OHA Investment Corporation
OHA Investment Corp (Form: 10-Q, Received: 05/15/2017 17:01:54)


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 March 31, 2017
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 o
Non-accelerated filer x
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if smaller reporting company)
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of May 15, 2017, there were 20,172,392 shares of the registrant’s common stock outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
 
OHA INVESTMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)  
 
 
March 31, 2017
 
December 31, 2016
 
 
(unaudited)
 
 
Assets
 
 

 
 

Investments in portfolio securities at fair value
 
 

 
 

Control investments (cost: $0 and $0, respectively)
 
$

 
$

Affiliate investments (cost: $20,530 and $19,724, respectively)
 
17,658

 
17,150

Non-affiliate investments (cost: $157,021 and $154,772, respectively)
 
71,024

 
87,855

Total portfolio investments (cost: $177,551 and $174,496, respectively)
 
88,682

 
105,005

Investments in U.S. Treasury Bills at fair value (cost: $39,997 and $39,997, respectively)
 
39,997

 
39,997

Total investments
 
128,679

 
145,002

Cash and cash equivalents
 
9,312

 
16,533

Accounts receivable and other current assets
 
39

 
33

Interest receivable
 
687

 
1,313

Due from broker
 
3,551

 

Prepaid assets
 
11

 
17

Total current assets
 
13,600

 
17,896

Total assets
 
$
142,279

 
$
162,898

 
 
 
 
 
Liabilities
 
 

 
 

Current liabilities
 
 

 
 

Distributions payable
 
$
403

 
$
1,210

Accounts payable and accrued expenses
 
1,504

 
1,999

Due to affiliate (Note 4)
 
169

 
220

Management and incentive fees payable (Note 4)
 
570

 
635

Income taxes payable
 
32

 
28

Repurchase agreement
 
39,200

 
39,200

Short-term debt, net of debt issuance costs
 
39,402

 

Total current liabilities
 
81,280

 
43,292

Long-term debt, net of debt issuance costs
 

 
39,113

Total liabilities
 
81,280

 
82,405

Commitments and contingencies  (Note 6)
 
 

 
 

Net assets
 
 

 
 

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

 
20

Paid-in capital in excess of par
 
235,703

 
235,703

Undistributed net investment loss
 
(3,083
)
 
(2,873
)
Undistributed net realized capital loss
 
(85,884
)
 
(85,979
)
Net unrealized depreciation on investments
 
(85,757
)
 
(66,378
)
Total net assets
 
60,999

 
80,493

Total liabilities and net assets
 
$
142,279

 
$
162,898

Net asset value per share
 
$
3.02

 
$
3.99

(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 March 31,
 
 
2017
 
2016
Investment income:
 
 

 
 

Interest income:
 
 

 
 

Affiliate investments
 
$
895

 
$
675

Non-affiliate investments
 
1,509

 
3,138

Dividend income:
 
 

 
 

Non-affiliate investments
 

 
1,313

Other income
 
51

 
31

Total investment income
 
2,455

 
5,157

Operating expenses:
 
 

 
 

Interest expense and bank fees
 
974

 
1,088

Management and incentive fees (Note 4)
 
570

 
930

Professional fees
 
271

 
720

Other general and administrative expenses
 
382

 
506

Directors fees
 
61

 
61

Total operating expenses
 
2,258

 
3,305

Income tax provision, net
 
4

 
17

Net investment income
 
193

 
1,835

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

 
 

Control investments
 
1

 

Non-affiliate investments
 
94

 
24

Provision for taxes on realized gain
 

 

Total net realized capital gain on investments
 
95

 
24

Net unrealized appreciation (depreciation) on investments
 
 

 
 

Control investments
 

 

Affiliate investments
 
(299
)
 
(35
)
Non-affiliate investments
 
(19,080
)
 
(13,488
)
Total net unrealized depreciation on investments
 
(19,379
)
 
(13,523
)
 
 
 
 
 
Net decrease in net assets resulting from operations
 
$
(19,091
)
 
$
(11,664
)
 
 
 
 
 
Net decrease in net assets resulting from operations per common share
 
$
(0.95
)
 
$
(0.58
)
 
 
 
 
 
Distributions declared per common share
 
$
0.02

 
$
0.06

Weighted average shares outstanding - basic and diluted
 
20,172

 
20,172


  (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 three months ended March 31,
 
