OHA Investment Corporation
OHA Investment Corp (Form: 10-Q, Received: 11/14/2016 06:10:51)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 ý 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 o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
(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 ý
 
As of November 14, 2016, there were 20,172,392 shares of the registrant’s common stock outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




EXPLANATORY NOTE

The Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016 (the “Third Quarter 10-Q”), as filed on November 14, 2016, was delayed solely as a result of an ongoing evaluation of an auditor independence matter related to its independent registered public accounting firm, Ernst & Young LLP (“EY”), a member of Ernst & Young Global Limited (“EYG”).

On November 7, 2016, EY informed the Company that it would not be able to complete its review of the interim financial statements required by Regulation S-X to be included in the Third Quarter 10-Q by November 9, 2016 (the filing deadline for the Third Quarter 10-Q) because it had discovered that an EY Global Limited ("EYG") member firm's pension plan had invested in a fund managed by a third party, which had in turn invested in an underlying fund managed by the Company's investment advisor.

On November 11, 2016, the EYG member firm pension plan sold its investment in the third party fund, thereby remediating the breach. The Company, its audit committee and EY have assessed the impact of the above matter on EY’s objectivity and impartial judgment in light of all of the relevant facts and circumstances. EY has concluded that this matter did not and will not impair its objectivity or impartial judgment on all issues encompassed within its audit and review engagements. The audit committee has concurred with EY’s conclusion. This Form 10-Q satisfies Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. As a result, this Form 10-Q includes certifications under Section 906 of SOX.




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
 
OHA INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)  
 
 
September 30, 2016
 
December 31, 2015
 
 
(unaudited)
 
 
Assets
 
 

 
 

Investments in portfolio securities at fair value
 
 

 
 

Control investments (cost: $17,030 and $28,608, respectively)
 
$

 
$
1,000

Affiliate investments (cost: $19,065 and $18,647, respectively)
 
17,724

 
18,893

Non-affiliate investments (cost: $168,619 and $192,012, respectively)
 
113,394

 
154,817

Total portfolio investments (cost: $204,714 and $239,267, respectively)
 
131,118

 
174,710

Investments in U.S. Treasury Bills at fair value (cost: $55,000 and $34,997, respectively)
 
55,000

 
34,997

Total investments
 
186,118

 
209,707

Cash and cash equivalents
 
2,857

 
15,554

Accounts receivable and other current assets
 
12

 
517

Interest receivable
 
1,777

 
2,248

Deferred loan costs and other prepaid assets
 
26

 
451

Total current assets
 
4,672

 
18,770

Total assets
 
$
190,790

 
$
228,477

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities
 
 

 
 

Due to broker
 
$

 
$
5,226

Distributions payable
 
1,210

 
2,421

Accounts payable and accrued expenses
 
2,944

 
1,962

Management and incentive fees payable
 
888

 
1,713

Income taxes payable
 
42

 
75

Repurchase agreement
 
53,900

 
34,300

Short-term debt
 

 
72,000

Total current liabilities
 
58,984

 
117,697

Long-term debt, net of debt issuance costs
 
38,818

 

Total liabilities
 
97,802

 
117,697

Commitments and contingencies  (Note 6)
 
 

 
 

Net assets
 
 

 
 

Common stock, $.001 par value, 250,000,000 shares authorized; 20,172,392 shares issued and outstanding for both periods
 
20

 
20

Paid-in capital in excess of par
 
241,985

 
241,985

Undistributed net investment loss
 
(4,689
)
 
(5,947
)
Undistributed net realized capital loss
 
(73,848
)
 
(63,838
)
Net unrealized depreciation on investments
 
(70,480
)
 
(61,440
)
Total net assets
 
92,988

 
110,780

Total liabilities and net assets
 
$
190,790

 
$
228,477

Net asset value per share
 
$
4.61

 
$
5.49

(See accompanying notes to consolidated financial statements)

4



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Investment income:
 
 

 
 

 
 

 
 

Interest income:
 
 

 
 

 
 

 
 

Affiliate investments
 
$
693

 
$
625

 
$
2,048

 
$
1,841

Non-affiliate investments
 
2,617

 
3,440

 
8,471

 
10,706

Dividend income:
 
 

 
 

 
 

 
 

Non-affiliate investments
 
897

 
1,010

 
3,180

 
2,997

Royalty income, net of amortization:
 
 

 
 

 
 

 
 

Control investments
 

 
11

 

 
30

Other income
 
114

 
2

 
152

 
244

Total investment income
 
4,321

 
5,088

 
13,851

 
15,818

Operating expenses:
 
 

 
 

 
 

 
 

Interest expense and bank fees
 
768

 
967

 
2,831

 
2,534

Management and incentive fees
 
888

 
758

 
2,585

 
2,290

Professional fees, net of legal fees of $0, $34, $0 and $521, respectively, related to ATP bankruptcy (See Note 6)
 
584

 
541

 
1,973

 
1,918

Other general and administrative expenses
 
387

 
735

 
1,554

 
2,270

Total operating expenses
 
2,627

 
3,001

 
8,943

 
9,012

Income tax provision, net
 
(6
)
 
6

 
19

 
58

Net investment income
 
1,700

 
2,081

 
4,889

 
6,748

Realized and unrealized gain (loss) on investments:
 
 
 
 
 
 
 
 
Net realized capital gain (loss) on investments
 
 

 
 

 
 

 
 

Control investments
 

 

 
(10,142
)
 
232

Non-affiliate investments
 

 
(33
)
 
223

 
(33
)
Provision for taxes on realized gain (loss)
 

 

 
(91
)
 

Total net realized capital gain (loss) on investments
 

 
(33
)
 
(10,010
)
 
199

Net unrealized appreciation (depreciation) on investments
 
 

 
 

 
 

 
 

Control investments
 

 
(1,000
)
 
10,578

 
(4,222
)
Affiliate investments
 
(1,254
)
 
170

 
(1,587
)
 
1,258

Non-affiliate investments
 
(3,058
)
 
(7,865
)
 
(18,031
)
 
(12,999
)
Total net unrealized depreciation on investments
 
(4,312
)
 
(8,695
)
 
(9,040
)
 
(15,963
)
 
 
 
 
 
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(2,612
)
 
$
(6,647
)
 
$
(14,161
)
 
$
(9,016
)
 
 
 
 
 
 
 
 
 
Net decrease in net assets resulting from operations per common share
 
$
(0.13
)
 
$
(0.33
)
 
$
(0.70
)
 
$
(0.44
)
 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.06

 
$
0.12

 
$
0.18

 
$
0.36

Weighted average shares outstanding - basic and diluted
 
20,172

 
20,177

 
20,172

 
20,372


  (See accompanying notes to consolidated financial statements)

5



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(in thousands, except per share data)
(unaudited)
 
 
 
For the nine months ended September 30,
 
 
2016
 
2015
Increase (decrease) in net assets from operations
 
 

 
 

Net investment income
 
$
4,889

 
$
6,748

Net realized capital gain (loss) on investments
 
(10,010
)
 
