of the average of our total assets (inclusive of all cash and cash equivalents without any exclusions) as of the end of the two most recent fiscal quarters, payable quarterly in arrears.

 

Incentive Fee : The incentive fee under the previous investment advisory agreement consisted of two parts. We calculated the first part of the incentive fee, the investment income incentive fee, as 20% of the excess, if any, of our net investment income for the quarter that exceeded a quarterly hurdle rate equal to 2% (8% annualized) of our net assets, with no “catch up” provision. We calculated and paid this investment income incentive fee quarterly in arrears. For the purpose of this fee calculation, net investment income was defined similarly to that under the Investment Advisory Agreement. We did not incur any investment income incentive fees in 2014 under the previous investment advisory agreement.

 

14
 

  

We calculated the second part of the incentive fee, the capital gains fee, as (1) 20% of (a) our net realized capital gains (realized capital gains less realized capital losses) on a cumulative basis from the closing date of our initial public offering to the end of such fiscal year, less (b) any unrealized capital depreciation at the end of such fiscal year, less (2) the aggregate amount of all capital gains fees paid to NGP Investment Advisor, LP in prior fiscal years. We determined and paid the capital gains fee in arrears as of the end of each fiscal year. We did not incur any capital gains fees under the previous investment advisory agreement since 2007.

 

Administration Agreement

 

On September 30, 2014, we entered into an Administration Agreement with OHA pursuant to which OHA replaced NGP Administration, LLC as our administrator and furnishes us with certain administrative services, personnel and facilities. The Administration Agreement has an initial term of two years. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The aggregate amount of certain costs and expenses payable by us under the Investment Advisory Agreement and the Administration Agreement for the period from October 1, 2014 to September 30, 2015 shall not exceed $2.5 million (the “Cap”); provided that, generally speaking, interest expense and bank fees, management and incentive fees, legal and professional fees, insurance expenses, taxes and costs related to the change in investment advisor are not subject to the Cap. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.

 

Prior to the September 30, 2014 appointment of OHA as our administrator, we had a similar administration agreement with our previous administrator, NGP Administration, LLC, with similar provisions as the Administration Agreement, except that under the previous administration agreement, (i) there was no Cap on expenses payable by us, and (ii) a portion of compensation costs of investment professionals and certain other costs were allocated to us that are not allocable to us under the Administration Agreement.

 

We owed $156,000 and $229,000 to OHA under the Administration Agreement as of March 31, 2015 and December 31, 2014, respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in accounts payable and accrued expenses on our consolidated balance sheets.

 

Note 5: Federal Income Taxes

 

We operate so as to qualify, for tax purposes, as a RIC under Subchapter M of Chapter 1 of the Code. As a RIC, we are generally not subject to corporate-level U.S. federal income taxes on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we distribute to our stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification requirements.

 

Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.

 

Note 6: Commitments and Contingencies

 

We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.

 

15
 

  

Legal Proceedings

 

From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.

 

ATP Litigation . On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the owners of the ORRIs execute a disgorgement agreement providing for the repayment of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012. As of March 15, 2015, our unrecovered investment was $26.5 million, and we had received aggregate production payments of $33.9 million subject to the disgorgement agreement; both of these amounts are the subject of disputes in the litigation described herein.

 

As of March 31, 2015, we had incurred legal and consulting fees totaling $5.1 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of March 31, 2015, $4.7 million of the $5.1 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $0.4 million and $0.1 million as of March 31, 2015 and December 31, 2014, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.

 

On October 17, 2012, we filed a lawsuit against ATP styled: NGP Capital Resources Company v. ATP Oil & Gas Corporation , Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not executory contracts that may be rejected in order to remove or recharacterize our interests in the properties (the “Adversary Proceeding”). ATP filed an answer and counterclaim in which it (a) denies that the ORRIs are valid and enforceable, (b) seeks a declaration that (i) the ORRIs are a financing agreement and not a true sale and (ii) the ORRIs are executory contracts that are subject to rejection under 11 U.S.C. Sec. 365, and (c) seeks disgorgement from us of amounts paid to us since August 17, 2012, the date of filing of ATP’s Chapter 11 proceeding. The United States, on behalf of the Department of the Interior, intervened in the lawsuit, arguing that the underlying leases are unexpired leases of real property or executory contracts (and not real property conveyances) and are subject to rejection by ATP. Certain service companies claiming statutory liens or privileges have intervened in the lawsuit for the purposes of establishing that their alleged statutory liens and privileges are superior to our rights and asserting related claims for disgorgement of proceeds paid to us by ATP. The Bank of New York Mellon Trust Company, N.A., the secondary lien holder, has also intervened in the lawsuit, arguing (i) the ORRIs are a financing agreement and not a true sale, (ii) our claims are barred, waived, released and/or otherwise foreclosed by the express terms of the conveyance of the ORRIs, and (iii) either we have not met a condition precedent or we failed to perform or substantially perform our contractual obligations. The issues in the lawsuit have been bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, will be tried first as “Phase 1” of the legal proceedings. Any additional claims, including the service company statutory lien claims and related issues, will be decided later if necessary in “Phase 2.” This lawsuit is currently pending, and the initial trial date was abated along with certain other deadlines pending consideration of various motions. In that context, a Motion for Summary Judgment that we filed was denied, and we subsequently filed a motion to appeal the denial on an interlocutory basis. After our motion to appeal was denied by the United States District Court, we filed a Motion for Reconsideration of the summary judgment denial with the bankruptcy court on June 17, 2014. A new scheduling order has not been entered. We intend to vigorously defend our position that the ORRIs constitute real property interests and are fully valid and enforceable pursuant to their terms, and we intend to vigorously defend our position that the service companies’ statutory liens and privileges do not attach to our ORRIs and/or are not superior to our rights.

 

16
 

  

Separately, ATP (through a motion filed by the Official Committee of Unsecured Creditors on October 31, 2012) threatened to bring a fraudulent transfer action against us, in which ATP would allege that (a) ATP was insolvent at the time of the assignment of the ORRIs to us, (b) ATP received less than fair value from us in exchange for the assignments of the ORRIs and (c) as a result, the assignments should be set aside. The motion was abated, and the referenced claim has not been asserted. We vigorously deny these allegations.

 

On April 23, 2013, the Department of the Interior, on behalf of the Bureau of Safety and Environmental Enforcement, issued an order directing that the wells on the Gomez properties be shut in and that operations cease. Operations and production ceased on the Gomez properties on April 30, 2013. On June 13, 2013, the bankruptcy court entered an order (Bankr. Dkt. No. 1999) approving ATP’s request (set forth in Bankr. Dkt. No. 1902) to reject and/or abandon and relinquish its interests in the Gomez properties and related agreements, or the Abandonment Order. Consequently, we no longer receive payments attributable to the Gomez properties.

 

On May 7, 2013, ATP conducted an auction of its assets, and ATP selected a credit bid from Credit Suisse AG, as administrative and collateral agent to those lenders who are parties to that certain Senior Secured Super Priority Priming Debtor in Possession Credit Agreement dated August 29, 2012, or the DIP Lenders, based on a reduction in the amount of ATP’s outstanding indebtedness to Credit Suisse AG, or the Credit Bid, as the highest and best bid. The Credit Bid did not include an offer to purchase the Gomez properties, but it included an offer to purchase the Telemark properties. On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale (Bankr. Dkt. No. 2706). Under the Final Sale Order, Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders, was authorized to purchase certain ATP assets, including the Telemark properties, as well as claims asserted by ATP in our pending lawsuit relating to the Telemark properties. Our ORRI continues to burden the Telemark properties subject to a resolution of the issues in our pending lawsuit against ATP. The sale to Bennu closed on November 1, 2013. On May 20, 2014, Bennu substituted into our lawsuit for ATP with respect to any claims that relate to assets purchased from ATP.