 
2017
 
2016
Increase (decrease) in net assets from operations
 
 

 
 

Net investment income
 
$
193

 
$
1,835

Net realized capital gain (loss) on investments
 
95

 
24

Net unrealized depreciation on investments
 
(19,379
)
 
(13,523
)
Net decrease in net assets resulting from operations
 
(19,091
)
 
(11,664
)
Distributions to common stockholders
 
 

 
 

Distributions from net investment income
 
(403
)
 
(1,210
)
Net decrease in net assets from distributions
 
(403
)
 
(1,210
)
Net decrease in net assets
 
(19,494
)
 
(12,874
)
Net assets, beginning of period
 
80,493

 
110,780

Net assets, end of period
 
$
60,999

 
$
97,906

Net asset value per common share at end of period
 
$
3.02

 
$
4.85

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 three months ended March 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net decrease in net assets resulting from operations
 
$
(19,091
)
 
$
(11,664
)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by (used in) operating activities:
 
 

 
 

Payment-in-kind interest
 
(1,445
)
 
(1,439
)
Net amortization of premiums, discounts and fees
 
(81
)
 
(62
)
Net realized capital loss (gain) on investments
 
(95
)
 
(24
)
Net unrealized depreciation on investments
 
19,379

 
13,523

Purchase of investments in portfolio securities
 
(9,925
)
 
(1,571
)
Proceeds from redemption or sale of investments in portfolio securities
 
8,490

 
437

Purchase of investments in U.S. Treasury Bills
 
(40,000
)
 
(35,000
)
Proceeds from redemption of investments in U.S. Treasury Bills
 
40,000

 
34,997

Amortization of debt issuance costs on Credit Facility
 
289

 

Effects of changes in operating assets and liabilities:
 
 

 
 

Accounts receivable and other current assets
 
(6
)
 
507

Interest receivable
 
626

 
339

Due from broker
 
(3,551
)
 
(437
)
Due to broker
 

 
(5,226
)
Prepaid assets
 
6

 
192

Due to affiliate
 
(51
)
 
(172
)
Payables and accrued expenses
 
(556
)
 
(757
)
Net cash used in operating activities
 
(6,011
)
 
(6,357
)
Cash flows from financing activities:
 
 

 
 

Borrowings under credit facilities
 

 
8,500

Borrowings under repurchase agreement
 
39,200

 
34,300

Repayments on credit facilities
 

 
(13,000
)
Repayments on repurchase agreement
 
(39,200
)
 
(34,300
)
Acquisition of common stock under repurchase plan
 

 

Distributions to stockholders
 
(1,210
)
 
(2,421
)
Net cash used in financing activities
 
(1,210
)
 
(6,921
)
Net change in cash and cash equivalents
 
(7,221
)
 
(13,278
)
Cash and cash equivalents, beginning of period
 
16,533

 
15,554

Cash and cash equivalents, end of period
 
$
9,312

 
$
2,276

 
(See accompanying notes to consolidated financial statements)
 

7



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2017
(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)
Subtotal Control Investments - (More than 25% owned)
 
 

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
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)
 
$
18,122

 
$
18,030

 
$
17,216

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 (14)
 
 

 
2,500

 
442

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

 
$
20,530

 
$
17,658

 
 
 
 
 
 
 
 
 
 
 
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) (6)(8)
 
$
58,058

 
$
56,315

 
$
12,285

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

 
9,767

 
11,186

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

 
9,221

 
9,137

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

 
11,984

 
7,920

Equinox Holdings, Inc.
 
Leisure Goods, Activities, Movies
 
Second Lien Term Loan (LIBOR+7.0% with a 1% floor, due 9/8/2024) (3)
 
$
7,000

 
$
6,948

 
$
7,114

Berlin Packaging
 
Packaging
 
Second Lien Term Loan (LIBOR+6.75% with a 1.0% floor, due 10/1/2022) (3)
 
$
6,705

 
$
6,415

 
$
6,789

PAE Holding Corp
 
Aerospace and Defense
 
Second Lien Term Loan
(LIBOR+9.50% with a 1% floor, due 10/20/2023) (3)
 
5,500

 
5,341

 
5,569

Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1.0% floor, due 6/19/2023) (3)
 
5,517

 
5,479

 
5,559

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

 
3,383

 
3,404

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

 
1,072

 
1,465

 
(See accompanying notes to consolidated financial statements)