199

Net unrealized depreciation on investments
 
(9,040
)
 
(15,963
)
Net decrease in net assets resulting from operations
 
(14,161
)
 
(9,016
)
Distributions to common stockholders
 
 

 
 

Distributions from net investment income
 
(3,631
)
 
(7,316
)
Net decrease in net assets from distributions
 
(3,631
)
 
(7,316
)
Capital transactions
 
 

 
 

Acquisition of common stock under repurchase plan
 

 
(2,426
)
Net decrease in net assets from capital transactions
 

 
(2,426
)
Net decrease in net assets
 
(17,792
)
 
(18,758
)
Net assets, beginning of period
 
110,780

 
154,164

Net assets, end of period
 
$
92,988

 
$
135,406

Net asset value per common share at end of period
 
$
4.61

 
$
6.71

Common shares outstanding at end of period
 
20,172

 
20,172

 
(See accompanying notes to consolidated financial statements)

6



OHA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
 
For the nine months ended September 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net decrease in net assets resulting from operations
 
$
(14,161
)
 
$
(9,016
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash attributable to operating activities:
 
 

 
 

Payment-in-kind interest
 
(3,909
)
 
(1,092
)
Net amortization of premiums, discounts and fees
 
(117
)
 
(384
)
Net realized capital loss (gain) on investments
 
9,919

 
(199
)
Net unrealized depreciation on investments
 
9,040

 
15,963

Amortization of deferred loan costs
 
491

 
857

Purchase of investments in portfolio securities
 
(1,756
)
 
(48,674
)
Proceeds from redemption or sale of investments in portfolio securities
 
30,414

 
17,488

Purchase of investments in U.S. Treasury Bills
 
(90,000
)
 
(91,801
)
Proceeds from redemption of investments in U.S. Treasury Bills
 
69,997

 
72,400

Effects of changes in operating assets and liabilities:
 
 

 
 

Accounts receivable and other current assets
 
505

 
(202
)
Interest receivable
 
471

 
112

Prepaid assets
 
(66
)
 
(30
)
Unamortized debt issuance costs
 
(1,682
)
 

Payables and accrued expenses
 
(5,102
)
 
258

Net cash attributable to operating activities
 
4,044

 
(44,320
)
Cash flows from financing activities:
 
 

 
 

Borrowings under credit facilities
 
49,000

 
166,000

Borrowings under repurchase agreement
 
88,200

 
49,000

Repayments on credit facilities
 
(80,500
)
 
(176,000
)
Repayments on repurchase agreement
 
(68,600
)
 

Acquisition of common stock under repurchase plan
 

 
(2,426
)
Distributions to stockholders
 
(4,841
)
 
(8,193
)
Net cash attributable to financing activities
 
(16,741
)
 
28,381

Net change in cash and cash equivalents
 
(12,697
)
 
(15,939
)
Cash and cash equivalents, beginning of period
 
15,554

 
31,455

Cash and cash equivalents, end of period
 
$
2,857

 
$
15,516

 
(See accompanying notes to consolidated financial statements)
 

7



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2016
(in thousands, except share amounts and percentages)
(unaudited)
Portfolio Company
 
Industry
Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
Control Investments - (More than 25% owned)
Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8.0% or LIBOR+4.0%, due
4/28/2015) (5)
 
$
4,657

 
$
4,621

 
$

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15.0% PIK or LIBOR+11.0%, due 10/28/2015) (5)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity (6)
 
 

 
8,000

 

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
17,030

 
$

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1.0% floor plus 3.0% PIK, due
8/15/2018) (7)
 
$
16,686

 
$
16,565

 
$
16,686

OCI Holdings, LLC
 
Home Health Services
 
100% of Class A Units in OHA/OCI Investments, LLC representing 20.8% diluted ownership of OCI Holdings, LLC
 
 

 
2,500

 
1,038

Subtotal Affiliate Investments - (5% to 25% owned)
 
 

 
$
19,065

 
$
17,724

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8.0% cash or 10.0% PIK) (8)
 
$
55,226

 
$
54,783

 
$
34,706

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%) (9)(10)
 
 

 
27,845

 
12,286

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+9.25% with a 1.0% floor, due 5/21/2021) (13)
 
9,323

 
9,212

 
9,137

Kronos Incorporated
 
Software
 
Second Lien Term Loan
(LIBOR+8.5% with a 1.25% floor, due 4/30/2020)
(3)
 
12,000

 
12,124

 
12,225

Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1.0% floor, due 6/19/2023) (3)
 
10,000

 
9,929

 
9,875

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes
(11.38% due 12/1/2021)
(3)
 
10,100

 
9,742

 
8,989

 
(See accompanying notes to consolidated financial statements)

8



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2016
(In thousands, except share amounts and percentages)
(Unaudited — Continued)
Portfolio Company
 
Industry Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Berlin Packaging
 
Packaging
 
Second Lien Term Loan
(LIBOR+6.75% with a 1.0% floor, due 10/1/2022)
(3)
 
$
7,205

 
$
6,875

 
$
7,259

Gramercy Park CLO Ltd. (4)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023) (3)
 
9,000

 
5,519

 
5,175

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes (9.75%, due 2/15/2018) (3)
 
12,000

 
11,976

 
5,565

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1.0% floor, due 5/14/2023) (3)
 
3,404

 
3,382

 
3,378

Synarc-BioCore Holdings, LLC
 
Healthcare
 
First Lien Senior Secured Notes (7.75% due 3/10/2021)
 
2,400

 
2,349

 
2,520

Stardust Financial Holdings (Hanson)
 
Building Materials
 
Second Lien Term Loan (LIBOR+9.5% with a 1.0% floor, due 3/13/2023) (3)
 
1,687

 
1,632

 
1,687

Coinamatic Canada, Inc. (4)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1.0% floor, due 5/14/2023) (3)
 
596

 
592

 
592

Shoreline Energy, LLC
 
Oil & Natural Gas Production and Development
 
Second Lien Term Loan (greater of LIBOR+9.25% with a 1.25% floor plus 2.0% PIK, or prime+8.25%, due 3/30/2019) (5)(11)
 
13,115

 
12,659

 

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (12)
 
 

 

 

Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
$
168,619

 
$
113,394

Subtotal Portfolio Investments (70.4% of total investments)
 
 

 
$
204,714

 
$
131,118

 
 
 
 
 
 
 
 
 
 
 
GOVERNMENT SECURITIES
U.S. Treasury Bills (14)
 
 
 
 
 
55,000

 
55,000

 
55,000

Subtotal Government Securities (29.6% of total investments)
 
 

 
$
55,000

 
$
55,000

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
259,714

 
$
186,118


 (See accompanying notes to consolidated financial statements)