 

On March 7, 2014, Bennu filed complaints seeking declaratory judgments that it acquired the Telemark properties free and clear of liens asserted by certain statutory lien claimants, thereby commencing the adversary proceedings styled Bennu Oil & Gas LLC v. Frank’s Casing Crew & Rental Tools, Inc., et. al., (Adv. No. 14-03060), or the Frank’s Casing Adversary, and Bennu Oil & Gas LLC v. Advanced Fire & Safety LLC, et. al., (Adv. No. 14-03056), or the Advanced Fire Adversary. We sought and were granted leave to intervene in the Frank’s Casing and Advanced Fire Adversaries to protect our rights in connection with any determinations relating to the extent, validity and priority of liens against the Telemark properties. Many of the defendants in these proceedings failed to plead or otherwise defend in response to the lawsuits. Notices of voluntary dismissal were filed by Bennu with respect to certain defendants, and on March 19, 2015, the bankruptcy court entered a default judgment in the Advanced Fire Adversary against the remaining defendants, determining that Bennu purchased the Telemark properties free and clear of the liens asserted by the defendants. The judgment was entered without prejudice to us, and any claims and defenses between us and Bennu remain unaffected by the judgment. On April 7, 2015, a similar default judgment was entered in the Frank’s Casing Adversary.

 

On June 26, 2014, the bankruptcy court entered an order converting ATP’s bankruptcy case to a case under Chapter 7 of the U.S. Bankruptcy Code. Rodney D. Tow was appointed as Chapter 7 Trustee of ATP’s bankruptcy estate.

 

On July 10, 2014, we filed, in our Adversary Proceeding, a Motion for Leave to amend our complaint to, among other things, add claims and defenses based on facts that occurred after the filing of our complaint, as well as claims and defenses specifically applicable to Bennu. On September 3, 2014, Bennu filed a Motion to Dismiss claims between Bennu and us, as well as an objection to our Motion for Leave. In connection with the Motion to Dismiss, Bennu stated that it does not desire to pursue affirmative claims against us for recharacterization or disgorgement, and it disclaimed any intention to sue us regarding the characterization of the ORRIs. The Motion to Dismiss does not seek to determine any claims, including our claims, any claims of the bankruptcy estate or the claims of the numerous intervenors involved in the litigation, nor does it preclude Bennu or a succeeding party from refiling such claims in the future.

 

On October 1, 2014, we filed an objection to the Motion to Dismiss, asserting that Bennu is the owner of all recharacterization claims against us and requesting that the judge enter a declaratory judgment (rather than an order of dismissal) holding that the ORRIs do, in fact, constitute real property interests that are not subject to recharacterization as a loan or otherwise, and are fully valid and enforceable pursuant to their terms. In related briefings, the Trustee asserted that Bennu does not own recharacterization claims relating to the Gomez properties, and objected to entry of a judgment in our favor due to alleged prejudice that would result against the estate’s alleged claims. Bennu asserted in response that it owns all recharacterization claims against us, but it is opposed to entry of a judgment in our favor. On November 13, 2014, Bennu filed a Motion to Determine Ownership of Claims, or the Ownership Motion, asserting that it is the sole owner of claims seeking to recharacterize the nature and validity of the ORRIs. On January 28, 2015, the bankruptcy court entered an order on the Ownership Motion (Adv. Dkt. No. 236), which determined, among other things, that Bennu has the exclusive right to seek to recharacterize the ORRIs as something other than a vested ownership in hydrocarbons to be produced. It also determined that (i) the Trustee has the exclusive right to seek to avoid payments made to OHA under sections 544, 547 and 548 of the Bankruptcy Code and (ii) the Trustee may only pursue claims under section 549 that were not purchased by Bennu. On February 24, 2015, the Trustee filed an Amended Counterclaim against us seeking to avoid and recover alleged preferential transfers in the amount of $3.4 million. The Trustee also seeks to avoid post-petition royalty payments made to us from the Gomez Properties in the amount of $9.6 million and from the Telemark Properties in the amount of $13.4 million. On April 1, 2015, we filed our Motion to Dismiss the Trustee’s Amended Counterclaim [Dkt. No. 249] arguing that the Amended Counterclaim should be dismissed, because Bennu purchased the recharacterization claims and the exclusive right to seek to recharacterize our ORRIs as anything other than a vested ownership interest. Also on April 1, 2015, Bennu filed a Motion to Enforce the Final Sale Order [Dkt. No. 248], arguing that the Trustee has no right to assert any section 549 claims against us. A hearing on our Motion to Dismiss and Bennu’s Motion to Enforce has been scheduled for May 21, 2015.

 

17
 

  

On April 30, 2015, we and Bennu filed an Expedited Joint Motion to Enter Agreed Judgment [Dkt. No. 251], seeking entry of an Agreed Judgment determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code, and that the ORRIs are not and never were property of ATP’s bankruptcy estate. In connection with the Joint Motion, we entered into a Settlement and Release Agreement with Bennu pursuant to which, in exchange for Bennu agreeing to execute and seek entry of the Agreed Judgment, we agreed to withdraw and/or release Bennu from certain claims contemplated in our July 2014 Motion for Leave mentioned above, primarily relating to our claim for breach of certain contractual Acts of Subordination which were executed in connection with the conveyance of the ORRIs. Our release of Bennu is contingent upon the bankruptcy court’s entry of the Agreed Judgment, or another acceptable form of agreed judgment that is final and not subject to appeal. The Joint Motion to Enter Agreed Judgment may be opposed by the Trustee or other parties. If the Agreed Judgment is entered in the form that we and Bennu have proposed, such judgment may resolve Phase I of the Adversary Proceeding.

 

During the 90-day preference period preceding the filing of ATP’s bankruptcy, we received royalty payments totaling approximately $3.6 million. Through March 31, 2015, we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $25.6 million, respectively. It is estimated that the statutory lien claims asserted by intervenors in the Adversary Proceeding against our ORRIs are in the principal amount of approximately $35.2 million. At this time, we estimate that there are potential statutory lien claims (including claims of the intervenors in the Adversary Proceeding, without regard to the validity of such claims) in the principal amount of approximately $54.2 million. We have or will assert that we have viable defenses with respect to all of the claims of the statutory lien claimants or any other claim which seeks to avoid or disgorge any prepetition or post-petition royalty payment which we received in respect of the Telemark or Gomez properties. In the event we do not prevail on our defenses to the statutory lien claims or any other claim seeking to avoid or disgorge pre-petition or post-petition royalty payments, we contend that, pursuant to the terms of our transaction documents, we are entitled to include any amounts disgorged on account of any such claims into the unrecovered investment balance of our ORRIs. Moreover, to the extent we do not prevail on our defenses to any action brought by the holder of a statutory lien claim, we contend that we would be permitted to seek contribution from other ORRI and net profits interest holders with respect to any disgorged amounts.

 

However, in the event our defenses to the claims of the statutory lien claimants are unsuccessful or we otherwise become liable for disgorgement of any pre-petition or post-petition royalty payments which we have received from either the Gomez or Telemark properties, the remaining oil and gas reserves associated with the Telemark properties may be insufficient to provide for a full recovery on our investment. In the event that it is determined that we are not entitled to include amounts disgorged on account of statutory lien claims or other claims, if any, into the unrecovered investment balance of our ORRIs, any disgorged amounts will result in a failure to achieve our anticipated return and/or a loss on our investment.

 

While we intend to vigorously defend our legal positions in the Adversary Proceeding, there can be no assurance that we will ultimately prevail in any or all of these matters.