8



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2017
(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
Coinamatic Canada, Inc. (5)
 
Industrials - Laundry Equipment
 
Second Lien Term Loan (LIBOR+7.0% with a 1.0% floor, due 5/14/2023) (3)
 
596

 
592

 
596

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

 
27,845

 

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) (10)(11)
 
13,182

 
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)
 
 

 
$
157,021

 
$
71,024

Subtotal Portfolio Investments (68.9% of total investments)
 
 

 
$
177,551

 
$
88,682

 
 
 
 
 
 
 
 
 
 
 
GOVERNMENT SECURITIES
U.S. Treasury Bills (4)
 
 
 
 
 
$
40,000

 
$
39,997

 
$
39,997

Subtotal Government Securities (31.1% of total investments)
 
 

 
$
39,997

 
$
39,997

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
217,548

 
$
128,679


 (See accompanying notes to consolidated financial statements)

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 Credit Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of March 31, 2017 , and due dates represent the contractual maturity dates. 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 the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6)  
Investment on non-accrual status and therefore non-income producing.


9



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
March 31, 2017
(in thousands, except share amounts and percentages)
(Unaudited — Continued)
 
(7)  
During the fourth quarter of 2016, we executed a series of amendments to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to allow the company to PIK its LIBOR+12% cash interest for November and December 2016. Also, default interest of $0.1 million and current unpaid interest of $0.4 million was added to the principal balance in the fourth quarter 2016. Effective January 31, 2017, we executed a seventh amendment to our note purchase and security agreement with OCI that allowed the company to PIK its LIBOR+12% cash interest through March 31, 2017. OCI remains in financial covenant default and while in default, we are earning an additional 2% cash interest and 2% PIK interest. In April 2017, we executed an eighth amendment to our note purchase and security agreement with OCI that allows the company to continue to PIK its LIBOR +12% cash interest through June 30, 2017.
(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 Energy 2005, LP, or 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 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 units 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. During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017 valuation, which reflects a determination that future payments received from this investment will no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment. The entity through which Castex produces and develops oil and natural gas may undergo a restructuring, bankruptcy, asset sale, or other transaction that could adversely affect the fair value of our investment in Castex, and our expected return. There is no guarantee that the outcome of such a transaction would be favorable to us, or would enhance the value of our preferred LP interest. We are subject to the risk that Castex or its creditors may make business decisions with which we disagree, and that the management may take risks or otherwise act in ways that are adverse to our interests.
(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. For more information on ATP, refer to the discussion of the ATP litigation in Note 6 to the Consolidated Financial Statements.
(10)  
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% 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%.
(11)  
On November 2, 2016, Shoreline and seven affiliated debtors (collectively, the "Debtors") each filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Debtors have requested that their cases be jointly administered under Case No. 16-35571.
(12)  
Contingent payment of up to $6.8 million is 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. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(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)  
Non-income producing equity security.



10



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2016
(in thousands, except share amounts and percentages)

Portfolio Company
 
Industry
Segment
 
Investment (1)
 
Principal
 
Cost
 
Fair Value (2)
 
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) (7)
 
$
17,330

 
$
17,224

 
$
16,464

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

 
686

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

 
$
19,724

 
$
17,150

 
 
 
 
 
 
 
 
 
 
 
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) (8)
 
$
56,625

 
$
55,662

 
$
32,876

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

 
9,754

 
10,100

Royal Holdings, Inc.
 
Chemicals
 
Second Lien Term Loan (LIBOR+7.5% with a 1% floor, due 6/19/2023) (3)
 
10,000

 
9,929

 
9,938

Appriss Holdings, Inc.
 
Information Services
 
Second Lien Term Loan (LIBOR+8.25% with a 1% floor, due 5/21/2021) (14)
 
9,323

 
9,217

 
9,137

Berlin Packaging
 
Packaging
 
Second Lien Term Loan
(LIBOR+6.75% with a 1% floor, due 10/1/2022) (3)
 
7,205

 
6,886

 
7,295

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

 
11,980

 
7,140

Kronos Incorporated
 
Software
 
Second Lien Term Loan
(LIBOR+8.50% with a 1.25% floor, due 4/30/2020) (3)
 
5,500

 
5,337

 
5,596

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

 
3,382

 
3,404

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

 
1,529

 
1,773

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

 
596


(See accompanying notes to consolidated financial statements)