9



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
September 30, 2016
(In thousands, except share amounts and percentages)
(Unaudited — Continued)
 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)  
We pledged all of our portfolio investments as collateral for obligations under our Credit Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of September 30, 2016 , and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2)  
The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(3)  
Fair value is determined using prices with observable market inputs (Level 2 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.
(4)  
We have determined that this investment is not a “qualifying asset” under Section 55(a) of the Investment Company Act of 1940, or 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 asset classifications on an ongoing basis.
(5)  
Investment on non-accrual status and therefore non-income producing.
(6)  
Non-income producing equity securities.
(7)  
Effective December 31, 2015, we executed a fourth amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to waive several defaults and amend covenant limits in exchange for increases in the interest rate to LIBOR+12% cash with a 1% floor, plus 3% payment-in-kind, or PIK. Also, default interest of $0.1 million was added to the principal balance on January 1, 2016.
(8)  
By the terms of our original investment, upon redemption, we were due the outstanding face amount of $50 million, any unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or make-whole (inclusive of the 8% cash distributions even if not paid), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex (0.67% net to us).  Castex elected to pay us in PIK for more than two consecutive quarters, causing the return on the initial make-whole calculation to first increase from 12% to 13.5%.  Preferred unit holders had a put right starting on July 1, 2016, which we exercised on that date with respect to all of our preferred units. Castex Energy 2005, LP, or Castex, had 90 days from the receipt of the put notice to redeem.  Castex did not redeem the preferred units within 90 days of the receipt of the put notice. As a result, the make-whole of 13.5% further increased by 4.5%, to 18%, we are entitled to board observation rights as a preferred unit holder, and other covenants apply. If the preferred units are not redeemed within one year from the originally scheduled put closing date (which would be September 29, 2017), Castex and the limited partners must use commonly reasonable efforts to enter into, within 90 days, a 12% dollar denominated production payment transaction with the preferred unit holders exercising the put right, with a 3 year term for such production payment. If such production payment transaction is not consummated within 90 days, Castex must use all available resources to repay preferred interests and the preferred return steps up to 25% from that point forward. Amounts shown for principal and cost include PIK dividends that have been added to the principal balance.
(9)  
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments, and income is recognized to the extent cash received.
(10)  
For more information on ATP, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(11)  
Effective June 24, 2015, we executed a third amendment to our credit agreement with Shoreline Energy, LLC, or Shoreline, to amend certain covenant limits in exchange for increases in Shoreline's interest to the greater of LIBOR+9.25% with a 1.25% floor or prime+8.25% with a 1.25% floor, effective after March 31, 2015. The third amendment also included the addition of 0.50% PIK interest effective after June 30, 2015. Effective September 23, 2015, we executed a fourth amendment to our credit agreement with Shoreline to increase PIK interest to 1.75%. Effective October 22, 2015, we executed a fifth amendment to our credit agreement with Shoreline which included an addition of 0.25% PIK, four quarters of deferred amortization beginning in the fourth quarter of 2015, and amendments to the leverage and minimum interest coverage ratios. In 2016, Shoreline defaulted and is no longer paying us cash interest. On November 2, 2016, Shoreline filed for Chapter 11 Bankruptcy.

10




(12)  
Contingent payment of up to $6.8 million was dependent upon Alden Resources, LLC’s achievement of 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; however, Globe BG, LLC had informally advised us that the company’s relative cost of production has not improved between July 2011 and July 2014.
(13)  
On August 10, 2016 the margin was amended to be increased from LIBOR+8.25% with a 1% floor to LIBOR+9.25% with a 1% floor.
(14)  
Fair value is determined using prices for identical securities in active markets (Level 1 hierarchy). See Note 7 of Notes to Consolidated Financial Statements.

(See accompanying notes to consolidated financial statements)

11



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(In thousands, except share amounts and percentages)

Portfolio Company
 
Industry
Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
Control Investments - (More than 25% owned)
Contour Highwall Holdings, LLC
 
Coal Mining
 
Senior Secured Term Loan (12%, due 10/14/2015) (6)
 
$
10,757

 
$
10,778

 
$
1,000

Contour Highwall Holdings, LLC
 
Coal Mining
 
 Unsecured Promissory Note (6%, due 4/11/2016) (6)
 
800

 
800

 

Contour Highwall Holdings, LLC
 
Coal Mining
 
800 Membership Units representing 80% of the common equity (7)(15)
 


 

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche A - Senior Secured Term Loan (greater of 8% or LIBOR+4.0%, due
4/28/2015) (6)
 
4,657

 
4,621

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
Tranche B - Senior Secured Term Loan (greater of 15% PIK or LIBOR+11.0%, due 10/28/2015) (6)
 
4,409

 
4,409

 

Spirit Resources, LLC
 
Oil & Natural Gas
Production and Development
 
80,000 Preferred Units representing 100% of the outstanding equity (15)
 
 

 
8,000

 

Subtotal Control Investments - (More than 25% owned)
 
 

 
$
28,608

 
$
1,000

 
 
 
 
 
 
 
 
 
 
 
Affiliate Investments - (5% to 25% owned)
OCI Holdings, LLC
 
Home Health Services
 
Subordinated Note (LIBOR+ 12.0% cash with a 1% floor plus 3% PIK, due
8/15/2018) (8)(9)
 
$
16,310

 
$
16,147

 
$
16,310

OCI Holdings, LLC
 
Home Health Services
 
100% of Class A Units in OHA/OCI Investments, LLC representing 20.8% diluted ownership of OCI Holdings, LLC (15)
 
 

 
2,500

 
2,583

 
 
 

 
$
18,647

 
$
18,893

 
 
 
 
 
 
 
 
 
 
 
Non-affiliate Investments - (Less than 5% owned)
Castex Energy 2005, LP
 
Oil & Natural Gas
Production and Development
 
Redeemable Preferred LP Units (current pay 8% cash or 10% PIK, due 7/1/2016) (10)
 
$
51,265

 
$
51,273

 
$
43,939

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+8.25% with a 1% floor, due 5/21/2021)
 
13,100

 
12,925

 
12,314

Kronos Incorporated
 
Software
 
Second Lien Term Loan
(LIBOR+8.50% with a 1.25% floor, due 4/30/2020) (3)
 
$
12,000

 
$
12,145

 
$
11,985

ATP Oil & Gas Corporation/Bennu Oil & Gas, LLC
 
Oil & Natural Gas
Production and Development
 
Limited Term Royalty Interest (notional rate of 13.2%) (11)(12)
 
 
 
27,709

 
11,845

WP Mustang (Electronic Funds Services, LLC)
 
Financial Services
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 5/29/2022) (3)
 
10,000

 
9,843

 
10,038

(See accompanying notes to consolidated financial statements)

12



CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(In Thousands, Except Share Amounts and Percentages)
(Continued)
Portfolio Company
 
Industry Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
 
 
 
 
 
 

 
 

 
 

Non-affiliate Investments - (Less than 5% owned) - Continued
Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 6/19/2023) (3)
 
10,000

 
9,926

 
9,850

Shoreline Energy, LLC
 
Oil & Natural Gas Production and Development
 
Second Lien Term Loan (greater of LIBOR+9.25% with a 1.25% floor plus 2.0% PIK, or prime+8.25%, due 3/30/2019) (13)
 
12,918

 
12,640

 
9,040

TIBCO Software, Inc.
 