 

18
 

  

Note 7: Fair Value

 

Our investments consisted of the following as of March 31, 2015 and December 31, 2014:

 

    March 31, 2015     December 31, 2014  
          % of           % of           % of           % of  
(Dollar amounts in thousands)   Cost     Total     Fair Value     Total     Cost     Total     Fair Value     Total  
Portfolio investments                                                                
First lien secured debt   $ 25,640       10.2 %   $ 10,246       4.6 %   $ 25,929       11.3 %   $ 11,270       5.4 %
Second lien debt     63,276       25.3 %     62,583       28.0 %     42,650       18.5 %     41,410       20.0 %
Subordinated debt     36,884       14.7 %     33,218       14.9 %     36,304       15.8 %     35,620       17.2 %
Limited term royalties     26,413       10.5 %     20,972       9.4 %     26,767       11.6 %     23,700       11.5 %
Contingent earn-out     -       0.0 %     -       0.0 %     -       0.0 %     -       0.0 %
Royalty interests     52       0.0 %     312       0.1 %     52       0.0 %     371       0.2 %
Redeemable preferred units     50,018       19.9 %     55,475       24.9 %     50,021       21.7 %     54,906       26.6 %
CLO residual interests     6,892       2.8 %     7,605       3.4 %     7,014       3.0 %     7,110       3.5 %
Equity securities                                                                
Membership and partnership units     10,500       4.2 %     2,110       1.0 %     10,500       4.6 %     1,730       0.8 %
Common stock     419       0.2 %     -       0.0 %     419       0.2 %     -       0.0 %
Warrants     91       0.0 %     47       0.0 %     91       0.0 %     46       0.0 %
Total equity securities     11,010       4.4 %     2,157       1.0 %     11,010       4.8 %     1,776       0.8 %
Total portfolio investments     220,185       87.8 %     192,568       86.3 %     199,747       86.7 %     176,163       85.2 %
Government securities                                                                
U.S. Treasury Bills     30,601       12.2 %     30,601       13.7 %     30,600       13.3 %     30,600       14.8 %
Total investments   $ 250,786       100.0 %   $ 223,169       100.0 %   $ 230,347       100.0 %   $ 206,763       100.0 %

 

We account for all of the assets in our investment portfolio at fair value, following the provisions of the Financial Accounting Standards Board Accounting Standards Codification Fair Value Measurements and Disclosures , or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

 

On a quarterly basis, the investment team of our investment advisor prepares fair value estimates for all of the assets in our portfolio utilizing the income approach and market approach in accordance with ASC 820 and presents them to a committee of our Board of Directors — the Audit Committee since OHA has been our investment advisor, and the Valuation Committee under our previous investment advisor. The committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of our investment advisor prepares valuation analyses as generally described below.

 

· Investment Team Valuation. The investment professionals of our investment advisor prepare fair value recommendations for each investment.

 

· Investment Team Valuation Documentation. The investment team documents and discusses its preliminary fair value recommendations with the investment committee and senior management of our investment advisor.

 

· Presentation to Audit Committee . Our investment advisor and senior management present the valuation analyses and fair value recommendations to the Audit Committee of our Board of Directors. Prior to September 30, 2014, such presentation was made to the Valuation Committee of our Board of Directors. Effective September 30, 2014, our Board of Directors no longer has a separate Valuation Committee.

 

· Third Party Valuation Activity. We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value recommendations provided by the investment team of our investment advisor. Since December 31, 2014, our general practice is that we have an independent valuation firm review all Level 3 investments (those whose value is determined using significant unobservable inputs) with recommended fair values in excess of $10 million on a quarterly basis, and review all Level 3 investments with recommended fair values greater than zero at least annually.

 

· Board of Directors and Audit Committee. The Board of Directors and the Audit Committee (or the Valuation Committee prior to September 30, 2014) review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the independent valuation firm, if applicable.

 

19
 

  

· Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee (or the Valuation Committee prior to September 30, 2014) and determines the fair value of each investment in our portfolio, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee (or Valuation Committee prior to September 30, 2014) and the independent valuation firm, if applicable.

 

ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:

 

· Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

 

· Level 2  — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.

 

· Level 3 — Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions that market participants would use to price the asset or liability based on the best available information.

 

Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment that may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at March 31, 2015 or December 31, 2014.

 

Debt Securities and Limited-Term Royalties:   In determining the fair value of our debt investments, we first assess the overall financial health of the portfolio company through an evaluation of a number of factors, including, as relevant, historical and projected financial results, the portfolio company's enterprise value, and the nature and realizable value of any collateral. In estimating the portfolio company’s enterprise value, we analyze the discounted value of estimated future net cash flows of the portfolio company, derived, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports on oil and natural gas properties. We also use a market approach in determining the portfolio company’s estimated enterprise value, considering recent comparable transactions involving similar businesses or assets. We also may consider the markets in which the portfolio company operates; comparison to a peer group of publicly traded securities; the size and scope of the portfolio company and its specific strengths and weaknesses; recent purchases or sales of securities by the portfolio company; recent offers to purchase the portfolio company; the estimated value of comparable securities; and other relevant factors. Based upon these analyses, we assess the sources of cash flow available to the portfolio company to service its debt and the underlying credit risk, and determine an appropriate yield, or discount rate, to apply to our anticipated cash flows to be collected from each debt investment, recognizing that the collection of contractual cash flows may come from one or a combination of cash flows generated from continuing operations of the portfolio company, liquidation of collateral or sale of the portfolio company.  The appropriateness of the yield on our investments is directly relative to our judgment of the associated risks, using observable yield or price data for similar or comparable debt investments when available. Fair value determinations using the discounted cash flow method can be sensitive to significant changes in the inputs. A significant increase (decrease) in the discount rate for a particular security may result in a lower (higher) value for that security.

 

We invest primarily in illiquid debt investments in small and mid-sized private companies, some of which are in the early stages of development, or are start-up companies in need of growth development capital. There is limited activity, transparency and variable data in the markets in which we invest. In circumstances where there is limited observable price or yield data of similar or comparable securities, we base our considerations on our assessments of the credit trends and underlying performance of our portfolio companies and of the markets in which we invest, relying on the collective judgment of the investment team of our investment advisor and our Board of Directors, which is based on their extensive experience and expertise investing in public and private securities markets.

 

20
 

  

Equity Securities:   We record our investments in preferred and common equity securities (including warrants or options to acquire equity securities) for which no market prices are available at fair value based on our pro rata share of the residual equity value available after deducting all outstanding debt and other obligations, as applicable, from the estimated enterprise value of the portfolio company. To estimate the enterprise value of the portfolio company, we analyze the discounted cash flows of the portfolio company and indicative pricing (on an EBITDA multiple, proved reserve and/or units-of-production basis, as appropriate) in recent comparable market transactions as mentioned above, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of the security. In most cases, we may compute an average of the calculated values of our share of the residual equity value (using multiple approaches or various assumptions) in determining the fair value of the equity security to be reported in our financial statements. Estimating a company’s enterprise value involves judgment, and residual equity values can be relatively volatile based on changes in market conditions, the company’s financial performance and outlook, and other factors. Fair value determinations using market comparables can be sensitive to significant changes in the inputs. A significant increase (decrease) in the reserve multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular equity security may result in a higher (lower) fair value for that security.

 

In some cases, where we deem recent or pending financing or recapitalization transactions involving the portfolio company to be more indicative of enterprise value, we use such recent transactions to value the enterprise, in lieu of the discounted cash flow or market comparables. In addition, in cases where we deem appropriate, we may utilize an option pricing method, or OPM, to value the various preferred stock, common stock and warrants we have in companies with complex capital structures. The OPM treats preferred stock, common stock and warrants as call options on the enterprise value, with exercise prices based on liquidation preference of the security. The OPM commonly uses the Black-Scholes model to price the call option and considers the various terms of the stockholder agreements upon liquidation of the enterprise. In addition, the OPM implicitly considers the effect of the liquidation preference as of a future liquidation date, not as of the valuation date.