11



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2016
(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
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

 

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) (6)(11)(12)
 
13,182

 
12,659

 

Globe BG, LLC
 
Coal Production
 
Contingent earn-out related to July 2011 sale of royalty interests in Alden Resources, LLC (13)
 
 
 

 

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

 
$
154,772

 
$
87,855

Subtotal Portfolio Investments (72.4% of total investments)
 
 

 
$
174,496

 
$
105,005

 
 
 
 
 
 
 

 
 

 
 

GOVERNMENT SECURITIES
U.S. Treasury Bills (4)
 
 
 
 
 
$
40,000

 
$
39,997

 
$
39,997

Subtotal Government Securities (27.6% of total investments)
 
 

 
$
39,997

 
$
39,997

 
 
 
 
 
 
 
 
 
 
 
TOTAL INVESTMENTS
 
$
214,493

 
$
145,002


  (See accompanying notes to consolidated financial statements)



12



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2016
(in thousands, except share amounts and percentages)
(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 Credit Facility. See Note 3 of Notes to Consolidated Financial Statements. Percentages represent interest rates in effect as of December 31, 2016, and due dates represent the contractual maturity dates. 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 the 1940 Act. Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. The status of these assets under the 1940 Act is subject to change. We monitor the status of these assets on an ongoing basis.
(6)  
Investment on non-accrual status.
(7)  
During the fourth quarter of 2016, we executed a series of amendments to our note purchase and security agreement with OCI Holdings, LLC, or OCI, to allow the company to PIK its LIBOR+12% cash interest for November and December 2016. Also, default interest of $0.1 million and current unpaid interest of $0.4 million was added to the principal balance in the fourth quarter 2016. Effective January 31, 2017, we executed a seventh amendment to our note purchase and security agreement with OCI to allow the company to PIK its LIBOR+12% cash interest through March 31, 2017. OCI remains in financial covenant default and while in default, we are earning an additional 2% cash interest and 2% PIK interest.
(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 Energy 2005, LP, or 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 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 units 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 7 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% 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%.


13



OHA INVESTMENT CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2016
(in thousands, except share amounts and percentages)
(Continued)

(12)  
On November 2, 2016, Shoreline and seven affiliated debtors (collectively, the "Debtors") each filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas. The Debtors have requested that their cases be jointly administered under Case No. 16-35571.
(13)  
Contingent payment of up to $6.8 million is 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. Globe BG, LLC has informally advised us that the company’s relative cost of production has not improved since July 2011.
(14)  
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.
(15)  
Non-income producing equity security.


(See accompanying notes to consolidated financial statements)



14



OHA INVESTMENT CORPORATION
CONSOLIDATED FINANCIAL HIGHLIGHTS
(unaudited)
 
For the three months ended March 31,
Per Share Data (1)
2017
 
2016
 
 
 
 
Net asset value, beginning of period
$
3.99

 
$
5.49

Net investment income, net of tax
0.01

 
0.09

Net realized and unrealized loss on investments (2)
(0.96
)
 
(0.67
)
Net decrease in net assets resulting from operations
(0.95
)
 
(0.58
)
Distributions to common stockholders
 

 
 

Distributions from net investment income
(0.02
)
 
(0.06
)
Net decrease in net assets from distributions
(0.02
)
 
(0.06
)
Effect of shares repurchased, gross
$

 


Net asset value, end of period
$
3.02

 
$
4.85

 
 
 
 
Market value, beginning of period
$
1.72

 
$
3.80

Market value, end of period
$
1.54

 
$
3.39

Market value return (3)(4)
(12.4
)%
 
0.2
%
 
 
 
 
Ratios and Supplemental Data
 

 
 

($ and shares in thousands)
 

 
 

Net assets, end of period
$
60,999

 
$
97,906

Average net assets
$
76,630

 
$
107,679

Common shares outstanding, end of period
20,172

 
20,172

Total operating expenses and taxes/average net assets (5)
12.0
 %
 
12.3
%
Net investment income, net of tax/average net assets (5)
1.0
 %
 
6.9
%
Portfolio turnover rate
7.8
 %
 
0.4
%
 
 
 
 
Expense Ratios (as a percentage of average net assets) (5)
 

 
 

Interest expense and bank fees
5.2
 %
 
4.1
%
Management and incentive fees
3.0
 %
 
3.5
%
Other operating expenses and taxes
3.8
 %
 
4.7
%
Total operating expenses
12.0
 %
 
12.3
%
 
(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.


(See accompanying notes to consolidated financial statements)

15



OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)

Note 1: Organization
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. The effects of all intercompany transactions between OHAI and its subsidiaries have been eliminated in 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 ("SEC"). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946, Financial Services - Investment Company ("ASC 946"). Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and ASC 946, the Company is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to the general principle occurs if the Company holds a controlling interest in an operating company that provides all or substantially all of its services directly to the Company or to its portfolio companies. None of the portfolio investments made by the Company qualify for this exception. Therefore, the Company's investment portfolio is carried on the Consolidated Balance Sheets at fair value.
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, 2016 .
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

16


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

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 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 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
December 8, 2016
 
0.06

 
December 31, 2016
 
January 9, 2017
March 14, 2017
 
0.02

 
March 31, 2017
 
April 7, 2017


Note 3: Credit Facilities and Borrowings
We are party to a Credit Agreement (the "Credit Facility"), dated September 9, 2016, with MidCap Financial Trust, as administrative agent, which replaced our prior Third Amended and Restated Revolving Credit Agreement (the "Investment Facility"), as amended, with SunTrust Bank, as administrative agent. As of March 31, 2017 , the size of 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, subject to certain conditions. The initial proceeds of $40.5 million from the Credit Facility were used to pay off the $38.5 million outstanding balance on the 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 March 31, 2017 and December 31, 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 $1.1 million and $1.4 million on our Consolidated Balance Sheet as of March 31, 2017 and December 31, 2016, respectively. 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 Adjusted 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 March 31, 2017 the 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 Credit Agreement through March 31, 2017 , 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 Debt to Tangible Net Worth Ratio of not more than 0.80:1.00 as determined on the last day of each calendar month,
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.

At the end of each quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which includes purchasing U.S. Treasury Bills, by utilizing repurchase agreements on a temporary basis. On March 29, 2017, we purchased $40.0 million of U.S. Treasury Bills and contemporaneously entered into a $39.2 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we

17


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

transferred $39.9 million of U.S. Treasury Bills and $0.8 million of cash as collateral under the repurchase agreement. We repaid the $39.2 million borrowed under the repurchase agreement, and was returned the $0.8 million cash collateral, net of a $8 thousand financing fee, upon maturity of the U.S. Treasury Bills on April 6, 2017. 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 March 31, 2017 .
On December 27, 2016, we purchased $40.0 million of U.S. Treasury Bills and contemporaneously entered into a $39.2 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $40.0 million of U.S. Treasury Bills and $0.8 million of cash as collateral under the repurchase agreement. We repaid the $39.2 million borrowed under the repurchase agreement, and was returned the $0.8 million cash collateral, net of a $10 thousand financing fee, upon maturity of the U.S. Treasury Bills on January 5, 2017. 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 December 31, 2016 .

Note 4: Investment Management
Investment Advisory Agreement
On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Investment Advisers Act of 1940, or Advisers Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The Investment Advisory Agreement was most recently approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us, 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 on August 2, 2016, 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 March 31, 2017 and 2016 , we incurred $0.6 million and $0.8 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 March 31, 2017 , we did not incur any investment income incentive fees. For the three months ended March 31, 2016, we incurred $0.1 million of investment income incentive fees.

18


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

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 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
Under the Administration Agreement, OHA furnishes us with certain administrative services, personnel and facilities. The Administration Agreement was most recently approved by our Board of Directors on August 2, 2016. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The aggregate amount of certain costs and expenses payable by us under the Investment Advisory Agreement and the Administration Agreement for the period from October 1, 2014 to September 30, 2015 shall not exceed $2.5 million, ("the Cap"); provided that interest expense and bank fees, management and incentive fees, legal and professional fees, insurance expenses, taxes and costs related to the change in investment advisor are not subject to the Cap. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.
We owed $0.2 million and $0.2 million to OHA under the Administration Agreement as of March 31, 2017 and December 31, 2016 , respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in due to affiliate 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 March 31, 2017 , we had investments in 13 portfolio companies totaling $177.6 million . Of these 13 investments, the Company had already funded investments in the amount of $177.6 million and there were no remaining outstanding unfunded commitments. As of December 31, 2016, we had investments in 12 portfolio companies totaling $174.5 million. Of these 12 portfolio companies, the Company had already funded investments in the amount of $174.5 million and there were no remaining outstanding unfunded commitments.

19


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.
ATP Litigation . On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the 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.
Phase 1 . 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”). 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.
On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale of the Telemark properties (Bankr. Dkt. No. 2706) to Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders. (The Gomez properties were abandoned by ATP.)
After the bankruptcy case was converted to a case under Chapter 7 of the Bankruptcy Code, we settled Phase 1 of the litigation with the Trustee, Bennu and Credit Suisse AG, as agent to the DIP Lenders (Adv. Dkt. No. 270, 271). 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. Additional detail on Phase 1 and the ATP bankruptcy is set forth in our Form 10Q for the quarter ending March 31, 2016.

20


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

Phase 2 . On February 3, 2016, we filed our Amended Motion to Dismiss the Complaints in Intervention Filed by the Statutory Lien Claimants, which was subsequently amended [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. 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. 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]. 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. 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 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 were not required under the statute, the Intervenors’ alleged liens could not have attached to the ORRIs in the first instance. On March 9, 2017, the District Court entered a Memorandum Opinion and Order [Dist. Dkt. No. 17] (the “District Court’s Order”) adopting the Bankruptcy Court’s Report and Recommendation and dismissing the Intervenors’ claims with prejudice.
On April 3, 2017, the Intervenors filed their notice to appeal the District Court’s Order to the United States Court of Appeals for the Fifth Circuit. On April 11, 2017, we filed a notice of (protective) cross appeal in order to preserve our alternative bases for dismissal which were denied by the Bankruptcy Court and District Court. The matter remains pending.
As of March 31, 2017 , our unrecovered investment was $32.2 million , and we had received aggregate royalty payments of $37.5 million since the date of ATP’s bankruptcy filing. As of March 31, 2017 , we had incurred legal and consulting fees totaling $6.0 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 March 31, 2017 , $5.4 million of the $6.0 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. No legal expenses have been added to our unrecovered investment balance during the three months ended March 31, 2017. We note that the fair value of our investment in ATP ORRI remains at $0 as of March 31, 2017 due to the cessation of monthly production payments beginning in December 2016.
Through March 31, 2017 , we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and $29.2 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. To the extent the District Court’s Order is reversed on appeal, we have or will assert that we have viable defenses with respect to all of the

21


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

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 that the District Court’s Order is reversed on appeal, and to the extent 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 the District Court’s Order is reversed on appeal and 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.
Bennu Titan Bankruptcy . 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.
Bennu Oil & Gas Bankruptcy . On November 30, 2016, Bennu Oil & Gas, LLC filed a Chapter 7 bankruptcy in the Bankruptcy Court for the Southern District of Texas, Case No. 16-35930. Two of its affiliates, Bennu Blocker, Inc., Case No. 16-35931, and Bennu Holdings, LLC, Case No. 16-35932, likewise filed on that date.
On November 30, 2016, Bennu Oil & Gas, LLC moved to reject the Platform Use Agreement with Bennu Titan, LLC for the drilling and production platform commonly known as the Titan Platform. On January 4, 2017, the Bankruptcy Court entered an order approving the rejection of the Platform Use Agreement effective November 30, 2016.
On January 26, 2017, the Delaware Bankruptcy Court entered an order transferring the Bennu Titan case to the Bankruptcy Court for the Southern District of Texas so that the affiliated cases will be in the same court.
The “meeting of creditors” in the Bennu Oil & Gas bankruptcy case was held on January 26, 2017. The Chapter 7 Trustee reported that she is in the process of working with the Bennu Oil & Gas lenders on a plan to market the leases including the Telemark properties.
Status of Telemark Leases . The Telemark properties are comprised of three leases: Mississippi Canyon Block 942 known as OCS-G 24130 (“ MC 942 ”); Mississippi Canyon Block 941 known as OCS-G 16661 (“ MC 941 ”); and Atwater Valley Block 63 known as OCS-G 13198 (“ AT 63 ”). At the meeting of creditors, Bennu officers testified that the well on the AT 63 lease stopped producing in May 2016. Prior to filing bankruptcy, Bennu Oil & Gas shut in all of the wells on the other two Telemark leases on November 30, 2016. The leases will expire in 180 days from the date of last production unless production is resumed or the BOEM grants a deferral of the requirement to produce (known as a Suspense of Operations (“SOO”) or Suspense of Production (“SOP”). Based on the testimony at the meeting of creditors, we understand that Bennu Oil & Gas applied for an SOP for the AT 63 lease. The Trustee’s counsel reported that the Trustee also plans for an SOP for the other leases. There is no assurance that the government will grant any request for an SOP. If the SOPs are not granted, the Telemark leases will expire 180 days from the date of last production.


22


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

Note 7: Fair Value
Our investments consisted of the following as of March 31, 2017 and December 31, 2016 :
 
 
March 31, 2017
 
December 31, 2016
(Dollar amounts in thousands)
 
Cost
 
% of total
 
Fair Value
 
% of total
 
Cost
 
% of total
 
Fair Value
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Portfolio investments
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Second lien debt
 
$
50,038

 
23.0
%
 
$
38,168

 
29.7
%
 
$
48,002

 
22.3
%
 
$
35,966

 
24.8
%
Subordinated debt
 
39,781

 
18.3
%
 
36,322

 
28.2
%
 
38,958

 
18.2
%
 
33,704

 
23.2
%
Limited term royalties
 
27,845

 
12.8
%
 

 
%
 
27,845

 
13.0
%
 

 
%
Redeemable preferred units
 
56,315

 
25.9
%
 
12,285

 
9.6
%
 
55,662

 
26.0
%
 
32,876

 
22.7
%
CLO residual interests
 
1,072

 
0.5
%
 
1,465

 
1.1
%
 
1,529

 
0.7
%
 
1,773

 
1.2
%
Equity securities
 
2,500

 
1.1
%
 
442

 
0.3
%
 
2,500

 
1.2
%
 
686

 
0.5
%
Total portfolio investments
 
177,551

 
81.6
%
 
88,682

 
68.9
%
 
174,496

 
81.4
%
 
105,005

 
72.4
%
Government securities
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
39,997

 
18.4
%
 
39,997

 
31.1
%
 
39,997

 
18.6
%
 
39,997

 
27.6
%
Total investments
 
$
217,548

 
100.0
%
 
$
128,679

 
100.0
%
 
$
214,493

 
100.0
%
 
$
145,002

 
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 , 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.
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.

23


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

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 March 31, 2017 or December 31, 2016 . Amounts outstanding under our Credit Facility are carried at amortized cost in the Consolidated Balance Sheets. As of March 31, 2017 , the estimated fair value of our Credit Facility approximated its carrying value of $39.4 million . As of December 31, 2016 , the fair value of our Credit Facility approximated its carry value of $39.1 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 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.

24


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

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 $0.8 million and $0.1 million in the three months ended March 31, 2017 and 2016 , respectively. We recorded PIK dividend income from our investment in Castex Energy 2005, LP, of $0.0 million and $1.3 million for the three months ended March 31, 2017 , and 2016 , respectively. During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017 valuation, which reflects a determination that future payments received from this investment will no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment.
The following tables set forth the fair value of our investments by level within the fair value hierarchy as of March 31, 2017 and December 31, 2016 (in thousands):
March 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Affiliate investments
 
 
 
 
 
 
 
 
Subordinated debt
 
$
17,216

 
$

 
$

 
$
17,216

Equity securities
 
442

 

 

 
442

Total affiliate investments
 
17,658

 

 

 
17,658

Non-affiliate investments
 
 
 
 
 
 
 
 
First lien secured debt
 

 

 

 

Second lien debt
 
38,168

 

 
29,031

 
9,137

Subordinated debt
 
19,106

 

 
19,106

 

Limited term royalties
 

 

 

 

Redeemable preferred units
 
12,285

 

 

 
12,285

CLO residual interests
 
1,465

 

 

 
1,465

Total non-affiliate investments
 
71,024

 

 
48,137

 
22,887

Total portfolio investments
 
88,682

 

 
48,137

 
40,545

Government securities
 
 
 
 
 
 
 
 
U.S. Treasury Bills
 
39,997

 
39,997

 

 

Total investments
 
$
128,679

 
$
39,997

 
$
48,137

 
$
40,545

 

25


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

December 31, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
Portfolio investments
 
 

 
 

 
 

 
 

Control investments
 
 

 
 

 
 

 
 

First lien secured debt
 
$

 
$

 
$

 
$

Total control investments
 

 

 

 

Affiliate investments
 
 