Software
 
Senior Unsecured Notes
(11.38% due 12/1/2021) (3)
 
10,100

 
9,707

 
8,446

KOVA International, Inc.
 
Medical Supplies Manufacturing and Distribution
 
Senior Subordinated Notes (12.75%, due 8/15/2018)
 
9,000

 
8,898

 
7,920

Stardust Financial Holdings (Hanson)
 
Building Materials
 
Second Lien Term Loan (LIBOR+9.5% with a 1% floor, due 3/13/2023) (3)
 
7,500

 
7,114

 
7,238

Gramercy Park CLO Ltd. (5)
 
Financial Services
 
Subordinated Notes, Residual Interest (11.95%, based on cost, due 7/17/2023) (3)
 
9,000

 
6,327

 
5,659

Berlin Packaging
 
Packaging
 
Second Lien Term Loan
(LIBOR+6.75% with a 1% floor, due 10/1/2022) (3)
 
5,500

 
5,226

 
5,253

Talos Production, LLC
 
Oil & Natural Gas
Production and Development
 
Senior Unsecured Notes (9.75%, due 2/15/2018) (3)
 
12,000

 
11,965

 
5,160

WASH Multifamily Acquisition, Inc.
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/2023) (3)
 
3,404

 
3,380

 
3,225

Synarc-BioCore Holdings, LLC
 
Healthcare
 
First Lien Senior Secured Notes (7.75% due 3/10/2021)
 
2,400

 
2,342

 
2,340

Coinamatic Canada, Inc (5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 5/14/2023) (3)
 
596

 
592

 
565

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (14)
 
 
 

 

 
 
 
 
 
 
 
 
 
 
 
Subtotal Non-affiliate Investments - (Less than 5% owned)
 
 

 
192,012

 
154,817

Subtotal Portfolio Investments (83.3% of total investments)
 
 

 
239,267

 
174,710

 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills (4)
 
 
 
 
 
35,000

 
34,997

 
34,997

Subtotal Government Securities (16.7% of total investments)
 
 

 
34,997

 
34,997

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
274,264

 
209,707

 
(See accompanying notes to consolidated financial statements)

13




OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2015
(Continued)
 
NOTES TO CONSOLIDATED SCHEDULE OF INVESTMENTS
 
(1)  
We pledged all of our portfolio investments, except our investments in U.S. Treasury Bills, as collateral for obligations under our Investment Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of December 31, 2015, and due dates represent the contractual maturity dates. Warrants, common stock, units and earn-outs are non-income producing securities, unless otherwise stated.
(2)  
The Audit Committee recommends fair values of each asset to our Board of Directors, which in good faith determines the final fair value for each investment. Fair value is determined using unobservable inputs (Level 3 hierarchy), unless otherwise stated. See Note 7 of Notes to Consolidated Financial Statements.
(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 Investment Company Act of 1940, or 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 asset classifications on an ongoing basis.
(6)  
Investment on non-accrual status and therefore non-income producing.
(7)  
The fair value of our Contour Highwall Holdings, LLC, or Contour, membership units also includes any value attributable to our ownership of 8,000 shares of common stock of Bundy Auger Mining, Inc., an affiliate of Contour.
(8)  
Effective July 9, 2014, we executed a third amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to amend certain covenant limits in exchange for increases in OCI’s interest to LIBOR+11% cash with a 1% floor, plus 3% payment-in-kind, or PIK.
(9)  
Effective December 31, 2015, we executed a fourth amendment to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to waive several defaults and amend covenant limits in exchange for increases in OCI's interest to LIBOR+12% cash with a 1% floor, plus 3% PIK. Also, default interest of $0.1 million was added to the principal balance on January 1, 2016.
(10)  
By the terms of our original investment, upon redemption, we were due the outstanding face amount of $50 million, any unpaid and accrued dividends, plus an option to elect to receive either: a) a cash payment resulting in a total 12% return or make-whole (inclusive of the 8% cash distributions even if not paid), or b) our pro rata share of 2% of the outstanding regular limited partner interests in Castex (0.67% net to us).  Castex elected to pay us in PIK for more than two consecutive quarters, causing the return on the initial make-whole calculation to first increase from 12% to 13.5%.  Preferred unit holders had a put right starting on July 1, 2016, which we exercised on that date with respect to all of our preferred units.  Castex Energy 2005, LP, or Castex, had 90 days from the receipt of the put notice to redeem.  Castex did not redeem the preferred units within 90 days of the receipt of the put notice. As a result, the make-whole of 13.5% further increased by 4.5%, to 18%, we are entitled to board observation rights as a preferred unit holder, and other covenants apply. If the preferred units are not redeemed within one year from the originally scheduled put closing date (which would be September 29, 2017), Castex and the limited partners must use commonly reasonable efforts to enter into, within 90 days, a 12% dollar denominated production payment transaction with the preferred unit holders exercising the put right, with a 3 year term for such production payment. If such production payment transaction is not consummated within 90 days, Castex must use all available resources to repay preferred interests and the preferred return steps up to 25% from that point forward. Amounts shown for principal and cost include PIK dividends that have been added to the principal balance.
(11)  
Effective July 1, 2015, ATP was placed on non-accrual status based on estimated future production payments and income is recognized to the extent cash received.
(12)  
For more information on ATP, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(13)  
Effective June 24, 2015, we executed a third amendment to our credit agreement with Shoreline Energy, LLC, or Shoreline, to amend certain covenant limits in exchange for increases in Shoreline's interest to the greater of LIBOR+9.25% with a 1.25% floor or prime+8.25% with a 1.25% floor, effective after March 31, 2015. The third amendment also included the

14



addition of 0.50% payment-in-kind, or PIK, interest effective after June 30, 2015. Effective September 23, 2015, we executed a fourth amendment to our credit agreement with Shoreline to increase PIK interest to 1.75%. Effective October 22, 2015, we executed a fifth amendment to our credit agreement with Shoreline which included an addition of 0.25% PIK, four quarters of deferred amortization beginning in Q4 2015, and amendments to the leverage and minimum interest coverage ratios.
(14)  
Contingent payment of up to $6.8 million was dependent upon Alden Resources, LLC’s achievement of 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; however, Globe BG, LLC had informally advised us that the company’s relative cost of production has not improved between July 2011 and July 2014.
(15)  
Non-income producing equity securities.
(See accompanying notes to consolidated financial statements)

15



OHA INVESTMENT CORPORATION
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
 
For the nine months ended September 30,
Per Share Data (1)
2016
 
2015
 
 
 
 
Net asset value, beginning of period
$
5.49

 
$
7.48

Net investment income, net of tax
0.24

 
0.33

Net realized and unrealized loss on investments (2)
(0.94
)
 
(0.78
)
Net decrease in net assets resulting from operations
(0.70
)
 
(0.45
)
Distributions to common stockholders
 

 
 

Distributions from net investment income
(0.18
)
 
(0.36
)
Net decrease in net assets from distributions
(0.18
)
 
(0.36
)
Effect of shares repurchased, gross
$

 
$
0.04

Net asset value, end of period
$
4.61

 
$
6.71

 
 