 

Royalty Interests : We record our investments in overriding royalty interests at fair value based on a multiple of cash flows generated by such investments, multiples from transactions involving the sale of comparable assets and/or the discounted value of expected future net cash flows from such investments, adjusted for lack of marketability due to the illiquid nature or other restrictions on the sale of our investment. We derive appropriate cash flow multiples from the review of comparable transactions involving similar assets. We derive the discounted value of future net cash flows, when appropriate, from third party valuations of a portfolio company’s assets, such as engineering reserve reports of oil and natural gas properties. A significant increase (decrease) in the cash flow multiple, or a significant decrease (increase) in the discount for lack of marketability, for a particular investment may result in a higher (lower) fair value for that investment.

 

Contingent Earn-Out : Our contingent earn-out investment resulted from the sale of our investment in Alden Resources, LLC to Globe BG, LLC in July 2011. The amount of the payment, up to $6.8 million, is based on a formula involving the number of clean tons of coal produced multiplied by the difference between the company’s cost of production in 2010 and the cost of production during the optimal consecutive twelve-month period during the three-year period ended July 2014. The reporting and review mechanism to conclude the ultimate value of the earn-out has not yet been completed. Globe has informally advised us that the company’s relative cost of production has not improved since July 2011, so we have recorded the value of the earn-out at zero.

 

We hold certain investments in debt or equity securities that are publicly traded, but for which there are relatively few transactions or for which trading activity is relatively infrequent. We value these investments at broker quotes as of the balance sheet date or at prices for which such securities were most recently traded. We consider these investments as Level 2 on the valuation hierarchy, as the values represent quoted prices for identical instruments in thinly-traded markets.

 

Due to the inherent uncertainty in the valuation process, the fair values of our investments may differ materially from the values that would have been used had a ready market for the securities existed. Additionally, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different than the valuations currently assigned.

 

We occasionally have investments in our portfolio that contain payment-in-kind, or PIK, interest or dividend provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement, and we add that amount to the principal balance of the investment. For investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue PIK interest income or PIK dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of dividends, even though we have not yet collected the cash.

 

During the three month periods ended March 31, 2015 and 2014, none of our investments in portfolio companies changed among the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers among Levels 3, 2 or 1.

 

21
 

  

The following tables set forth our financial assets by level within the fair value hierarchy that we accounted for at fair value as of March 31, 2015 and December 31, 2014 (in thousands):

 

March 31, 2015:   Total     Level 1     Level 2     Level 3  
Portfolio investments                                
Control investments                                
First lien secured debt   $ 5,226     $ -     $ -     $ 5,226  
Royalty interests     265       -       -       265  
Equity securities     -       -       -       -  
Total control investments     5,491       -       -       5,491  
Affiliate investments                                
Subordinated debt     15,818       -       -       15,818  
Equity securities     2,110       -       -       2,110  
Total affiliate investments     17,928       -       -       17,928  
Non-affiliate investments                                
First lien secured debt     5,020       -       -       5,020  
Second lien debt     62,583       -       22,354       40,229  
Subordinated debt     17,400       -       8,400       9,000  
Limited term royalties     20,972       -       -       20,972  
Contingent earn-out     -       -       -       -  
Redeemable preferred units     55,475       -       -       55,475  
CLO residual interests     7,605       -       7,605       -  
Royalty interests     47       -       -       47  
Equity securities     47       -       -       47  
Total non-affiliate investments     169,149       -       38,359       130,790  
Total portfolio investments     192,568       -       38,359       154,209  
Government securities                                
U.S. Treasury Bills     30,601       30,601       -       -  
Total investments   $ 223,169     $ 30,601     $ 38,359     $ 154,209  

 

December 31, 2014:   Total     Level 1     Level 2     Level 3  
Portfolio investments                                
Control investments                                
First lien secured debt   $ 5,950     $ -     $ -     $ 5,950  
Royalty interests     325       -       -       325  
Equity securities     -       -       -       -  
Total control investments     6,275       -       -       6,275  
Affiliate investments                                
Subordinated debt     15,700       -       -       15,700  
Equity securities     1,730       -       -       1,730  
Total affiliate investments     17,430       -       -       17,430  
Non-affiliate investments                                
First lien secured debt     5,320       -       -       5,320  
Second lien debt     41,410       -       19,575       21,835  
Subordinated debt     19,920       -       10,920       9,000  
Limited term royalties     23,700       -       -       23,700  
Contingent earn-out     -       -       -       -  
Redeemable preferred units     54,906       -       -       54,906  
CLO residual interests     7,110       -       7,110       -  
Royalty interests     46       -       -       46  
Equity securities     46       -       -       46  
Total non-affiliate investments     152,458       -       37,605       114,853  
Total portfolio investments     176,163       -       37,605       138,558  
Government securities                                
U.S. Treasury Bills     30,600       30,600       -       -  
Total investments   $ 206,763     $ 30,600     $ 37,605     $ 138,558  

 

22
 

  

The following tables present roll-forwards of the changes in fair value during the three-month periods ended March 31, 2015 and 2014 for all investments for which we determine fair value using unobservable (Level 3) factors (in thousands):

 

    First                 Royalty Interests,        
    Lien Secured           Subordinated     Contingent        
    Debt and           Debt and     Earn-out        
    Limited Term     Second     Redeemable     and Equity     Total  
    Royalties     Lien Debt     Preferred Units     Securities     Investments  
Fair value at December 31, 2014   $ 34,970     $ 21,835     $ 79,606     $ 2,147     $ 138,558  
Total gains, (losses) and amortization:                                        
Net unrealized gains (losses)     (3,109 )     54       113       322       (2,620 )
Net amortization of premiums, discounts and fees     57       22       16       -       95  
New investments, repayments and settlements, net:                                        
New investments     -       18,513       440       -       18,953  
Payment-in-kind     -       -       118       -       118  
Repayments and settlements     (700 )     (195 )     -       -       (895 )
Fair value at March 31, 2015   $ 31,218     $ 40,229     $ 80,293     $ 2,469     $ 154,209  
                                         
Fair value at December 31, 2013   $ 64,449     $ 31,747     $ 77,099     $ 8,602     $ 181,897  
Total gains, (losses) and amortization:                                        
Net realized gains (losses)     -       -       (9,382 )     -       (9,382 )
Net unrealized gains (losses)     (2,433 )     (26 )     9,005       (5,525 )     1,021  
Net amortization of premiums, discounts and fees     108       25       13       (6 )     140  
New investments, repayments and settlements, net:                                        
New investments     1,116       -       -       -       1,116  
Payment-in-kind     145       89       76       -       310  
Repayments and settlements     (1,439 )     -       (70 )     -       (1,509 )
Fair value at March 31, 2014   $ 61,946     $ 31,835     $ 76,741     $ 3,071     $ 173,593  
                                         
Net change in unrealized gains (losses) from investments still held as of reporting date:                                        
March 31, 2015   $ (3,109 )   $ 54     $ 113     $ 322     $ (2,620 )
March 31, 2014     (2,433 )     (26 )     (378 )     (5,525 )     (8,362 )

 

We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”

 

23
 

  

The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of March 31, 2015 (dollars in thousands):

 

    Fair     Valuation   Significant   Range of     Weighted  
Type of Investment   Value     Technique   Unobservable Inputs   Inputs     Average  
First lien secured debt                                
and limited term royalties   $ 25,992     Discounted cash flow   Discount rate     12.5% - 25.0%       22.6%
      726     Market comparables   EBITDA multiples     3.0x     3.0x
      4,500     Recent or pending transactions   N/A     N/A       N/A  
      31,218                          
Second lien debt     21,716     Market comparables   EBITDA multiples     3.8x - 14.7x        9.2 x  
                Reserve multiples (1)     $9.00 - $12.00     $ 10.50  
                Production multiples (2)     $42.00 - $51.00     $ 46.50  
      18,513     Recent or pending transactions   N/A     N/A       N/A  
      40,229                          
Subordinated debt and                                
redeemable preferred units     80,293     Market comparables   EBITDA multiples     3.0x - 6.5x        4.3 x  
                Reserve multiples (1)     $13.20 - $15.60     $ 14.40  
                Production multiples (2)     $27.00 - $35.40     $ 31.20  
Royalty interests, contingent                                
earn-out and equity securities     2,375     Market comparables   EBITDA multiples     4.0x - 6.0x       5.9x
      94     Recent or pending transactions   N/A     N/A       N/A  
      2,469                          
    $ 154,209                          

________________

(1) Based on recent comparable transactions involving similar assets, expressed as price per unit of equivalent barrel of oil in proved reserves.
(2) Based on recent comparable transactions involving similar assets, expressed as price per daily production of equivalent barrel of oil in proved reserves.

 

Note 8: Common Stock

 

On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed the net asset value of our shares. During 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, totaling $7.6 million, in accordance with the approved stock repurchase plan. These repurchases were made at approximate discounts to the most recently published net asset value of 30%, 26% and 28% in May and November 2012 and May 2013, respectively. In March 2015, our Board of Directors authorized the Company to repurchase up to the remaining $2.4 million available to be repurchased under this plan. Between March 16 and March 31, 2015, we repurchased 72,483 shares of our common stock in the open market at an average price of $5.16 per share, totaling $0.4 million, at a 31% discount to net asset value calculated as of December 31, 2014. Between April 1 and May 7, 2015, pursuant to a plan executed in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, we repurchased 201,456 shares of our common stock in the open market at an average price of $5.36 per share, totaling $1.0 million, leaving $1.0 million available to be used for stock repurchases under the stock repurchase plan. Any such share repurchases will be made in accordance with applicable securities laws and regulations that set certain restrictions on the method, timing, price and volume of stock repurchases, and no assurance can be given that any particular amount of Company common stock will be repurchased under the plan.

 

24
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

You should read the following analysis of our financial condition and results of operations in conjunction with management’s discussion and analysis contained in our 2014 Annual Report on Form 10-K, as well as our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

 

Forward-Looking Statements

 

Certain statements in this Quarterly Report on Form 10-Q that relate to estimates or expectations of our future performance or financial condition may constitute “forward-looking statements.” These forward-looking statements are subject to various risks and uncertainties, which could cause actual results and conditions to differ materially from those projected, including, but not limited to:

 

uncertainties associated with the timing and likelihood of investment transaction closings;
changes in interest rates;
the future operating results of our portfolio companies and their ability to achieve their objectives;
changes in regional or national economic conditions and their impact on the industries in which we invest;
disruptions in the credit and capital markets;
changes in the conditions of the industries in which we invest;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the ability of OHA to locate suitable investments for us and to monitor and administer our investments; and
other factors enumerated in our filings with the Securities and Exchange Commission, or the SEC.

 

We may use words such as “anticipates,” “believes,” “intends,” “plans,” “expects,” “projects,” “estimates,” “will,” “should,” “may” and similar expressions to identify forward-looking statements. These forward-looking statements are subject to various risks and uncertainties. Certain factors could cause actual results and conditions to differ materially from those projected and our historical experience. You should not place undue reliance on such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statements made herein, unless required by law.

 

Overview

 

We are a specialty finance company designed to provide our investors with current income and capital appreciation. We focus primarily on providing creative direct lending solutions to middle market private companies across industry sectors. Our investment objective is to generate both current income and capital appreciation primarily through debt investments, some of which include equity components. Our investment activities are managed by Oak Hill Advisors, L.P., or OHA, and supervised by our Board of Directors, the majority of whose members are independent of OHA and its affiliates.

 

OHA (and its affiliated investment advisors and predecessor firms) continues to build on its over 20-year history of investing in various asset classes and believes that its past success is a reflection of the firm’s consistent investment philosophy, strategy and process. As our investment advisor, OHA seeks to expand our portfolio’s exposure to a broader range of industries beyond energy, focusing on the middle market. OHA believes that middle market companies are generally less able to secure financing from public financial markets than larger companies and thus offer better return opportunities for firms able to originate and structure these investments, along with conducting the necessary diligence to appropriately evaluate these opportunities.

 

OHA expects that most of our new investments will be in senior and junior secured, unsecured and subordinated debt securities in U.S. private and small public middle market companies with maturities ranging from three to seven years. However, OHA seeks to identify attractive investments throughout the capital structure and thus may invest in equity, distressed debt, residual interests of CLOs and other assets. We may invest in newly issued securities and acquire investments in the secondary market. We do not currently intend to invest in mortgage-related structured products.

 

On September 30, 2014, our stockholders approved the appointment of OHA as our investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation, or OHAI. OHA is a registered investment adviser under the Investment Advisers Act of 1940, or the Advisers Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively.

 

25
 

  

The aggregate fair value of our investment portfolio at March 31, 2015 was $192.3 million, with such value comprised of 15 active portfolio investments compared to 10 active portfolio investments at September 30, 2014. Under our previous investment advisor, we focused our investments primarily on small and mid-size companies engaged in the upstream sector of the energy industry, which includes businesses that find, develop and extract energy resources, including natural gas, crude oil and coal. Consequently, the majority of our current investment portfolio value is comprised of debt securities and other investments in upstream exploration and production companies engaged in the acquisition, development and production of oil and natural gas properties in and along the Gulf Coast, in the state and federal waters of the Gulf of Mexico, and in the Permian Basin, Mid-Continent and Rocky Mountain areas.

 

Part of our current investment strategy is to reduce our portfolio concentration in the energy industry and to diversify our portfolio with investments in debt securities of U.S. private and small public middle market companies across various industry sectors. The concentration of our investment portfolio in the energy sector decreased from 74% at September 30, 2014 to 56% at March 31, 2105, on a fair value basis.

 

Our historical focus and current concentration in the energy sector causes our portfolio to be particularly influenced by commodity prices for oil and natural gas, which declined dramatically during the fourth quarter of 2014 and remain significantly lower than they have been in recent years. Further decline in commodity prices or increased volatility in the energy markets, particularly in North America, may further significantly affect the business, financial condition, results of operations and cash flows of the energy-related businesses in our investment portfolio and their ability to meet financial commitments, which would negatively impact the fair values of many of our energy-related investments and, in turn, our net asset value. These factors may also extend the holding period for such investments, thus impacting our ability to reduce the concentration of energy investments in our portfolio.

 

Our level of investment activity can and does vary substantially from period to period depending on many factors. Some of these factors are the amount of debt and equity capital available to middle market companies, the level of acquisition and divestiture activity for such companies, the general economic environment and the competitive environment for the types of investments we make, and our own ability to raise capital to fund our investments, both through the issuance of debt and equity securities. If a substantial portion of our investment portfolio were to be realized in the near term, no assurance can be given that OHA will be able to source sufficient appropriate investments for us to timely replace the investment income from the realized investments.

 

Portfolio and Investment Activity

 

In March 2015, we purchased an $18.7 million participation in a second lien term loan to Foundation Building Materials, LLC, or FBM, a national distributor of drywall and related building products. The FBM Second Lien Term Loan was purchased at a 1% discount, earns interest payable in cash at a rate of 12% per annum (LIBOR +11% with a 1% Floor) and matures in April 2019.

 

In March 2015, we also purchased a $2.5 million participation in a second lien term loan to Stardust Financial Holdings, Inc., an affiliate of Hanson Building Products, or Hanson, a manufacturer of a diversified range of concrete and clay building products in the United States, Canada and the United Kingdom. We purchased $2.4 million through the syndication process at a discount of 9% and an additional $0.1 million in the secondary market at a discount of 6.5%. The Hanson second lien term loan earns interest payable in cash at a rate of 10.5% per annum (LIBOR+9.5% with a 1% Floor) and matures in March 2023.

 

In 2011 and 2012, we purchased from ATP Oil & Gas Corporation, or ATP, limited-term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP in the Gulf of Mexico, including $25.0 million paid on July 3, 2012. Under this arrangement, we purchased the right to portions (ranging from 5.0% to 10.8%) of the monthly production proceeds from the various oil and gas properties subject to the ORRIs in ATP’s Gomez and Telemark properties. The terms of the ORRIs provide that they will terminate after we receive production payments that equal a defined sum calculated (generally) based on our investment in the ORRIs plus a time-value factor at a rate of 13.2% per annum. On August 17, 2012, ATP filed for protection under Chapter 11 of the U.S. Bankruptcy Code. For more information, please refer to the discussion of the ATP Litigation under the heading “Legal Proceedings” in Note 6, “Commitments and Contingencies,” to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. As of March 31, 2015, our unrecovered investment was $26.5 million, and we had received aggregate production payments of $33.9 million subject to a disgorgement agreement. In addition, as of March 31, 2015, we had incurred legal and consulting fees totaling $5.1 million in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. We add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of March 31, 2015, $4.7 million of the $5.1 million in legal and consulting fees have been added to, and are thus included in, the unrecovered investment balance under the terms of our transaction documents. The remaining amounts of legal and consulting fees, totaling $0.4 million and $0.1 million as of March 31, 2015 and December 31, 2014, respectively, are included in accounts receivable and other current assets on our consolidated balance sheets and are, thus, not included in the unrecovered investment balance as of such dates.

 

26
 

  

The table below shows our portfolio investments by type as of March 31, 2015 and December 31, 2014. We compute yields on investments using interest rates as of the balance sheet date and include amortization of original issue discount and market premium or discount, royalty income and other similar investment income, weighted by their respective costs when averaged. These yields do not include income from any investments on non-accrual status but do include the cost basis of such investments in the denominator. Such weighted average yields are not necessarily indicative of expected total returns on a portfolio.

 

    March 31, 2015     December 31, 2014  
    Weighted                 Weighted              
    Average     Percentage of Portfolio     Average     Percentage of Portfolio  
    Yields     Cost     Fair Value     Yields     Cost     Fair Value  
First lien secured debt     2.6 %     11.6 %     5.3 %     2.7 %     13.0 %     6.4 %
Second lien debt     10.6 %     28.8 %     32.5 %     9.7 %     21.2 %     23.5 %
Subordinated debt     13.0 %     16.8 %     17.3 %     13.1 %     18.2 %     20.2 %
Limited term royalties     13.9 %     12.0 %     10.9 %     13.9 %     13.4 %     13.5 %
Contingent earn-out     0.0 %     0.0 %     0.0 %     0.0 %     0.0 %     0.0 %
Royalty interests     154.6 %     0.0 %     0.2 %     187.3 %     0.0 %     0.2 %
Redeemable preferred units     8.0 %     22.7 %     28.8 %     8.0 %     25.1 %     31.2 %
CLO residual interests (1)     12.2 %     3.1 %     3.9 %     12.0 %     3.5 %     4.0 %
Equity securities                                                
Membership and partnership units     0.0 %     4.8 %     1.1 %     0.0 %     5.3 %     1.0 %
Common stock     0.0 %     0.2 %     0.0 %     0.0 %     0.2 %     0.0 %
Warrants     0.0 %     0.0 %     0.0 %     0.0 %     0.1 %     0.0 %
Total equity securities     0.0 %     5.0 %     1.1 %     0.0 %     5.6 %     1.0 %
Total portfolio investments     9.4 %     100.0 %     100.0 %     9.2 %     100.0 %     100.0 %

 

(1) Yields from investments in CLO residual interests represent the implied internal rate of return calculation expected from cash flow streams.

 

As of March 31, 2015 and December 31, 2014, the total fair value of our portfolio investments was $192.6 million and $176.2 million, respectively. Of those fair value totals, approximately $154.2 million, or 80%, as of March 31, 2015, and $138.6 million, or 79%, as of December 31, 2014, are determined using significant unobservable (i.e., Level 3) inputs.

 

Results of Operations

 

Investment Income

 

During the three months ended March 31, 2015, our total investment income was $4.8 million, decreasing by $1.0 million, or 18%, compared to $5.9 million in the corresponding period of 2014. The decrease in 2015 was primarily a result of a decrease in the weighted average yield on our investment portfolio due to realizations of some higher yielding investments during 2014 and due to the placing of certain investments on non-accrual status during the fourth quarter of 2014. Our weighted average yield on portfolio investments, on a cost basis, decreased from 10.4% at March 31, 2014 to 9.4% at March 31, 2015. In addition, our average portfolio balance, on a cost basis, declined from $214.7 million during the first quarter of 2014 to $204.7 million during the first quarter of 2015, primarily as a result of the volume of realizations exceeding the volume of new investments between the two periods.

 

27
 

  

The table below summarizes our non-accruing and non-income producing investments:

 

    March 31, 2015     December 31, 2014  
(Dollars in thousands)   Cost     Fair Value     Cost     Fair Value  
Non-accruing investments                                
Contour Highwall Holdings, LLC (non-accrual 10/01/2014)   $ 11,218     $ 4,500     $ 10,778     $ 4,500  
Spirit Resources, LLC - Tranche A (non-accrual 11/01/2014)     5,464       726       5,464       1,450  
Spirit Resources, LLC - Tranche B (non-accrual 3/31/14)     4,409       -       4,409       -  
Total non-accruing investments     21,091       5,226       20,651       5,950  
Non-income producing investments                                
Contour Highwall Holdings, LLC units     -       -       -       -  
Globe BG, LLC (contingent Alden Resources royalty earn-out)     -       -       -       -  
Huff Energy Holdings, Inc. warrants and overriding royalty (after pay-out)     84       94       84       92  
Myriant Corporation common stock and warrants     468       -       468       -  
OHA/OCI Investments, LLC Class A Units     2,500       2,110       2,500       1,730  
Spirit Resources, LLC preferred units     8,000       -       8,000       -  
Total non-income producing investments     11,052       2,204       11,052       1,822  
Total non-accruing and non-income producing investments   $ 32,143     $ 7,430     $ 31,703     $ 7,772  

 

Operating Expenses

 

The table below summarizes the components of our operating expenses (in thousands):

 

    For The Three Months Ended  
    March 31,  
    2015     2014  
Interest expense and bank fees   $ 652     $ 613  
Management fees     678       1,346  
Costs related to strategic alternatives review     -       457  
Professional fees and other G&A     1,295       1,509  
Total operating expenses   $ 2,625     $ 3,925  

 

For the three months ended March 31, 2015, operating expenses were $2.6 million, decreasing $1.3 million, or 33%, compared to $3.9 million for the quarter ended March 31, 2014. Management fees were $0.7 million, or 50%, lower in the quarter ended March 31, 2015 at $0.7 million, compared to the quarter ended March 31, 2014, primarily as a result of the lower base management fee structure in the Investment Advisory Agreement with OHA as compared to the base management fee structure associated with our former investment advisor. Costs related to our strategic alternatives review process, which ultimately resulted in the appointment of OHA as our new investment advisor as of September 30, 2014, totaled $0.5 million during the first quarter of 2014 and did not recur during the first quarter of 2015. Professional fees and other general and administrative expenses totaled $1.3 million for the quarter ended March 31, 2015, decreasing by $0.2 million, or 14% compared to the quarter ended March 31, 2014, primarily as a result of lower personnel and insurance costs, partially offset by higher legal and professional fees.

 

Operating expenses include our allocable portion of operating expenses incurred on our behalf by our investment advisor and our administrator. Other general and administrative expenses include our allocated share of employee, facilities, stockholder services and marketing costs incurred by our administrator.

 

According to the terms of our previous investment advisory agreement with NGP Investment Advisor, LP, we calculated the base management fee quarterly as 0.45% of the average of our total assets (inclusive of all cash and cash equivalents without any exclusions) as of the end of the two most recent fiscal quarters. According to the terms of our new Investment Advisory Agreement with OHA, effective September 30, 2014, we calculate the base management as 0.4375% (reduced to 0.375% in the first year) of the average of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code). Consequently, our base management fee, relative to our total asset balances, is lower under the Investment Advisory Agreement than it was under our previous investment advisory agreement.

 

28
 

  

Under the Investment Advisory Agreement, the investment income incentive fee is calculated quarterly at a rate of 20% of quarterly net investment income above a “hurdle rate” of 1.75% per quarter (7% annualized) with a “catch up” provision. Under our previous investment advisory agreement, the investment income incentive fee was calculated at 20% of net investment income above a “hurdle rate” of 2.0% per quarter (8% annualized) with no “catch up” provision. We have not incurred any investment income incentive fees since the second quarter of 2013. However, if our operating results improve in future periods and exceed the 1.75% quarterly hurdle rate, we will incur investment income incentive fees.

 

Net Investment Income

 

For the three months ended March 31, 2015, net investment income was $2.2 million, or $0.11 per common share, compared to $1.9 million, or $0.09 per common share, for the three months ended March 31, 2014. The $0.3 million increase in net investment income was primarily attributable to the $1.3 million decrease in operating expenses, partially offset by decreases in investment income of $1.0 million, both discussed above.

 

Net Realized Gains (Losses)

 

For the three months ended March 31, 2014, we realized net capital losses of $9.6 million, or $0.47 per common share, primarily as a result of a loss of $9.4 million on the disposition of our GMX Resources, Inc. Senior Secured Second-Priority Notes due 2018, or the GMX 2018 Notes. The realized loss on the GMX 2018 Notes was entirely offset by the reversal of previously recognized unrealized depreciation on this investment.

 

Unrealized Appreciation or Depreciation on Investments

 

For the three months ended March 31, 2015, net unrealized depreciation on portfolio investments was $4.0 million, or $0.20 per share, primarily due to decreases in the fair value of our investments in Talos Production, LLC Senior Unsecured Notes of $2.5 million and our limited-term overriding royalty interest, or ORRI, in certain properties operated by Bennu Oil & Gas, LLC, or Bennu, of $2.4 million, and our investments in Spirit Resources, LLC, or Spirit, of $0.8 million, partially offset by increases in the fair value of our investment in Castex 2005 LP Preferred Units of $0.6 million and Gramercy Park CLO of $0.6 million. Net increases in the fair value of remaining investments totaled $0.5 million in the first quarter of 2015. By comparison, for the three months ended March 31, 2014, net unrealized appreciation on portfolio investments was $1.3 million, or $0.06 per share, primarily due to the reversal of previously recorded unrealized depreciation, due to realization, associated with our investment in GMX 2018 Notes of $9.4 million, partially offset by decreases in the fair value of our investments in Spirit Preferred Units of $3.4 million, Bennu limited-term ORRIs of $2.4 million, OCI Holdings, LLC Subordinated Notes and Preferred Units of $1.9 million, and net decreases in the value of remaining investments of $0.4 million.

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

For the three months ended March 31, 2015, we recorded a net decrease in net assets resulting from operations of $1.9 million, or $0.09 per share, compared to $6.4 million, or $0.31 per share, for the three months ended March 31, 2014. The $4.5 million, or $0.22 per share, net improvement between the two periods was primarily attributable to the $0.3 million increase in net investment income and the $4.2 million reduction in net realized and unrealized losses on our investments, all of which are described above.

 

Financial Condition, Liquidity and Capital Resources

 

During the three months ended March 31, 2015, we generated cash from operations of $2.4 million, excluding net purchases of investments, compared to $3.0 million during the comparable period of 2014. The lower amount of cash generated from operations in 2015 was primarily attributable to timing differences involving the invoicing and payment of accounts payable between the two periods.

 

Our net cash used in operating activities for the three months ended March 31, 2015 was $17.8 million, compared to $3.1 million of cash provided by operating activities for the same period of 2014. This increase in net cash used in 2015 was primarily due to higher net purchases of investments in portfolio securities during 2015. Purchases of portfolio securities during the first three months of 2015 totaled $21.1 million, compared to $1.1 million during the first three months of 2014. Purchases in 2015 consisted of the FBM Second Lien Term Loan of $18.5 million, the Hanson Second Lien Term Loan of $2.3 million and additional investments in existing portfolio companies totaling $0.3 million. Purchases in 2014 consisted of additional investments in existing portfolio companies. Proceeds from the realization of investments totaled $0.9 million during the first three months of 2015, compared to $1.3 million during the first three months of 2014.

 

29
 

  

At March 31, 2015, we had cash and cash equivalents totaling $30.0 million. At March 31, 2015, the amount outstanding under our $72.0 million Third Amended and Restated Revolving Credit Agreement, or the Investment Facility, was $72.0 million, and there was no additional amount available for borrowing. We repaid $25.0 million of the balance outstanding under the Investment Facility in early April with cash on hand. As of March 31, 2015, the amount outstanding under our $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, was $30.0 million, and there was no additional amount available for borrowing. We repaid the entire balance outstanding under the Treasury Facility in April 2015 with proceeds from the sale of U.S. Treasury Bills.

 

During the three months ended March 31, 2015, we paid cash dividends totaling $3.3 million, or $0.16 per share, to our common stockholders. In March 2015, we declared a first quarter dividend totaling $2.5 million, or $0.12 per share, which was paid in April 2015. We currently intend to continue to distribute, out of assets legally available for distribution and as determined by our Board of Directors, in the form of quarterly dividends, a minimum of 90% of our annual investment company taxable income to our stockholders.

 

In March 2015, our Board of Directors authorized the Company to repurchase up to $2.4 million of our common stock pursuant to a stock repurchase plan established in October 2011. During the first quarter of 2015, we repurchased 72,483 shares of our common stock in the open market at an average price of $5.16 per share, totaling $0.4 million. From April 1 through May 7, 2015, pursuant to a plan executed in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, we repurchased 201,456 shares of our common stock in the open market at an average price of $5.36 per share, totaling $1.0 million, leaving $1.0 million available to be used for stock repurchases under the stock repurchase plan. Any such share repurchases will be made in accordance with applicable securities laws and regulations that set certain restrictions on the method, timing, price and volume of stock repurchases, and no assurance can be given that any particular amount of Company common stock will be repurchased under the plan.

 

Credit Facilities and Borrowings

 

We have a $72.0 million revolving Investment Facility. The total amounts outstanding under the Investment Facility were $72.0 million and $52.0 million as of March 31, 2015 and December 31, 2014, respectively. Substantially all of our assets except our investments in U.S. Treasury Bills are collateral for the obligations under the Investment Facility. The Investment Facility matures on May 23, 2016, and bears interest, at our option, at either (i) LIBOR plus 325 to 475 basis points, or (ii) the base rate plus 225 to 375 basis points, both based on our amounts outstanding. As of March 31, 2015, the average interest rate on our outstanding balance of $72.0 million was 3.9%, and there was no additional amount available for borrowing under the Investment Facility. We repaid $25.0 million of the balance outstanding under the Investment Facility in early April 2015.

 

We have a $30.0 million Treasury Facility that can only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitate the growth of our investment portfolio and provide flexibility in the sizing of our portfolio investments. As of March 31, 2015, we had $30.0 million outstanding and no additional amount available for borrowing under the Treasury Facility, and the interest rate on our outstanding balance was 1.7%. We repaid the entire balance outstanding under the Treasury Facility in April 2014 with proceeds from the sale of U.S. Treasury Bills.

 

Both the Investment Facility and the Treasury Facility contain affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2015 and 2014 and had no existing defaults or events of default under either facility. The most restrictive covenants, with terms as defined in the credit agreements, are:

 

· maintaining a ratio of net asset value to consolidated total indebtedness (excluding net hedging liabilities) of not less than 2.25:1.0,
· maintaining a ratio of net asset value to consolidated total indebtedness (including net hedging liabilities) of not less than 2.0:1.0,
· maintaining a ratio of EBITDA (excluding revenue from cash collateral) to interest expense (excluding interest on loans under the Treasury Facility) of not less than 3.0:1.0, and
· maintaining a ratio of collateral to the aggregate principal amount of borrowings under the Treasury Facility of not less than 1.02:1.0.

 

30
 

  

Distributions

 

We have elected to operate our business to be taxed as a RIC for federal income tax purposes. As a RIC, we generally are not required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To maintain our RIC status, we must meet specific source-of-income and asset diversification requirements and distribute annually an amount equal to at least 90% of our “investment company taxable income” (which generally consists of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, reduced by deductible expenses) and net tax-exempt interest. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (i.e., realized capital gains in excess of realized capital losses) for the one-year period ended on October 31 of that calendar year, and (3) 100% of any ordinary income or capital gain net income not distributed in prior years and on which we did not pay corporate-level federal income taxes. We currently intend to make sufficient distributions to satisfy the annual distribution requirement and to avoid the excise taxes.

 

We determine the tax characteristics of our dividend distributions as of the end of the fiscal year, based on the taxable income for the full year and distributions paid during the year. Taxable income available for distribution differs from consolidated net investment income under GAAP due to (i) temporary and permanent differences in income and expense recognition, (ii) capital gains and losses, (iii) activity at taxable subsidiaries, and (iv) the timing and period of recognition regarding dividends declared in December of one year and paid in January of the following year. We (or the applicable withholding agent) report the tax characteristics of dividends paid annually to each stockholder on Form 1099-DIV after the end of the year.

 

We may not achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings when applicable to us as a BDC under the 1940 Act and due to provisions in our Investment Facility. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at any specific level.

 

Portfolio Credit Quality

 

At March 31, 2015, most of our portfolio investments were in negotiated, and often illiquid, securities of energy-related and middle market businesses, with a concentration in the energy industry. As of March 31, 2015, we had two investments on non-accrual status with an aggregate cost and fair value of $21.1 million and $5.2 million, respectively. Both of these investments were placed on non-accrual status during the fourth quarter of 2014. Our portfolio investments at fair value were approximately 87% and 88% of the related cost basis as of March 31, 2015 and December 31, 2014, respectively.

 

In light of enhancements made in our financial reporting and valuation processes, which include the expanded use of an independent valuation firm, we discontinued the use of a risk rating system as part of our internal investment monitoring procedures and did not apply risk ratings to our portfolio investments effective in the first quarter of 2015.

 

Contractual Obligations and Off-Balance Sheet Arrangements

 

The following table summarizes our contractual payment obligations at March 31, 2015 (in thousands):

 

          Less than                 More than  
Revolving credit facilities (1) :   Total     1 Year     1-3 Years     3-5 Years     5 Years  
Investment Facility   $ 72,000     $ -     $ 72,000     $ -     $ -  
Treasury Facility     30,000       30,000       -       -       -  
Total   $ 102,000     $ 30,000     $ 72,000     $ -     $ -  

 

 

(1) Excludes accrued interest amounts.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

There have been no material changes from the information provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act), designed to ensure that information required to be disclosed in our reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

31
 

  

In connection with the preparation of this Quarterly Report on Form 10-Q, as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q (March 31, 2015), we performed an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2015, our disclosure controls and procedures were effective in providing reasonable assurance (i) that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and (ii) that such information is accumulated and communicated to management in a manner that allows timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

No changes in internal control over financial reporting occurred during the quarter ended March 31, 2015 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

The information set forth under the heading “Legal Proceedings” in Note 6, “Commitments and Contingencies,” to Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors.

 

During the three months ended March 31, 2015, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

As discussed in Note 8 to our interim consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, on October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed the net asset value of our shares during our open trading periods. During 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, totaling $7.6 million, in accordance with the approved stock repurchase plan. In March 2015, our Board of Directors authorized the Company to repurchase up to the remaining $2.4 million available to be repurchased under this plan. The following table provides information for the quarter ended March 31, 2015 regarding shares of our common stock that we repurchased in the open market.

 

                Total Number     Approximate  
                of Shares     Dollar Value of  
    Total     Weighted     Purchased as     Shares that May  
    Number     Average     Part of Publicly     Yet be Purchased  
    of Shares     Price Paid     Announced Plans     Under the Plans  
First Quarter 2015   Purchased     Per Share     or Programs     or Programs  
Month #1:  January 1, 2015 - January 31, 2015     -     $ -       -     $ 2,426,838  
Month #2:  February 1, 2015 - February 28, 2015     -       -       -       2,426,838  
Month #3:  March 1, 2015 - March 31, 2015     72,483       5.16       72,483       2,053,048  
Total     72,483     $ 5.16       72,483          

 

Item 6. Exhibits.

 

See “Index to Exhibits” following the signature page for a description of the exhibits furnished as part of this Quarterly Report on Form 10-Q.

 

32
 

 

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.

 

  OHA INVESTMENT CORPORATION
     
Date:  May 8, 2015 By: /s/ ROBERT W. LONG
    Robert W. Long
    President and Chief Executive Officer
     
Date:  May 8, 2015 By: /s/ L. SCOTT BIAR
    L. Scott Biar
    Chief Financial Officer, Treasurer and
    Chief Compliance Officer

 

33
 

  

Index to Exhibits

 

Exhibit No.   Exhibit
     
31.1*   Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Executive Officer
31.2*   Certification required by Rule 13a-14(a)/15d-14(a) by the Chief Financial Officer
32.1**   Section 1350 Certification by the Chief Executive Officer
32.2**   Section 1350 Certification by the Chief Financial Officer

____________

*Filed herewith.

**Furnished herewith.

 

34

   

Exhibit 31.1

 

Certification Required by Rule 13a-14(a)

or Rule 15d-14(a)

 

I, Robert W. Long, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of OHA Investment Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this  report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 8, 2015  /s/ ROBERT W. LONG
  Robert W. Long
  President and Chief Executive Officer

 

 

  

Exhibit 31.2

 

Certification Required by Rule 13a-14(a)

or Rule 15d-14(a)

 

I, L. Scott Biar, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of OHA Investment Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this  report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 8, 2015  /s/ L. SCOTT BIAR
  L. Scott Biar
 

Chief Financial Officer, Treasurer and

Chief Compliance Officer

 

 

  

Exhibit 32.1

 

Certification required by Rule 13a-14(b) or

Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

In connection with the Quarterly Report of OHA Investment Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Long, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 8, 2015 /s/ ROBERT W. LONG
  Robert W. Long
  President and Chief Executive Officer

 

 

 

Exhibit 32.2

 

Certification required by Rule 13a-14(b) or

Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code

 

In connection with the Quarterly Report of OHA Investment Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L. Scott Biar, Chief Financial Officer, Treasurer, Secretary and Chief Compliance Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 8, 2015  /s/ L. SCOTT BIAR
  L. Scott Biar
 

Chief Financial Officer, Treasurer and

Chief Compliance Officer