 
 

 
 

 
 

Subordinated debt
 
16,464

 

 

 
16,464

Equity securities
 
686

 

 

 
686

Total affiliate investments
 
17,150

 

 

 
17,150

Non-affiliate investments
 
 

 
 

 
 

 
 

First lien secured debt
 

 

 

 

Second lien debt
 
35,966

 

 
26,829

 
9,137

Subordinated debt
 
17,240

 

 
17,240

 

Limited term royalties
 

 

 

 

Redeemable preferred units
 
32,876

 

 

 
32,876

CLO residual interests
 
1,773

 

 

 
1,773

Total non-affiliate investments
 
87,855

 

 
44,069

 
43,786

Total portfolio investments
 
105,005

 

 
44,069

 
60,936

Government securities
 
 

 
 

 
 

 
 

U.S. Treasury Bills
 
39,997

 
39,997

 

 

Total investments
 
$
145,002

 
$
39,997

 
$
44,069

 
$
60,936


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
 
CLO Equity
 
Total
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
For the three months ended March 31, 2017
Fair value at December 31, 2016
 
$

 
$
9,137

 
$
49,340

 
$
686

 
$
1,773

 
$
60,936

Total gains, (losses) and amortization:
 
 

 
 

 
 

 
 

 
 
 
 

Net realized gains (losses)
 

 

 

 

 

 

Net unrealized gains (losses)
 

 
(5
)
 
(21,299
)
 
(244
)
 
149

 
(21,399
)
Net amortization of premiums, discounts and fees
 

 
5

 
15

 

 

 
20

New investments, repayments and settlements, net:
 

 

 

 

 

 

New investments
 

 

 

 

 

 

PIK
 

 

 
1,445

 

 

 
1,445

Repayments and settlements
 

 

 

 

 
(457
)
 
(457
)
Fair value at March 31, 2017
 
$

 
$
9,137

 
$
29,501

 
$
442

 
$
1,465

 
$
40,545

 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) from investments still held as of reporting date:
March 31, 2017
 
$

 
$
(5
)
 
$
(21,299
)
 
$
(244
)
 
$
149

 
$
(21,399
)
March 31, 2016
 
(33
)
 
(5,819
)
 
(4,961
)
 
(22
)
 

 
(10,835
)

26


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

 
 
 
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 March 31, 2016
Fair value at December 31, 2015
 
$
15,185

 
$
21,354

 
$
68,169

 
$
2,583

 
$
107,291

Total gains, (losses) and amortization:
 
 

 
 

 
 

 
 

 
 

Net realized gains
 

 

 

 

 

Net unrealized gains (losses)
 
(33
)
 
(5,819
)
 
(4,961
)
 
(22
)
 
(10,835
)
Net amortization of premiums, discounts and fees
 
2

 
10

 
17

 

 
29

New investments, repayments and settlements, net:
 
 

 
 

 
 

 
 

 
 
New investments
 


 


 


 

 

PIK
 
136

 
15

 
1,424

 

 
1,575

Repayments and settlements
 


 


 

 


 

Fair value at March 31, 2016
 
$
15,290

 
$
15,560

 
$
64,649

 
$
2,561

 
$
98,060

 
 
 
 
 
 
 
 
 
 
 
During the three months ended March 31, 2017 and 2016 , none of our investments in portfolio companies changed among the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers among Levels 3, 2 or 1.
We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”

27


OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2017
(unaudited)

The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of March 31, 2017 (dollars in thousands):
 
Type of Investment
 
Fair Value
 
Valuation Technique
 
Significant Unobservable Inputs
 
Range of Inputs
 
Weighted Average
 
 
 
 
 
 
 
 
 
 
 
Non-Energy Investments:
 
 
 
 
 
 
 
 
 
 
Second lien debt
 
$
9,137

 
Market comparables
 
EBITDA multiples
 
11.0x - 16.0x
 
12.4x
 
 
 
 
 
 
 
 
 
 
 
Subordinated debt
 
17,216

 
Market comparables
 
EBITDA multiples
 
5.0x - 6.0x
 
5.5x
 
 
 
 
 
 
 
 
 
 
 
CLO residual interest
 
1,465

 
Net asset value with discount rate
 
Discount rate
 
15.0%
 
15.0%
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
442

 
Market comparables
 
EBITDA multiples
 
5.0x - 6.0x