 
 
Market value, beginning of period
$
3.80

 
$
4.69

Market value, end of period
$
3.14

 
$
4.23

Market value return (3)(4)
(12.0
)%
 
(3.4
)%
 
 
 
 
Ratios and Supplemental Data
 

 
 

($ and shares in thousands)
 

 
 

Net assets, end of period
$
92,988

 
$
135,406

Average net assets
$
102,171

 
$
148,429

Common shares outstanding, end of period
20,172

 
20,172

Total operating expenses and taxes/average net assets (5)(6)
11.7
 %
 
8.3
 %
Net investment income, net of tax/average net assets (5)
6.4
 %
 
6.1
 %
Portfolio turnover rate
1.1
 %
 
9.2
 %
 
 
 
 
Expense Ratios (as a percentage of average net assets) (5)
 

 
 

Interest expense and bank fees
3.7
 %
 
2.3
 %
Management and incentive fees
3.4
 %
 
2.1
 %
Other operating expenses and taxes (6)
4.6
 %
 
3.9
 %
Total operating expenses (6)
11.7
 %
 
8.3
 %
 
(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)  
Total return is based on the change in market price per share during the respective periods. Total return calculations take into account distributions, if any, reinvested in accordance with the Company's dividend reinvestment plan and do not reflect brokerage commissions.
(4)  
Not annualized.
(5)  
Annualized.
(6)  
Net of legal fee reimbursements of $0 million and $0.5 million for the nine months ended September 30, 2016 and 2015 , respectively. Excluding these legal fee reimbursements, other operating expenses and total operating expenses ratios would have been 4.3% and 8.6%, respectively, for the nine months ended September 30, 2015 . See Note 6 of Notes to Consolidated Financial Statements.

(See accompanying notes to consolidated financial statements)

16



OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(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 (collectively “we,” “us,” “our” and “OHAI”). 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 that at times may have 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, as amended, 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. See Note 4.
 
Note 2: Basis of Presentation
 
These interim unaudited consolidated financial statements include the accounts of OHAI and its consolidated subsidiaries. We eliminate all significant intercompany accounts and transactions upon consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
 
We prepare the interim consolidated financial statements in accordance with accounting principles generally accepted in United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission. The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 946, Financial Services - Investment Company ("ASC 946"). We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with 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 or any other interim period. You should read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 .
 
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 materially 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 so that substantially all of our net taxable income is distributed on an annual basis. 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

17


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

determines the distribution amount, if any. We generally declare our distributions each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:
Declaration Date
 
Per Share
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
June 10, 2015
 
0.12

 
June 30, 2015
 
July 9, 2015
September 17, 2015
 
0.12

 
September 30, 2015
 
October 7, 2015
December 11, 2015
 
0.12

 
December 31, 2015
 
January 8, 2016
March 15, 2016
 
0.06

 
March 31, 2016
 
April 8, 2016
June 7, 2016
 
0.06

 
June 30, 2016
 
July 8, 2016
September 15, 2016
 
0.06

 
September 30, 2016
 
October 7, 2016

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03 Interest - Imputation of Interest (“ASU 2015-03”). The pronouncement requires that debt issuance costs related to a recognized debt liability be presented in the consolidated statement of assets and liabilities as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amendment becomes effective for financial statements issued for fiscal years that begin after December 15, 2015. This guidance is applicable to the Company as of September 30, 2016 and there are no effects to information presented or disclosed in prior periods.

Note 3: Credit Facilities and Borrowings
 
We are party to a new Credit Agreement, dated September 9, 2016, with MidCap Financial, which replaced our existing Third Amended and Restated Revolving Credit Agreement (the "Investment Facility"), dated May 23, 2013, as amended. As of September 9, 2016, the size of the secured term loan credit facility (the "Credit Facility") was $56.5 million with a maturity date of March 9, 2018, which can be extended for a six-month period at our option. The initial proceeds of $40.5 million from the Credit Facility were used to pay off the $38.5 million outstanding balance on our previous Investment Facility, pay transaction expenses and provide balance sheet cash. The remaining $16.0 million consists of a delayed draw term loan, which is committed for one year, and is available to us to grow our investment portfolio and operate our business.
As of September 30, 2016, the total amount outstanding under the Credit Facility was $40.5 million with $16.0 million available to draw. The total amount outstanding on the Credit Facility is shown net of unamortized debt issuance costs of $1.7 million on our Consolidated Balance Sheet as of September 30, 2016. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Credit Facility. The Credit Facility bears an interest rate of LIBOR plus 5.35% for Eurodollar Loans, subject to a 1% LIBOR floor, and Base Rate plus 4.35% for Base Rate Loans. As of September 30, 2016, the average interest rate on our outstanding balance of $40.5 million was 6.35%.
The Credit Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants from the date of the new Credit Agreement through September 30, 2016, and had no existing defaults or events of default under the Credit Facility. The financial covenants, with terms as defined in the Credit Agreement, are:
 
maintain a Maximum Debt to Tangible Net Worth Ratio of not more than 0.80:1.00,
maintain at all times a Minimum Liquidity in the form of Cash or Cash Equivalents of at least $1.0 million,
maintain a Debt to Fair Market Value Ratio of not more than 0.50:1.00 at any time, and
maintain the Fair Market Value of Liquid Portfolio Investments as a percentage of outstanding aggregate principal balance to not be less than 80% through March 9, 2017, 90% through September 9, 2017 and 100% through March 9, 2018.

18


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)


We were party to a $72.0 million Investment Facility, which went through a series of amendments to extend its maturity date and was paid down and extinguished on September 9, 2016. On May 9, 2016, we amended the Investment Facility to extend the maturity date from May 23, 2016 to July 29, 2016 (the "Extension"), and reduce the size of the Investment Facility from $72.0 million to $54.0 million. Under the Extension, we were required to use cash proceeds from any returns of capital on our portfolio investments to prepay our debt obligations under the Investment Facility. We were also permitted to accrue but were prohibited from paying management or incentive fees (excluding reimbursements to OHA for costs and expenses, or indemnification payments owed to OHA) to OHA under our Investment Advisory Agreement or Administration Agreement.
On July 28, 2016, we amended our existing Investment Facility to extend its maturity date from July 29, 2016 to September 15, 2016 (the “July Extension”). The July Extension contained substantially identical terms and conditions to the prior extension granted on May 9, 2016, but with the addition of the following: (i) a reduction of the size of the Investment Facility from $54.0 million to $42.3 million, reflecting the outstanding principal balance on July 26, 2016 and (ii) an increase in the margin rate applicable to Eurodollar Loans and Base Rate Loans to 5.25%.
As of December 31, 2015, the total amount outstanding under the Investment Facility was $72.0 million. Substantially all of our assets, except our investments in U.S. Treasury Bills, were pledged as collateral for the obligations under the Investment Facility. The Investment Facility bore interest, at our option, at either (i) LIBOR plus 3.25% to 4.75%, or (ii) the base rate plus 2.25% to 3.75%, both based on our amounts outstanding.
We were party to a $30.0 million Treasury Secured Revolving Credit Agreement, or the Treasury Facility, dated March 31, 2011, as amended, with SunTrust Bank as administrative agent, that could only be used to purchase U.S. Treasury Bills. Proceeds from the Treasury Facility facilitated the growth of our investment portfolio and provided flexibility in the sizing of our portfolio investments. On September 24, 2014, we entered into a fifth amendment to the Treasury Facility, 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 bore interest, at our option, at either (i) LIBOR plus 150 basis points or (ii) the base rate plus 50 basis points. The Treasury Facility matured on September 24, 2015 and was not renewed.
The Investment Facility and the Treasury Facility contained affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants throughout 2015 and the period ended September 9, 2016, 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 (these restrictive covenants apply to both the Investment Facility and the Treasury Facility, unless otherwise noted):
 
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.

On September 30, 2016, we purchased $55.0 million of U.S. Treasury bills and contemporaneously entered into a repurchase arrangement with Jefferies LLC, or Jefferies, to finance such purchase. Under the repurchase arrangement, we transferred $55.0 million of U.S. Treasury bills and $1.1 million of cash to Jefferies as collateral under the repurchase agreement. We repaid the amount borrowed under the repurchase agreement, and Jefferies returned to us the $1.1 million cash collateral, net of a $8 thousand financing fee, upon maturity of the U.S. Treasury bills on October 6, 2016. We account for the transfer of the U.S. Treasury bills under the repurchase agreement as a secured borrowing. As a result, the U.S. Treasury bills are recorded on our books as investments in U.S. Treasury bills, and the amount borrowed under the repurchase agreement is recorded as short-term debt at September 30, 2016.


Note 4: Investment Management

19


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

 
Investment Advisory Agreement
 
On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Advisers Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. Following an initial two-year term, the term of the Investment Advisory Agreement is for successive one-year periods, provided such continuation is annually approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us. Such approval was granted on August 2, 2016. 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.
 
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. For the three months ended September 30, 2016 and 2015 , we incurred $0.7 million and $0.8 million, respectively, in base management fees. For the nine months ended September 30, 2016 and 2015 , we incurred $2.3 million and $2.2 million, respectively, in base management fees.
 
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 distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-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. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of 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. For the three months ended September 30, 2016 we incurred $181,000 in investment income incentive fees and for the three months ended September 30, 2015 we did not incur an investment income incentive fee. For the nine months ended September 30, 2016 and 2015 , we incurred $281,000 and $139,000, respectively, of investment income incentive fees.
 
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 September 30, 2014 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 a vote of the holders of at least a majority of our outstanding voting securities (within the meaning of

20


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

the 1940 Act) on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). OHA may terminate the Investment Advisory Agreement without penalty by providing us at least 60 days’ written notice.
 
Administration Agreement
 
On September 30, 2014, we entered into the 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 had an initial two-year term and, on August 2, 2016, its continuation for an additional one-year period was approved by the Board. 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 was capped at $2.5 million, or the Cap; provided that 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 we 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 $0.2 million and $0.2 million to OHA under the Administration Agreement as of September 30, 2016 and December 31, 2015 , 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
 
As of September 30, 2016 , we had investments in 16 portfolio companies totaling $204.7 million . Of these 16 investments, the Company had already funded investments in the amount of $204.7 million and there were no remaining outstanding unfunded commitments. As of December 31, 2015, we had investments in 19 portfolio companies totaling $239.3 million . Of these 19 investments, the Company had already funded investments in the amount of $239.3 million and there were no remaining outstanding unfunded commitments.

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

21


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

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.
 
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). Credit Suisse, AG, or CS, and The Bank of New York Mellon Trust Company, N.A., or BONY, which held mortgages on ATP’s interests in the Gomez and Telemark properties at the time of the conveyances, executed certain Acts of Subordination of their liens in our favor. 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 ORRI holders 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.

On October 17, 2012, we filed a lawsuit against ATP styled: OHA Investment Corporation 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 claimed, among other things, that the ORRIs were a financing agreement and not a real property interest and that ATP was entitled to disgorge from us any and all royalties paid since the date of ATP’s bankruptcy filing. Also, certain service companies claiming statutory liens or privileges intervened for the purpose of establishing that their alleged statutory liens and privileges are superior to our rights in the ORRIs and asserting related claims for disgorgement of royalties paid to us by ATP. The issues in the Adversary Proceeding were 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, would be tried first as “Phase 1” of the proceeding. And, any additional claims, including the service company statutory lien claims and related issues, would be decided later in “Phase 2.” Phase 1 of the litigation proceeded into the discovery stage and dispositive motion practice.

In connection with an auction and various proceedings in the bankruptcy case, CS, 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, submitted a Credit Bid - or bid based on a reduction in the amount of ATP’s outstanding indebtedness to CS - to purchase the Telemark properties and certain other assets. On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale (Bankr. Dkt. No. 2706) to Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders. The assets purchased included claims asserted by ATP in our pending Adversary Proceeding.
 
On May 20, 2014, Bennu substituted into the Adversary Proceeding for ATP with respect to any claims that relate to assets purchased from ATP. And, on June 26, 2014, the bankruptcy court entered an order converting ATP’s bankruptcy case to

22


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

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.

Subsequently, a series of disputes arose in the main bankruptcy case and the Adversary Proceeding between us, Bennu, and the Trustee regarding who owned and/or held the right to prosecute and finally resolve the claims that were asserted by ATP against us.

     On October 14, 2015, we entered into a Stipulation of Settlement and Release with the Trustee, Bennu and CS, as agent to the DIP Lenders (Adv. Dkt. No. 270, 271). Pursuant to the Stipulation, in exchange for a cash payment of $335,000 and a $3.0 million reduction/credit on the outstanding indebtedness owed by ATP to CS, the Trustee agreed (i) to dismiss any and all claims against us with prejudice, (ii) to release us from any and all claims of any nature; and (iii), among other things, that he shall not contest that 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. The Trustee is deemed to have transferred to CS any rights he holds in claims arising under section 549 of the Bankruptcy Code, and CS and the DIP Lenders, in turn, released us from such claims. In exchange for the agreements of the Trustee and CS, we agreed to prosecute a motion to dismiss our claims against the Trustee without prejudice We released CS and the DIP Lenders from any claims relating to the ORRIs and our transaction documents, including the Acts of Subordination which were executed by CS in connection with the conveyance of the ORRIs. Prior to entering the Stipulation of Settlement and Release with the Trustee, we entered into a Settlement and Release Agreement with Bennu pursuant to which, in exchange for the entry of an Agreed Judgment, we agreed to withdraw and/or release Bennu from certain claims including our claim for breach of the Acts of Subordination. On December 14, 2015, the Court entered its order approving the Stipulation, and it dismissed the Trustee’s claims with prejudice. On February 4, 2016, an Agreed Final Judgment [Adv. Dkt. No. 276] was entered 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. Likewise, our claims against ATP were dismissed without prejudice. The Agreed Judgment resolved Phase 1 of the Adversary Proceeding. It did not address any disputes between us and Bennu with respect to the proper calculation of the investment balance under the terms of the ORRIs, including our legal fees, default interest, or the claims asserted by the statutory lien claimants.

On February 3, 2016, we filed our Amended Motion to Dismiss the Complaints in Intervention Filed by the Statutory Lien Claimants [Adv. Dkt. No. 274], which was subsequently amended pursuant to a briefing schedule set by the Court [Adv. Dkt. No. 284]. The Amended Motion to Dismiss asserted, among other things, that under the terms of the applicable Louisiana Oil Well Lien Statute, the alleged statutory liens of the lien claimants either cannot attach to overriding royalties, or alternatively, that OHA purchased the ORRIs free and clear of the statutory liens because the lien claimants did not provide notice of the liens as required under the statute. We also filed a Motion to Withdraw the Reference of the Phase II Claims from the Bankruptcy Court to the District Court [Adv. Dkt. No. 278]. The lien claimants filed responses to the Amended Motion to Dismiss and the Motion to Withdraw the Reference. On May 13, 2016, the Court entered its order granting in part and denying in part OHA’s Motion to Dismiss and Motion to Withdraw Reference [Adv. Dkt. No. 294] and its Report and Recommendation and Memorandum Opinion [Adv. Dkt. No. 293]. Pursuant to the Memorandum Opinion and the order, the Court determined that under the Louisiana statute, if we purchased our ORRIs without notice of the lien claimants liens, in a bona fide transaction, we would take the ORRIs free and clear of the lien claimants’ rights [Adv. Dkt. No. 293 at 13]. The Court granted the lien claimants leave to file amended complaints to specifically plead whether we had notice of their alleged privileges at the time we paid the purchase price. To that end, the Court stated that the Amended Motion to Dismiss was denied as to all issues other than the issue of whether we had notice of the lien claimants’ liens and that the Court would review the amended complaints (to determine whether they sufficiently pleaded a claim) [Adv. Dkt. No. 294]. Pursuant to the Report and Recommendation and Memorandum Opinion, the Bankruptcy Court recommended that the District Court grant the Motion to Withdraw the Reference, but that the Adversary Proceeding remain in the Bankruptcy Court until the time of trial. After certain clarifying orders were entered by the Bankruptcy Court (in response to our motion [Adv. Dkt. No. 306]) relating to its Report and Recommendation and Memorandum Opinion, the District Court entered an order consistent with the Bankruptcy Court’s recommendation on the Motion to Withdraw the Reference.

On May 27, 2016, the Intervenors filed their amended complaints, which made new allegations with respect to the issue of notice. Accordingly, on June 9, 2016, we filed our Motion to Dismiss the amended complaints [Adv. Dkt. No. 310] asserting that the allegations regarding notice are insufficient to state a claim under the statute. On June 30, 2016, the lien

23


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

claimants filed their Response [Adv. Dkt. No. 316] in opposition to our Motion to Dismiss. On July 18, 2016, we filed our Reply in Support of the Motion to Dismiss [Adv. Dkt. No. 317].

On August 19, 2016, the Bankruptcy Court entered its order [Adv. Dkt. No. 325] and its related Report and Recommendation [Adv. Dkt. No. 326] dismissing, with prejudice, the Intervenors’ amended complaints. The Bankruptcy Court’s order and the related Report and Recommendation recommends, to the District Court, that Phase II of the lawsuit be fully resolved in our favor. The Report and Recommendation was docketed in the United States District Court for the Southern District of Texas, Case No. 4:16-CV-02556. On September 2, 2016, certain of the Intervenors filed their Objection to Judge Isgur’s Report and Recommendation [Dist. Dkt. No. 3] arguing that the Bankruptcy Court’s conclusions were erroneous, and that the Intervenors were not required to give notice to OHA in order for their alleged liens to attach. We filed a limited objection to the Report and Recommendation arguing that the Report and Recommendation should be affirmed, but even if notice was not required under the statute, the Intervenors’ alleged liens could not have attached to the ORRIs in the first instance. The Intervenors filed a joint response [Dist. Dkt. No. 4] to our limited objection on September 15, 2016 and we filed a response to the Intervenors’ objection on September 16, 2016. We also filed a reply in support of our limited objection on September 27, 2016. The District Court has scheduled an oral argument on the parties’ objections to the Report and Recommendation to be held on November 29, 2016, at 10:00 a.m.

The dismissal of the lawsuit by the Bankruptcy Court remains subject to the District Court's review. As of September 30, 2016 , our unrecovered investment was $30.3 million , and we had received aggregate royalty payments of $37.1 million since the date of ATP’s bankruptcy filing. As of September 30, 2016 , we had incurred legal and consulting fees totaling $5.9 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. As a result, we add our legal expenses to the unrecovered investment balance in accordance with our transaction documents. As of September 30, 2016 , $5.4 million of the $5.9 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 have been expensed to legal fees, of which $25,000 and $261,000 as of September 30, 2016 and December 31, 2015, 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.
    
Through September 30, 2016 , we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $28.8 million , respectively. It is estimated that the statutory lien claims asserted by the 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 the 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 pre-petition 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.


24


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

On August 11, 2016, an involuntary Chapter 11 bankruptcy petition was filed by Beal Bank USA against Bennu Titan LLC (formerly known as ATP Titan LLC), an indirect subsidiary of Bennu Oil & Gas, LLC, and the owner of the floating production platform in the Gulf of Mexico that processes and transports hydrocarbons produced from the Telemark properties, in which OHA owns the ORRI. An order for relief was entered on September 9, 2016, in the case styled In re Bennu Titan LLC (f/k/a ATP Titan LLC), Case No. 16-11870, in the United States Bankruptcy Court for the District of Delaware. We are not a creditor in this bankruptcy case, and it is unknown whether this case will have any effect on OHA’s ORRI or the related royalty payments.

Note 7: Fair Value
 
Our investments consisted of the following as of September 30, 2016 and December 31, 2015 :
 
 
 
September 30, 2016
 
December 31, 2015
(Dollar amounts in thousands)
 
Cost
 
% of total
 
Fair Value
 
% of total
 
Cost
 
% of total
 
Fair Value
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

First lien secured debt
 
$
11,379

 
4.5
%
 
$
2,520

 
1.3
%
 
$
22,150

 
8.1
%
 
$
3,340

 
1.7
%
Second lien debt
 
56,405

 
21.7
%
 
44,153

 
23.7
%
 
73,791

 
26.9
%
 
69,508

 
33.1
%
Subordinated debt
 
38,283

 
14.7
%
 
31,240

 
16.8
%
 
47,517

 
17.3
%
 
37,836

 
18.0
%
Limited term royalties
 
27,845

 
10.7
%
 
12,286

 
6.6
%
 
27,709

 
10.1
%
 
11,845

 
5.6
%
Redeemable preferred units
 
54,783

 
21.1
%
 
34,706

 
18.6
%
 
51,273

 
18.7
%
 
43,939

 
21.0
%
CLO residual interests
 
5,519

 
2.1
%
 
5,175

 
2.8
%
 
6,327

 
2.3
%
 
5,659

 
2.7
%
Equity securities
 
10,500

 
4.0
%
 
1,038

 
0.6
%
 
10,500

 
3.8
%
 
2,583

 
1.2
%
Total portfolio investments
 
204,714

 
78.8
%
 
131,118

 
70.4
%
 
239,267

 
87.2
%
 
174,710

 
83.3
%
Government securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
55,000

 
21.2
%
 
55,000

 
29.6
%
 
34,997

 
12.8
%
 
34,997

 
16.7
%
Total investments
 
$
259,714

 
100.0
%
 
$
186,118

 
100.0
%
 
$
274,264

 
100.0
%
 
$
209,707

 
100.0
%
 
We account for all of the assets in our investment portfolio at fair value, following the provisions of the FASB ASC 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 recommendations for all of the assets in our portfolio in accordance with ASC 820 and presents them to the Audit Committee of our Board of Directors. The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment.
 
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.

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. 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 to provide positive assurance on our valuations.


25


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

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.

Board of Directors and Audit Committee. The Board of Directors and the Audit Committee 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.

Final Valuation Determination. Our Board of Directors discusses the fair values recommended by the Audit Committee and determines the fair value of each investment in our portfolio for which market quotations are not readily available, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee 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 regarding what 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 September 30, 2016 or December 31, 2015. Amounts outstanding under our Credit Facility are carried at amortized cost in the Consolidated Balance Sheets. As of September 30, 2016, the estimated fair value of our Credit Facility approximated its carrying value of $39.3 million. As of December 31, 2015, the carrying value of our Investment Facility was $72.0 million and the estimated fair value was $69.3 million. The estimated fair value of the Credit Facility is determined by discounting projected remaining payments using market interest rates for borrowings of the Company.
 
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 and fair value estimates, using the most recently available financial statements, forecasts and, when applicable, comparable transaction data. These valuation analyses rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.
The methodologies for determining asset valuations include estimates based on: the liquidation or sale value of a portfolio company’s assets, the discounted value of expected future net cash flows from the assets and third party valuations of a portfolio company’s assets, such as asset appraisal reports, futures prices and engineering reserve reports of oil and natural gas properties. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated asset value of a portfolio company.
The methodologies for determining enterprise valuations include estimates based on: valuations of comparable companies, recent sales of comparable companies, the value of recent investments in the equity securities of a portfolio

26


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

company and on the methodologies used for asset valuations. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated enterprise value of a portfolio company.
The methodologies for determining estimated current market values of comparable securities include estimates based on: recent initial offerings of comparable securities of public and private companies; recent secondary market sales of comparable securities of public and private companies; current market implied interest rates for comparable securities in general; and current market implied interest rates for non-comparable securities in general, with adjustments for such elements as size of issue, terms, and liquidity. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated current market value of a comparable security.
For some of our securities, quoted prices in active markets for identical assets (Level 1 valuation inputs) or other significant observable inputs, including quoted prices of similar securities, interest rates, prepayments, credit risk, etc. (Level 2 valuation inputs) are readily available from independent sources and are used to value such securities. For other securities, there will be no readily available Level 1 or Level 2 pricing information, and therefore significant unobservable inputs (Level 3 valuation inputs), including the assumptions of OHA, must be relied upon in determining fair value for these securities.
If prices or quotes for securities are either not readily available, or a price or quote is deemed not reflective of the security’s fair market value, we employ a fair valuation technique for that security. In determining the fair value of a security, we may take into consideration (either individually or in combination) the financial condition and operating results of the underlying portfolio company, nature of the investment, restrictions on marketability, liquidity, market conditions, earnings multiple analyses using comparable companies, discounted cash flow analyses, appraisals, and other factors we deem appropriate.

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 distributions, even though we have not yet collected the cash. We recorded net PIK interest income of $0.1 million and $0.1 million in the three months ended September 30, 2016 and 2015 , respectively, and $0.4 million and $1.1 million in the nine months ended September 30, 2016 and 2015 , respectively. We recorded PIK dividend income from our investment in Castex Energy 2005, LP, of $1.0 million and $3.5 million for the three and nine months ended September 30, 2016 , respectively, and did not record any PIK dividend income in the three and nine months ended September 30, 2015 .


27


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

The following tables set forth the fair value of our investments by level within the fair value hierarchy as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Affiliate investments
 
 
 
 
 
 
 
 
Subordinated debt
 
$
16,686

 
$

 
$

 
$
16,686

Equity securities
 
1,038

 

 

 
1,038

Total affiliate investments
 
17,724

 

 

 
17,724

Non-affiliate investments
 
 
 
 
 
 
 
 
First lien secured debt
 
2,520

 

 

 
2,520

Second lien debt
 
44,153

 

 
35,016

 
9,137

Subordinated debt
 
14,554

 

 
14,554

 

Limited term royalties
 
12,286

 

 

 
12,286

Redeemable preferred units
 
34,706

 

 

 
34,706

CLO residual interests
 
5,175

 

 
5,175

 

Total non-affiliate investments
 
113,394

 

 
54,745

 
58,649

Total portfolio investments
 
131,118

 

 
54,745

 
76,373

Government securities
 
 
 
 
 
 
 
 
U.S. Treasury Bills
 
55,000

 
55,000

 

 

Total investments
 
$
186,118

 
$
55,000

 
$
54,745

 
$
76,373

 
December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$
1,000

 
$

 
$

 
$
1,000

Total control investments
 
1,000

 

 

 
1,000

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
16,310

 

 

 
16,310

Equity securities
 
2,583

 

 

 
2,583

Total affiliate investments
 
18,893

 

 

 
18,893

Non-affiliate investments
 
 

 
 

 
 

 
 

First lien secured debt
 
2,340

 

 

 
2,340

Second lien debt
 
69,508

 

 
48,154

 
21,354

Subordinated debt
 
21,526

 

 
13,606

 
7,920

Limited term royalties
 
11,845

 

 

 
11,845

Redeemable preferred units
 
43,939

 

 

 
43,939

CLO residual interests
 
5,659

 

 
5,659

 

Total non-affiliate investments
 
154,817

 

 
67,419

 
87,398

Total portfolio investments
 
174,710

 

 
67,419

 
107,291

Government securities
 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
34,997

 
34,997

 

 

Total investments
 
$
209,707

 
$
34,997

 
$
67,419

 
$
107,291



28


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2016
(unaudited)

The following tables present roll-forwards of the changes in fair value for all investments for which we determine fair value using unobservable (Level 3) factors for the periods indicated (in thousands):
 
 
First
Lien Secured
Debt and
Limited Term
Royalties
 
Second
Lien Debt
 
Subordinated
Debt and
Redeemable
Preferred Units
 
Equity
Securities
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
For the three months ended September 30, 2016
Fair value at June 30, 2016
 
$
16,117

 
$
12,814

 
$
55,645

 
$
2,277

 
$
86,853

Total gains, (losses) and amortization: