Vista Credit Strategic Lending Corp.
05/03/2024 | Press release | Distributed by Public on 05/03/2024 12:10
Quarterly Report for Quarter Ending March 31, 2024 (Form 10-Q)
vcsl-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________
FORM 10-Q
_______________________________________________
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2024
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 000-56562
_______________________________________________
VISTA CREDIT STRATEGIC LENDING CORP.
(Exact name of Registrant as specified in its Charter)
_______________________________________________
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Maryland
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88-1906598
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(State or other jurisdiction
of incorporation or
organization)
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(I.R.S. Employer
Identification
No.)
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50 Hudson Yards, Floor 77, New York, New York
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10001
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| (Address of principal executive offices) |
(Zip Code)
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Registrant's telephone number, including area code: (212)804-9100
_______________________________________________
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which
registered
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None
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None
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None
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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. YesxNo o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YesxNo o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Small reporting company
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o |
Emerging growth company
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Non-accelerated filer
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x |
Accelerated filer
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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. x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES oNO x
As of May 3, 2024, the registrant had 6,103,539.089 shares of common stock, $0.01 par value per share, outstanding.
1
Table of Contents
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Page
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PART I
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CONSOLIDATED FINANCIAL INFORMATION
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Item 1.
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Consolidated Financial Statements
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Consolidated Statements of Assets and Liabilities as of March 31, 2024 (unaudited) and December 31, 2023
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5
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Consolidated Statements of Operations for the three months ended March 31, 2024 (unaudited) and the three months ended March 31, 2023 (unaudited)
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6
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Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2024 (unaudited)
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7
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Consolidated Statements of Cash Flows for the three months ended March 31, 2024 (unaudited) and the three months ended March 31, 2023 (unaudited)
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8
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Consolidated Schedules of Investments as of March 31, 2024 (unaudited) and December 31, 2023
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9
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Notes to the Consolidated Financial Statements (unaudited)
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14
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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29
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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44
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Item 4.
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Controls and Procedures
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45
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PART II
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OTHER INFORMATION
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Item 1.
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Legal Proceedings
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46
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Item 1A.
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Risk Factors
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46
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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46
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Item 3.
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Defaults upon Senior Securities
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46
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Item 4.
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Mine Safety Disclosures
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46
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Item 5.
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Other Information
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46
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Item 6.
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Exhibits
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47
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Signatures
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2
FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the Company, our current and prospective portfolio investments, our industry, our beliefs and opinions and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," "outlook," "potential," "predicts" and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
•fluctuations in our operating results;
•our ability to source investment opportunities;
•our inability to control the business operations of our portfolio companies, and potential inability to dispose of our interests in our portfolio companies;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•our use of borrowed money to finance a portion of our investments;
•provisions of a credit facility or other borrowings that may limit discretion in operating our business;
•the impact of changes in interest rates;
•the impact of competition for investment opportunities;
•our dependence on the ability of Vista Credit BDC Management, L.P. (the "Adviser") to manage and support our investment process;
•the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
•actual and potential conflicts of interest with our Adviser;
•our access to confidential information which may restrict our ability to take action with respect to some investments;
•restrictions on our ability to enter into transactions with our affiliates;
•the ability of the Adviser or their respective affiliates to attract and retain highly talented professionals;
•our ability to qualify and maintain our qualification as a regulated investment company (a "RIC") and as a business development company;
•regulations governing our operations as a business development company and RIC which impact our ability to raise capital or borrow for investment purposes;
•the impact of global economic, political and market conditions, including the risks of a slowing economy, rising inflation and risk of recession;
•the impact of global health crises on our or our portfolio companies' business and the U.S. and global economies;
•the impact of the Russian invasion of Ukraine on our portfolio companies and the global economy and general uncertainty surrounding the financial and political stability of the United States, the United Kingdom, the European Union, the Middel East and China;
•the impact of adverse developments affecting the financial services and banking industries, including events or concerns involving liquidity, defaults or non-performance by financial institutions;
•the fact that our portfolio companies are expected to operate in the enterprise software, data and technology-enabled businesses sector and are subject to risks particular to that industry; and
•changes in laws or regulations governing our operations.
3
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled "Item 1A. Risk Factors" and elsewhere in this Quarterly Report. These forward-looking statements apply only as of the date of this Quarterly Report. Moreover, we assume no duty and do not undertake any obligation to update or revise these forward-looking statements or any other information, except as required by applicable law. Because we are an investment company, the forward-looking statements and projections contained in this Quarterly Report are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
4
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(dollars in thousands, except share and per share data)
|
March 31, 2024 |
December 31, 2023 |
|||
| (unaudited) | ||||
| Assets | ||||
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Investments - non-controlled/non-affiliated, at fair value (amortized cost of $180,078 and $104,685, respectively)
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$ | 180,487 | $ | 104,869 |
| Cash and cash equivalents | 53,410 | 61,943 | ||
| Interest and other income receivable from investments | 952 | 362 | ||
| Deferred offering costs | 695 | 915 | ||
| Prepaid expenses and other assets | 853 | 1,188 | ||
| Expense support reimbursement (Note 4) | 3,000 | 3,000 | ||
| Total assets | $ | 239,397 | $ | 172,277 |
| Liabilities | ||||
| Secured borrowings (Note 5) | $ | 84,250 | $ | 77,250 |
| Payable for investments purchased | 34,931 | 13,871 | ||
| Interest and credit facility fees payable (Note 5) | 631 | 221 | ||
| Administrative service fees payable (Note 4) | 404 | 390 | ||
| Management and incentive fees payable (Note 4) | 291 | 117 | ||
| Due to Adviser (Note 4) | 3,047 | 4,932 | ||
| Accrued expenses and other liabilities | 865 | 819 | ||
| Total liabilities | 124,419 | 97,600 | ||
| Commitments and contingencies (Note 6) | ||||
| Net Assets (Note 8) | ||||
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Common stock, $0.01 par value, 500,000,000.000 shares authorized, 5,850,392.831 and 3,809,576.503 issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
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59 | 38 | ||
| Paid-in-capital in excess of par value | 114,451 | 74,472 | ||
| Total distributable earnings (loss) | 468 | 167 | ||
| Total net assets | 114,978 | 74,677 | ||
| Total liabilities and net assets | $ | 239,397 | $ | 172,277 |
| Net asset value per share | $ | 19.65 | $ | 19.60 |
The accompanying notes are an integral part of these consolidated financial statements.
5
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars in thousands, except share and per share data)
|
For the Three Months Ended March 31, 2024 |
For the Three Months Ended March 31, 2023 |
|||
| Investment income: | ||||
| From non-controlled/non-affiliated investments | ||||
| Interest income | $ | 3,378 | $ | - |
| Other income | 142 | - | ||
| Total investment income from non-controlled/non-affiliated investments | 3,520 | - | ||
| Total investment income | 3,520 | - | ||
| Expenses: | ||||
| Interest expense and credit facility fees (Note 5) | 1,525 | - | ||
| Offering costs | 629 | - | ||
| Professional fees | 439 | - | ||
| Administrative service fees (Note 4) | 404 | - | ||
| Other general and administrative expenses | 363 | - | ||
| Management fees (Note 4) | 240 | - | ||
| Directors fees | 68 | - | ||
| Insurance costs | 61 | - | ||
| Incentive fees (Note 4) | 28 | - | ||
| Organization costs | - | 289 | ||
| Total expenses before expense support and waivers | 3,757 | 289 | ||
| Expense support and waivers (Note 4) | (313) | (289) | ||
| Net expenses after expense support and waivers | 3,444 | - | ||
| Net investment income (loss) | 76 | - | ||
| Net realized gain (loss) and change in unrealized appreciation (depreciation): | ||||
| Net change in unrealized appreciation (depreciation) on investments: | ||||
| Non-controlled/non-affiliated investments | 225 | - | ||
| Net realized and unrealized gain (loss) on investments | 225 | - | ||
| Net increase (decrease) in net assets resulting from operations | $ | 301 | $ | - |
| Per common share data: | ||||
| Basic and diluted earnings (loss) per share (Note 8) | $ | 0.08 | $ | - |
| Basic and diluted weighted average shares outstanding (Note 8) | 3,921,709.266 | - | ||
The accompanying notes are an integral part of these consolidated financial statements.
6
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)
(dollars in thousands, except share and per share data)
| Common Stock | |||||||||
| Shares | Par Amount |
Paid in Capital in Excess of Par |
Distributable Earnings (Loss) |
Total Net Assets | |||||
| Balance at December 31, 2023 | 3,809,576.503 | $ | 38 | $ | 74,472 | $ | 167 | $ | 74,677 |
| Net investment income (loss) | - | - | - | 76 | 76 | ||||
| Net realized and unrealized gain (loss) on investments | - | - | - | 225 | 225 | ||||
| Net increase (decrease) in net assets resulting from operations | - | - | - | 301 | 301 | ||||
| Issuance of common stock | 2,040,816.328 | 21 | 39,979 | - | 40,000 | ||||
| Net increase (decrease) in net assets resulting from capital share transactions | 2,040,816.328 | 21 | 39,979 | - | 40,000 | ||||
| Total increase (decrease) for the three months ended March 31, 2024 | 2,040,816.328 | 21 | 39,979 | 301 | 40,301 | ||||
| Balance at March 31, 2024 | 5,850,392.831 | $ | 59 | $ | 114,451 | $ | 468 | $ | 114,978 |
The accompanying notes are an integral part of these consolidated financial statements.
7
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars in thousands, except share and per share data)
|
For the Three Months Ended March 31, 2024 |
For the Three Months Ended March 31, 2023 |
|||
| Cash flows from operating activities | ||||
| Net increase (decrease) in net assets resulting from operations | $ | 301 | $ | - |
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities | ||||
| Amortization of deferred offering costs | 629 | - | ||
| Amortization of deferred financing costs | 218 | - | ||
| Net accretion of discount on investments | (202) | - | ||
| Net change in unrealized (appreciation) depreciation on investments | (225) | - | ||
| Cost of investments purchased | (67,638) | - | ||
| Proceeds from repayments of investments | 13,509 | - | ||
| Payment-in-kind interest capitalized | (2) | - | ||
| Change in operating assets and liabilities: | ||||
| Deferred offering costs | (409) | - | ||
| Expense support reimbursement | - | (289) | ||
| Prepaid expenses and other assets | 117 | - | ||
| Interest and other income receivable from investments | (590) | - | ||
| Due to Adviser | (1,885) | 289 | ||
| Management and incentive fees payable | 174 | - | ||
| Administrator service expense payable (Note 4) | 14 | - | ||
| Interest and credit facility fees payable (Note 5) | 410 | - | ||
| Accrued expense and other liabilities | 46 | - | ||
| Net cash provided by (used in) operating activities | (55,533) | - | ||
| Cash flows from financing activities | ||||
| Proceeds from issuance of common stock | 40,000 | - | ||
| Borrowings on debt | 55,000 | - | ||
| Repayments on debt | (48,000) | - | ||
| Net cash provided by (used in) financing activities | 47,000 | - | ||
| Net increase (decrease) in cash and cash equivalents | (8,533) | - | ||
| Cash and cash equivalents, beginning of period | 61,943 | - | ||
| Cash and cash equivalents, end of period | $ | 53,410 | $ | - |
| Supplemental disclosures | ||||
| Interest, including credit facility fees, paid during the period | $ | 1,115 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
8
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)
MARCH 31, 2024
(dollars in thousands, except share and per share data)
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Investments (1)(15)
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Footnotes |
Reference Rate and Spread |
Interest Rate(2) (11)
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Maturity Date |
Par
Amount/Units(1)
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AmortizedCost(3)
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Fair Value |
% of Net Assets |
|||||
| Investments - non-controlled/non-affiliated | (12) | ||||||||||||
| First-Lien Debt | |||||||||||||
| Health-Care Technology | |||||||||||||
| Athenahealth Group, Inc. | (8) | SOFR + 3.25% | 8.58 | % | 2/15/2029 | $ | 9,962 | $ | 9,896 | $ | 9,893 | 8.6 | % |
| Insurance | |||||||||||||
| Integrity Marketing Acquisition, LLC | (4) (6) (9) | SOFR + 6.00% | 11.34 | % | 8/27/2026 | 348 | 337 | 311 | 0.3 | ||||
| IT Services | |||||||||||||
| Acronis International | (4) (5) (10) (13) (14) |
SOFR + 6.85%
(1.00% PIK)
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12.28 | % | 4/1/2027 | 20,002 | 19,678 | 19,652 | 17.1 | ||||
| Banff Merger Sub, Inc. | (7) | SOFR + 4.25% | 9.58 | % | 12/29/2028 | 4,014 | 3,980 | 4,045 | 3.5 | ||||
| MH Sub I, LLC | (8) | SOFR + 4.25% | 9.58 | % | 5/3/2028 | 9,962 | 9,798 | 9,915 | 8.6 | ||||
| Redwood Services Group, LLC | (4) (6) (9) (14) | SOFR + 6.25% | 11.57 | % | 12/31/2025 | 15,102 | 14,807 | 15,041 | 13.1 | ||||
| Total IT Services | 48,263 | 48,653 | 42.3 | ||||||||||
| Oil, Gas & Consumable Fuels | |||||||||||||
| Enverus Holdings, Inc. | (4) (6) (9) | SOFR + 5.50% | 10.83 | % | 12/24/2029 | 16,651 | 16,390 | 16,393 | 14.2 | ||||
| Software | |||||||||||||
| Aptean, Inc. | (4) (6) (9) | SOFR + 5.25% | 10.57 | % | 1/30/2031 | 19,805 | 19,576 | 19,554 | 17.0 | ||||
| ASG III, LLC | (4) (6) (10) | SOFR + 6.50% | 11.81 | % | 10/31/2029 | 10,777 | 10,494 | 10,528 | 9.2 | ||||
| Azurite Intermediate Holdings, Inc. | (4) (6) (10) | SOFR + 6.50% | 11.83 | % | 3/19/2031 | 5,371 | 5,171 | 5,079 | 4.4 | ||||
| Central Parent, Inc. | (7) | SOFR + 4.00% | 9.31 | % | 7/6/2029 | 10,000 | 10,025 | 10,041 | 8.7 | ||||
| MRI Software, LLC | (4) (6) (10) | SOFR + 5.50% | N/A | 2/10/2027 | - | (65) | (99) | (0.1) | |||||
| Perforce Software, Inc. | (4) (7) | SOFR + 4.75% | 10.07 | % | 3/25/2031 | 10,000 | 9,950 | 9,950 | 8.6 | ||||
| Quartz Acquireco, LLC | (7) | SOFR + 3.50% | 8.81 | % | 6/28/2030 | 4,975 | 4,981 | 4,998 | 4.3 | ||||
| Renaissance Holding Corp. | (8) | SOFR + 4.25% | 9.58 | % | 4/5/2030 | 9,963 | 9,981 | 9,994 | 8.7 | ||||
| Rocket Software, Inc. | (8) | SOFR + 4.75% | 10.08 | % | 11/28/2028 | 9,962 | 9,887 | 9,902 | 8.6 | ||||
| Softeon, Inc. | (4) (6) (9) | SOFR + 5.75% | 11.06 | % | 11/20/2030 | 12,500 | 12,195 | 12,267 | 10.7 | ||||
| Waystar Technologies, Inc. | (7) | SOFR + 4.00% | 9.33 | % | 10/22/2029 | 7,987 | 8,021 | 8,017 | 7.0 | ||||
| Zelis Healthcare Corporation | (7) | SOFR + 2.75% | 8.07 | % | 9/28/2029 | 5,000 | 4,976 | 5,006 | 4.4 | ||||
| Total Software | 105,192 | 105,237 | 91.5 | ||||||||||
| Total First-Lien Debt | 180,078 | 180,487 | 156.9 | ||||||||||
| Total Investments - non-controlled/non-affiliated | 180,078 | 180,487 | 156.9 | ||||||||||
| Cash and Cash Equivalents | 53,410 | 53,410 | 46.5 | ||||||||||
| Total Investments, Cash and Cash Equivalents | $ | 233,488 | $ | 233,897 | 203.4 | % |
9
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) - (continued)
MARCH 31, 2024
(dollars in thousands, except share and per share data)
(1)Unless otherwise indicated, all debt investments held by the Company (the "Company" includes the Company's consolidated subsidiaries for purposes of this Consolidated Schedule of Investments) are denominated in U.S. dollars and headquarted in the United States. All debt investments are income producing unless otherwise indicated. Certain portfolio company investments are subject to contractual restrictions on sales. The total par amount (in thousands) is presented for debt investments. None of the Company's investments are pledged as collateral under one or more of its credit facilities unless otherwise indicated.
(2)Variable rate loans to the portfolio companies bear interest at a rate that is determined by reference to Secured Overnight Financing Rate ("SOFR") or an alternate base rate (commonly based on the Federal Funds Rate ("F") or the U.S. Prime Rate ("P"), which generally resets periodically. For each loan, the Company has indicated the reference rate used and provided the spread and the interest rate in effect as of March 31, 2024. Variable rate loans typically include an interest reference rate floor feature.
(3)The cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.
(4)These investments were valued using unobservable inputs and are considered Level 3 investments. Fair value was determined in good faith by the Adviser under the direction of the Board of Directors (the "Board") (see Note 3), pursuant to the Company's valuation policy.
(5)The investment is not a qualifying asset under Section 55(a) of the 1940 Act. The Company may not acquire any nonqualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company's total assets. As of March 31, 2024, nonqualifying assets represented 8.37% of total assets as calculated in accordance with regulatory requests.
(6) Position or portion thereof is an unfunded commitment, and no interest is being earned on the unfunded portion, although the investment may be subject to unused commitment fees. Negative cost and fair value results primarily from unamortized fees, which are capitalized to the investment cost. The unfunded commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See below for more information on the Company's unfunded commitments:
| Investments - non-controlled/non-affiliated | Commitment Type |
Commitment Expiration Date |
Unfunded Commitment |
Fair Value | ||
| Aptean, Inc. | Delayed draw term loan | 1/30/2031 | $ | 3,375 | $ | (34) |
| Aptean, Inc. | Revolver | 1/30/2031 | 1,820 | (18) | ||
| ASG III, LLC | Delayed draw term loan | 10/31/2029 | 1,148 | (22) | ||
| ASG III, LLC | Revolver | 10/31/2029 | 1,325 | (25) | ||
| Azurite Intermediate Holdings, Inc. | Delayed draw term loan | 3/19/2031 | 12,207 | (183) | ||
| Azurite Intermediate Holdings, Inc. | Revolver | 3/19/2031 | 1,953 | (29) | ||
| Enverus Holdings, Inc. | Delayed draw term loan | 12/24/2029 | 833 | (11) | ||
| Enverus Holdings, Inc. | Revolver | 12/24/2029 | 1,267 | (17) | ||
| Integrity Marketing Acquisition, LLC | Delayed draw term loan | 8/27/2026 | 4,650 | (35) | ||
| MRI Software, LLC | Delayed draw term loan | 2/10/2027 | 11,364 | (99) | ||
| MRI Software, LLC | Revolver | 2/10/2027 | 1,136 | - | ||
| Redwood Services Group, LLC | Delayed draw term loan | 12/31/2025 | 4,003 | (73) | ||
| Softeon, Inc. | Delayed draw term loan | 11/20/2030 | 3,333 | (46) | ||
| Softeon, Inc. | Delayed draw term loan | 11/20/2030 | 1,667 | 8 | ||
| Softeon, Inc. | Revolver | 11/20/2030 | 1,667 | (23) | ||
| Total unfunded commitments | $ | 51,748 | $ | (607) |
(7)There are no interest rate floors on these investments.
(8)The interest rate floor on these investments as of March 31, 2024 was 0.50%.
(9)The interest rate floor on these investments as of March 31, 2024 was 0.75%.
(10)The interest rate floor on these investments as of March 31, 2024 was 1.00%.
(11)For unsettled positions the interest rate does not include the base rate.
(12)The Company uses GICS® industry tier for classification of investments. All investments ultimately are focused in enterprise software, data and technology-enabled sectors.
(13)The headquarters of this portfolio company is located in Switzerland.
(14)Loans include a credit spread adjustment of 0.10%.
10
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) - (continued)
MARCH 31, 2024
(dollars in thousands, except share and per share data)
(15)The following table shows the portfolio composition by geographic region at amortized cost and fair value as a percentage of total investments in portfolio companies. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which is not always indicative of the primary source of the portfolio company's business:
| As of March 31, 2024 | ||||||||
| Geography - % of Fair Value | Amortized Cost | Fair Value | ||||||
| United States | $ | 160,400 | 89.1 | % | $ | 160,835 | 89.1 | % |
| Switzerland | 19,678 | 10.9 | 19,652 | 10.9 | ||||
| Total | $ | 180,078 | 100.0 | % | $ | 180,487 | 100.0 | % |
11
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2023
(dollars in thousands, except share and per share data)
|
Investments (15)
|
Footnotes |
Reference Rate and Spread |
Interest Rate(2) (11)
|
Maturity Date |
Par
Amount/Units(1)
|
AmortizedCost(3)
|
Fair Value |
% of Net Assets |
|||||
| Investments - non-controlled/non-affiliated | (12) | ||||||||||||
| First-Lien Debt | |||||||||||||
| Health-Care Technology | |||||||||||||
| Athenahealth Group, Inc. | (8) | SOFR + 3.25% | 8.61 | % | 2/15/2029 | $ | 4,987 | $ | 4,938 | $ | 4,973 | 6.7 | % |
| Insurance | |||||||||||||
| Integrity Marketing Acquisition, LLC | (4) (6) (9) | SOFR + 6.00% | 11.39 | % | 8/27/2026 | 349 | 337 | 306 | 0.4 | ||||
| IT Services | |||||||||||||
| Acronis International | (4) (5) (10) (13) (14) | SOFR + 5.85% | 11.29 | % | 4/1/2027 | 15,000 | 14,746 | 14,737 | 19.7 | ||||
| Banff Merger Sub, Inc. | (7) | SOFR + 4.25% | 9.21 | % | 12/29/2028 | 4,024 | 4,029 | 4,059 | 5.4 | ||||
| MH Sub I, LLC | (8) | SOFR + 4.25% | 9.60 | % | 5/3/2028 | 4,987 | 4,848 | 4,913 | 6.6 | ||||
| Redwood Services Group, LLC | (4) (6) (9) (14) | SOFR + 6.25% | 11.70 | % | 6/15/2029 | 12,737 | 12,497 | 12,441 | 16.7 | ||||
| Total IT Services | 36,120 | 36,150 | 48.4 | ||||||||||
| Oil, Gas & Consumable Fuels | |||||||||||||
| Enverus Holdings, Inc. | (4) (6) (9) | SOFR + 5.50% | 10.86 | % | 12/24/2029 | 9,990 | 9,826 | 9,825 | 13.2 | ||||
| Software | |||||||||||||
| Aptean, Inc. | (7) | SOFR + 5.50% | 10.86 | % | 4/23/2026 | 8,436 | 8,298 | 8,447 | 11.3 | ||||
| ASG III, LLC | (4) (6) (10) | SOFR + 6.50% | 11.88 | % | 10/31/2029 | 8,392 | 8,131 | 8,127 | 10.9 | ||||
| Central Parent, Inc. | (8) | SOFR + 4.00% | 9.35 | % | 7/6/2029 | 5,000 | 5,006 | 5,034 | 6.7 | ||||
| MRI Software, LLC | (4) (6) (10) | SOFR + 5.50% | N/A | 2/10/2027 | - | (68) | (125) | (0.2) | |||||
| Quartz Acquireco, LLC | (7) | SOFR + 3.50% | 8.86 | % | 6/28/2030 | 4,988 | 4,994 | 5,009 | 6.7 | ||||
| Renaissance Holding Corp. | (8) | SOFR + 4.75% | 10.09 | % | 4/5/2030 | 4,988 | 4,994 | 5,012 | 6.7 | ||||
| Rocket Software, Inc. | (8) | SOFR + 4.75% | 10.11 | % | 11/28/2028 | 4,987 | 4,928 | 4,910 | 6.6 | ||||
| Softeon, Inc. | (4) (6) (9) | SOFR + 5.75% | 11.10 | % | 11/20/2030 | 12,500 | 12,188 | 12,198 | 16.3 | ||||
| Zelis Healthcare Corporation | (7) | SOFR + 3.50% | 8.97 | % | 9/30/2026 | 4,987 | 4,993 | 5,003 | 6.7 | ||||
| Total Software | 53,464 | 53,615 | 71.7 | ||||||||||
| Total First-Lien Debt | 104,685 | 104,869 | 140.4 | ||||||||||
| Total Investments - non-controlled/non-affiliated | 104,685 | 104,869 | 140.4 | ||||||||||
| Cash and Cash Equivalents | 61,943 | 61,943 | 82.9 | ||||||||||
| Total Investments, Cash and Cash Equivalents | $ | 166,628 | $ | 166,812 | 223.3 | % |
(1)Unless otherwise indicated, all debt investments held by the Company (the "Company" includes the Company's consolidated subsidiaries for purposes of this Consolidated Schedule of Investments) are denominated in U.S. dollars and headquarted in the United States. All debt investments are income producing unless otherwise indicated. Certain portfolio company investments are subject to contractual restrictions on sales. The total par amount (in thousands) is presented for debt investments. None of the Company's investments are pledged as collateral, under one or more of its credit facilities unless otherwise indicated.
12
VISTA CREDIT STRATEGIC LENDING CORP.
CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)
DECEMBER 31, 2023
(dollars in thousands, except share and per share data)
(2)Variable rate loans to the portfolio companies bear interest at a rate that is determined by reference to Secured Overnight Financing Rate ("SOFR") or an alternate base rate (commonly based on the Federal Funds Rate ("F") or the U.S. Prime Rate ("P"), which generally resets periodically. For each loan, the Company has indicated the reference rate used and provided the spread and the interest rate in effect as of December 31, 2023. Variable rate loans typically include an interest reference rate floor feature.
(3)The cost represents the original cost adjusted for the amortization of discounts and premiums, as applicable, on debt investments using the effective interest method.
(4)These investments were valued using unobservable inputs and are considered Level 3 investments. Fair value was determined in good faith by the Adviser under the direction of the Board of Directors (the "Board") (see Note 3), pursuant to the Company's valuation policy.
(5)The investment is not a qualifying asset under Section 55(a) of the 1940 Act. The Company may not acquire any nonqualifying asset unless, at the time of acquisition, qualifying assets represent at least 70% of the Company's total assets. As of December 31, 2023, nonqualifying assets represented. 8.82% of total assets as calculated in accordance with regulatory requests.
(6) Position or portion thereof is an unfunded commitment, and no interest is being earned on the unfunded portion, although the investment may be subject to unused commitment fees. Negative cost and fair value results primarily from unamortized fees, which are capitalized to the investment cost. The unfunded commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. See below for more information on the Company's unfunded commitments:
| Investments - non-controlled/non-affiliated | Commitment Type |
Commitment Expiration Date |
Unfunded Commitment |
Fair Value | ||
| ASG III, LLC | Delayed draw term loan | 10/31/2029 | $ | 3,533 | $ | (71) |
| ASG III, LLC | Revolver | 10/31/2029 | 1,325 | (27) | ||
| Enverus Holdings, Inc. | Delayed draw term loan | 12/24/2029 | 500 | (4) | ||
| Enverus Holdings, Inc. | Revolver | 12/24/2029 | 760 | (11) | ||
| Integrity Marketing Acquisition, LLC | Delayed draw term loan | 8/27/2026 | 4,650 | (40) | ||
| MRI Software, LLC | Delayed draw term loan | 2/10/2027 | 11,364 | (114) | ||
| MRI Software, LLC | Revolver | 2/10/2027 | 1,136 | (11) | ||
| Redwood Services Group, LLC | Delayed draw term loan | 6/15/2029 | 2,063 | (41) | ||
| Softeon, Inc. | Delayed draw term loan | 11/20/2030 | 3,333 | (58) | ||
| Softeon, Inc. | Delayed draw term loan | 11/20/2030 | 1,667 | 4 | ||
| Softeon, Inc. | Revolver | 11/20/2030 | 1,667 | (29) | ||
| Total unfunded commitments | $ | 31,998 | $ | (402) |
(7)There are no interest rate floors on these investments.
(8)The interest rate floor on these investments as of December 31, 2023 was 0.50%.
(9)The interest rate floor on these investments as of December 31, 2023 was 0.75%.
(10)The interest rate floor on these investments as of December 31, 2023 was 1.00%.
(11)For unsettled positions the interest rate does not include the base rate.
(12)The Company uses GICS® industry tier for classification of investments. All investments ultimately are focused in enterprise software, data and technology-enabled sectors.
(13)The headquarters of this portfolio company is located in Switzerland.
(14)Loans include a credit spread adjustment of 0.10%.
(15)The following table shows the portfolio composition by geographic region at amortized cost and fair value as a percentage of total investments in portfolio companies. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which is not always indicative of the primary source of the portfolio company's business:
| As of December 31, 2023 | ||||||||
| Geography - % of Fair Value | Amortized Cost | Fair Value | ||||||
| United States | $ | 89,939 | 85.9 | % | $ | 90,132 | 85.9 | % |
| Switzerland | 14,746 | 14.1 | 14,737 | 14.1 | ||||
| Total | $ | 104,685 | 100.0 | % | $ | 104,869 | 100.0 | % |
13
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
1. ORGANIZATION
Vista Credit Strategic Lending Corp. (the "Company") is incorporated under the laws of the State of Maryland and was formed on March 15, 2022, its date of inception ("Inception Date"). The Company is structured as a closed-end management investment company. The Company has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). In addition, for tax purposes, the Company intends to elect to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is externally managed by Vista Credit BDC Management, L.P. (the "Adviser"), an investment adviser that is registered with the U.S. Securities and Exchange Commission (the "SEC") under the Investment Advisers Act of 1940, as amended. The Adviser also intends to provide the administrative services necessary for the Company to operate pursuant to an administration agreement (the "Administration Agreement"). The Adviser is a wholly owned subsidiary of VEP Group, LLC (together with its affiliates, including Vista Credit Partners, L.P., "Vista").
The Company is conducting a private offering (the "Private Offering") of its shares of common stock to accredited investors, as defined in Regulation D under the Securities Act of 1933 (the "1933 Act") and outside the United States in accordance with Regulation S or Regulation D under the 1933 Act, in reliance on exemptions from the registration requirements of the 1933 Act. The Company is a privately placed, perpetual-life BDC, which is a BDC whose shares are not listed for trading on a stock exchange or other securities market. Each investor in the Private Offering will make a capital commitment (a "Capital Commitment") to purchase shares of common stock of the Company pursuant to a subscription agreement entered into with the Company. If investors' Capital Commitments are not fully funded at the time such Commitments are accepted, such investors will be required to fund drawdowns to purchase the Company's shares up to the amount of their respective Capital Commitments on an as-needed basis each time the Company delivers a notice to the investors. The Company anticipates funding investments utilizing proceeds from the Private Offering. On June 16, 2023, the Adviser purchased 1,250 shares of the Company's common stock at $20.00 per share. On September 8, 2023, the Company began accepting subscription agreements from third-party investors acquiring shares of the Company's common stock in the Private Offering.
The Company expects to invest in "middle market companies," which the Company defines to generally mean companies with earnings before interest, taxes, depreciation and amortization ("EBITDA") of less than $250 million annually, and/or annual revenue of $25 million to $2.5 billion at the time of investment, in the enterprise software, data and technology-enabled sectors. The Company's investment objective is to generate current income and, to a lesser extent, capital appreciation by investing in a portfolio of investments that will primarily consist of senior or subordinated debt, preferred stock or other interests senior to common equity as well as equity securities (or rights to acquire equity securities) acquired in connection with debt financing transactions in management buyouts, recapitalizations and other opportunities.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). In the opinion of management, all adjustments considered necessary for the fair presentation of the consolidated financial statements have been included.
The Company is an investment company for the purposes of accounting and financial reporting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946, Financial Services-Investment Companies("ASC 946").
Interim financial statements are prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim periods presented, have been included. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2024.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
14
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
reporting period. It also requires management to exercise judgment in the process of applying the Company's accounting policies. Actual results could differ from those estimates.
Consolidation
As provided under ASC 946 and Regulation S-X, the Company will generally not consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company's wholly-owned subsidiaries, BDC CA Lender, LLC, VCSL Funding 1 LLC and VCSL Funding 2 LLC. All significant intercompany balances and transactions have been eliminated.
Investments
Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the accompanying Consolidated Statements of Operations reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and highly liquid investments (e.g., money market funds, U.S. treasury notes) with original maturities of three months or less. Cash and cash equivalents are denominated in U.S. dollars and are carried at cost, which approximates fair value. The Company deposits its cash and cash equivalents with highly rated banking corporations and, at times, cash deposits may exceed the insured limits under applicable law. As of March 31, 2024 and December 31, 2023, the Company did not have any balances related to restricted cash.
Revenue Recognition
Interest income is recorded on an accrual basis and includes the accretion of discounts, amortization of premiums and payment-in-kind ("PIK") interest. Discounts from and premiums to par value on investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. To the extent loans contain PIK provisions, PIK interest, computed at the contractual rates is accrued and recorded as interest income and added to the principal balance of the loan. PIK interest income added to the principal balance is generally collected upon repayment of the outstanding principal. For the three months ended March 31, 2024 and 2023, the Company earned $19 and $0 of PIK interest income, respectively.
Loans are generally placed on non-accrual status when interest and/or principal payments become materially past due and there is reasonable doubt that principal or interest will be collected in full. Recognition of interest income of that loan will be ceased until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, the Company remains contractually entitled to this interest. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon the Company's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid or there is no longer any reasonable doubt that such principal or interest will be collected in full and, in the Company's judgment, are likely to remain current. The Company may make exceptions to this policy if the loan has sufficient collateral value or is in the process of collection. Accrued interest is written off when it becomes probable that the interest will not be collected, and the amount of uncollectible interest can be reasonably estimated. The Company did not have any loans on non-accrual status as of March 31, 2024 or December 31, 2023.
Other income may include income such as consent, waiver, amendment, unused, underwriting, arranger and prepayment fees associated with the Company's investment activities as well as any fees for managerial assistance services rendered by the Company to the portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive fees for guaranteeing the outstanding debt of a portfolio company. Such fees are amortized into other income over the life of the guarantee. The unamortized amount, if any, is included in other assets in the accompanying Consolidated Statements of Assets and Liabilities. For the three months ended March 31, 2024 and 2023, the Company earned $142 and $0, respectively, in other income, primarily from unused fees.
15
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
Organization and Offering Costs
Organization and offering costs will be borne by the Company and have been advanced from the Adviser subject to recoupment. Costs associated with the organization of the Company have been expensed as incurred, subject to the limitations described below. These costs consist primarily of legal fees and other fees of organizing the Company.
Costs associated with the Private Offering of the Company are capitalized as deferred offering costs on the Consolidated Statement of Assets and Liabilities and amortized over a twelve-month period from the commencement of operations. These costs consist primarily of legal fees and other fees incurred in connection with the Private Offering.
For the three months ended March 31, 2024, the Company incurred $0 of organization costs and $96 of offering costs, and amortized $629 of offering costs. For the three months ended March 31, 2023, the Company incurred $289 of organization costs and $260 of offering costs, and amortized $0 of offering costs. Refer to Note 4 for further details on the Expense Support and Conditional Reimbursement Agreement.
Deferred Financing Costs
The Company has entered into a $200,000 senior secured revolving credit facility with Sumitomo Mitsui Banking Corporation (the "SMBC Credit Facility"). Interest expense and unused commitment fees on the SMBC Credit Facility are recorded on an accrual basis. Unused commitment fees are included in interest expense and credit facility fees in the accompanying Consolidated Statements of Operations.
Deferred financing costs include capitalized expenses related to the closing or amendments of the SMBC Credit Facility. Amortization of deferred financing costs for the credit facility is computed on the straight-line basis over the term of the credit facility. The unamortized balance of such costs is included in prepaid expenses and other assets in the accompanying Consolidated Statements of Assets and Liabilities. The amortization of such costs is included in interest expense and credit facility fees in the accompanying Consolidated Statements of Operations.
As of March 31, 2024 and December 31, 2023, the Company had $702 and $921of deferred financing costs, respectively. Amortization expense for deferred financing costs for the three months months ended March 31, 2024 and March 31, 2023 were $218 and $0, respectively.
Expenses
The Company is responsible for software costs, insurance costs and other expenses related to the Company's operations. Such expenses, including expenses incurred by the Adviser on behalf of the Company, are generally expected to be reimbursed by the Company. Costs incurred for annual subscriptions and insurance policies are generally recorded as a deferred charge and are amortized using the straight-line method over the term of the subscription or policy period. Deferred costs related to the Company's Director and Officers liability insurance are presented in prepaid expenses and other assets on the Company's Consolidated Statement of Assets and Liabilities.
Income Taxes
The Company intends to elect to be treated as a RIC under the Code. So long as the Company maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Therefore, no provision for federal income taxes is recorded in the consolidated financial statements of the Company. Rather, any tax liability related to income earned and distributed by the Company would represent obligations of the Company's investors.
To qualify for and maintain qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must also annually distribute dividends for U.S. federal income tax purposes to its stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of its investment company taxable income, determined without regard to any deduction for dividends paid.
Depending on the level of taxable income earned in a tax year, the Company can be expected to carry forward taxable income (including net capital gains, if any) in excess of current year dividend distributions from the current tax year into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such taxable income, as required. To the extent that the Company determines that the estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, the Company accrues excise tax on estimated excess taxable income.
16
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority. Tax positions not deemed to meet the "more-likely-than-not" threshold are reserved and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.
Functional Currency
The functional currency of the Company is the U.S. Dollar, and all transactions were in U.S. Dollars.
Earnings per Common Share
The Company computes earnings per common share in accordance with ASC 260, Earnings Per Share("ASC 260"). Basic earnings per common share is calculated by dividing the net increase (decrease) in net assets resulting from operations attributable to common stock by the weighted average number of shares of common stock outstanding. Diluted earnings per common share reflects the assumed conversion of all dilutive securities.
Recent Accounting Standards Updates
In November 2023, the FASB issued ASU 2023-07, Segment Reporting(Topic 280), which affects all public entities that are required to report segment information. The amendments in ASU 2023-07 clarify that a public entity that has a single reportable segment is required to provide all the disclosures required by the amendments. The effective date for the amendments in ASU 2023-07 are for fiscal years beginning after December 15, 2023 and interim periods within the fiscal years beginning after December 15, 2024. The Company has concluded that this guidance will not have a material impact on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes-Improvements to Income Tax Disclosures. This guidance enhances the transparency and decision usefulness of income tax disclosures. The effective date for the amendments in ASU 2023-09 are for fiscal years beginning after December 15, 2024. Management is currently evaluating the impact of the guidance on the Company's financial statements and disclosures.
3. FAIR VALUE MEASUREMENTS
The Company applies fair value accounting in accordance with the terms ofASC 820, Fair Value Measurements("ASC 820"), as amended, which establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, the Company considers its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
•Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
•Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
The Adviser, as the valuation designee pursuant to Rule 2a-5 under the 1940 Act, determines in good faith the fair value of the Company's investment portfolio for which market quotations are not readily available. In addition to using the above inputs in investment valuations, the Adviser will apply a valuation policy approved by the Board that is consistent
17
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
with ASC 820. Consistent with the valuation policy, the Company evaluates the source of the inputs, including any markets in which the Company's investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When an investment is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), the Company subjects those prices to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, the Company, or the independent valuation firm(s), reviews pricing support provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.
Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. For the three months ended March 31, 2024 and 2023, there were no transfers between levels.
The following tables summarize the Company's investments measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31, 2024 and December 31, 2023.
| As of March 31, 2024 | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||
| Assets | ||||||||
| First-lien debt | $ | - | $ | 71,811 | $ | 108,676 | $ | 180,487 |
| Total | $ | - | $ | 71,811 | $ | 108,676 | $ | 180,487 |
| As of December 31, 2023 | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||
| Assets | ||||||||
| First-lien debt | $ | - | $ | 47,359 | $ | 57,510 | $ | 104,869 |
| Total | $ | - | $ | 47,359 | $ | 57,510 | $ | 104,869 |
18
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
The changes in the Company's investments at fair value for which the Company has used Level 3 inputs to determine fair value and net change in unrealized appreciation (depreciation) included in earnings for Level 3 investments that continue to be held are as follows:
|
Financial Assets For the Three Months Ended March 31, 2024 |
||||
|
First-Lien Debt |
Total | |||
| Balance, beginning of period | $ | 57,510 | $ | 57,510 |
| Purchases | 50,779 | 50,779 | ||
| Paydowns | - | - | ||
| Accretion of discount | 59 | 59 | ||
| PIK interest | 2 | 2 | ||
| Net change in unrealized appreciation (depreciation) | 325 | 325 | ||
| Balance, end of period | $ | 108,676 | $ | 108,676 |
| Net change in unrealized appreciation (depreciation) included in earnings related to investments that continue to be held at the reporting date included in net change in unrealized appreciation (depreciation) on investments on the Consolidated Statements of Operations | $ | 325 | $ | 325 |
There was no investment activity for the three months ended March 31, 2023.
The Company generally uses the following framework when determining the fair value of investments that are categorized as Level 3:
The Company's Board has appointed the Adviser as its valuation designee, in accordance with Rule 2a-5 under the 1940 Act. The fair value is determined by the Adviser's valuation committee, subject to oversight by the Board, consistent with a documented valuation policy and consistently applied valuation process. In connection with that determination, investment valuations will be prepared using ranges of valuations obtained from independent valuation firms, and/or proprietary models depending on the materiality of the investments, the availability of information on the Company's investments and the type of investment being valued, all in accordance with the Company's valuation policy.
Determination of fair value involves subjective judgments and estimates. As part of the valuation process, the factors that may be taken into account in determining the fair value of the Company's investments include, as relevant: the estimated enterprise value of a portfolio company (i.e., the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments based on its earnings and cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Adviser's valuation committee will consider whether the pricing indicated by the external event corroborates its valuation.
Investments in debt securities are initially evaluated to determine whether the enterprise value of the portfolio company is greater than the applicable debt. The enterprise value of the portfolio company is estimated using a market approach and an income approach. The market approach utilizes market value (EBITDA) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Adviser carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value the Company's portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The income approach typically uses a discounted cash flow analysis of the portfolio company.
Investments in debt securities that do not have sufficient coverage through the enterprise value analysis are valued based on an expected probability of default and discount recovery analysis.
19
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
Investments in debt securities with sufficient coverage through the enterprise value analysis are generally valued using a discounted cash flow analysis of the underlying security. Projected cash flows in the discounted cash flow typically represent the relevant security's contractual interest, fees and principal payments plus the assumption of full principal recovery at the security's expected maturity date. The discount rate to be used is determined using an average of two market-based methodologies. Investments in debt securities may also be valued using consensus pricing.
The following table summarizes the quantitative information related to the significant unobservable inputs for Level 3 instruments which are carried at fair value as of March 31, 2024:
| Range | ||||||||||
|
Fair Value as of March 31, 2024 |
Valuation Techniques |
Significant Unobservable Inputs |
Low | High |
Weighted Average |
|||||
| First-lien debt | $ | 93,648 | Yield Analysis | Discount Rate | 10.1 | % | 13.1 | % | 11.3 | % |
| 15,028 | Recent Transactions | Transaction Price | 98.50 | 99.50 | 99.16 | |||||
| Total first-lien debt | $ | 108,676 | ||||||||
The following table summarizes the quantitative information related to the significant unobservable inputs for Level 3 instruments which are carried at fair value as of December 31, 2023:
| Range | ||||||||||
|
Fair Value as of December 31, 2023 |
Valuation Techniques |
Significant Unobservable Inputs |
Low | High |
Weighted Average |
|||||
| First-lien debt | $ | 47,810 | Yield Analysis | Discount Rate | 10.9 | % | 12.7 | % | 11.5 | % |
| 9,700 | Recent Transactions | Transaction Price | 98.50 | 99.25 | 98.50 | |||||
| Total first-lien debt | $ | 57,510 | ||||||||
The significant unobservable inputs used in the fair value measurement of the Company's investments in first lien debt securities are discount rates and transaction prices. Significant increases in discount rates in isolation would result in a significantly lower fair value measurement. Significant decreases in transaction prices in isolation would result in a significantly lower fair value measurement.
Financial Instruments Disclosed but Not Carried at Fair Value
The following table presents the carrying value and fair value of the Company's secured borrowings (see Note 5, Borrowings) disclosed but not carried at fair value as of March 31, 2024 and December 31, 2023:
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||
| Secured borrowings | $ | 84,250 | $ | 84,250 | $ | 77,250 | $ | 77,250 |
| Total secured borrowings | $ | 84,250 | $ | 84,250 | $ | 77,250 | $ | 77,250 |
Secured borrowings as of March 31, 2024and December 31, 2023 consist of borrowings under the SMBC Credit Facility which closed on November 17, 2023. Given there were no material market movements in credit spreads from November 17, 2023 through March 31, 2024and given the underlying interest rate on any secured borrowing is based on an underlying index that resets on a periodic basis, the carrying values of the secured borrowings approximate fair value. Secured borrowings are categorized as Level 3 within the hierarchy.
20
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
The carrying value of other financial assets and liabilities approximates their fair value based on the short term nature of these items.
4. RELATED PARTY TRANSACTIONS
Investment Advisory Agreement
On June 16, 2023, the Company entered into an investment advisory agreement (the "Investment Advisory Agreement") with the Adviser, pursuant to which the Adviser will manage the Company's investment program and related activities. For providing these services, the Adviser will receive fees from the Company consisting of two components: (1) a Management Fee and (2) an Incentive Fee (both as described below). The cost of the Management Fee and the Incentive Fee will ultimately be borne by the Company's stockholders. No Management Fee or Incentive Fee was payable to the Adviser until the commencement of investment activities. Without payment of any penalty, the Company will have the right to terminate the Investment Advisory Agreement upon 60 days' written notice.
The Management Fee will be payable quarterly in arrears at an annual rate of 1.25% of the Company's net asset value as of the last day of the immediately preceding quarter. Such amount shall be appropriately adjusted (based on the actual number of days elapsed relative to the total number of days in such calendar quarter) for any share issuances or repurchases during a calendar quarter. In addition, the Management Fee for any partial quarter shall be appropriately prorated. For the purposes of the Investment Advisory Agreement, net assets mean the Company's total assets less indebtedness and before taking into account any incentive fees payable during the period. The Management Fee incurred for the three months ended March 31, 2024 was $240.
The Incentive Fee will consist of two components: the investment income component (the "Investment Income Incentive Fee"), and the capital gains component (the "Capital Gains Incentive Fee"). The two components are independent of each other, with the result that one component may be payable even if the other is not.
(i)Investment Income Incentive Fee
The Investment Income Incentive Fee is calculated quarterly in arrears based on pre-incentive fee net investment income for the immediately preceding calendar quarter. "Pre-incentive fee net investment income", means dividends (including reinvested dividends), interest and fee income accrued by the Company during the calendar quarter, minus operating expenses for the calendar quarter (including the Management Fee, expenses payable to the Adviser under the Administration Agreement and any interest expense and dividends 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 PIK and zero-coupon securities), accrued income that the Company may not have received in cash. 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 the Company's net assets at the end of the immediately preceding quarter, is compared to a "hurdle rate" of 1.25% per quarter (5.0% annualized).
The Company will pay the Adviser an Investment Income Incentive Fee in each calendar quarter as follows:
•No Investment Income Incentive Fee in any calendar quarter in which the Company's pre-incentive fee net investment income does not exceed the hurdle rate of 1.25% per quarter (5.00% annualized);
•100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 1.43% (5.72% annualized). This portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 1.43%) is referred to as the "catch-up"; and
•12.5%of the Company's pre-incentive fee net investment income, if any, that exceeds 1.43% (5.72% annualized).
The Company did not earn an Investment Income Incentive Fee for the three months ended March 31, 2024.
(ii)Capital Gains Incentive Fee
The second component of the Incentive Fee, the Capital Gains Incentive Fee, is payable in arrears at the end of each calendar year in an amount equal to 12.5% of cumulative realized capital gains from initial drawdown through the end
21
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
of such calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis less the aggregate amount of any previously paid capital gains incentive fees.
The Company will accrue, but will not pay, a Capital Gains Incentive Fee with respect to unrealized appreciation because a Capital Gains Incentive Fee would be owed to the Adviser if the Company were to sell the relevant investment and realize a capital gain. For the three months ended March 31, 2024, the Company incurred a Capital Gains Incentive Fee of $28, none of which is contractually payable under the terms of the Investment Advisory Agreement.
Notwithstanding the foregoing, if the Company is required by U.S. GAAP to record an investment at its fair value as of the time of acquisition instead of at the actual amount paid for such investment (including, for example, as a result of the application of the asset acquisition method of accounting), then solely for the purposes of calculating the capital gains incentive fee, the "accreted or amortized cost basis" of an investment shall be an amount (the "Contractual Cost Basis") equal to (1) (x) the actual amount paid by the Company for such investment plus (y) any amounts recorded in the Company's financial statements as required by U.S. GAAP that are attributable to the accretion of such investment plus (z) any other adjustments made to the cost basis included in the Company's financial statements, including payment-in-kind interest or additional amounts funded (net of repayments) minus (2) any amounts recorded in the Company's financial statements as required by U.S. GAAP that are attributable to the amortization of such investment, whether such calculated Contractual Cost Basis is higher or lower than the fair value of such investment (as determined in accordance with U.S. GAAP) at the time of acquisition.
The fees that are payable under the Investment Advisory Agreement for any partial period will be appropriately prorated and adjusted for any share issuances or repurchases during the relevant period. For the three months ended March 31, 2024, $240and $28of management fees and incentives were incurred, respectively, and remain payable as of March 31, 2024. The cumulative incentive fee payable is $51 as of March 31, 2024.
Administration Agreement
On June 16, 2023, the Company entered into the Administration Agreement with its Adviser. Pursuant to the Administration Agreement, the Adviser will perform, or oversee the performance of, administrative services, which includes, but is not limited to, providing office facilities, equipment and office services, maintaining financial records, preparing reports to stockholders and the Board and reports filed with SEC, managing the payment of expenses, providing significant managerial assistance to those portfolio companies to which the Company is required to provide such assistance, assisting the Company in determining and publishing (as necessary or appropriate) the Company's net asset value and overseeing the preparation and filing of the Company's tax returns and the performance of administrative and professional services rendered by others, which could include employees of the Adviser or its affiliates. The Company will reimburse the Adviser (and/or one or more of its affiliates) costs and expenses incurred by the Adviser for services performed for the Company pursuant to the terms of the Administration Agreement. In addition, pursuant to the terms of the Administration Agreement, the Adviser may delegate its obligations under the Administration Agreement to an affiliate and/or to a third party and the Company will reimburse the Adviser (or its affiliate(s)) for any services performed for us by such affiliate or third party. To the extent that the Adviser outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to the Adviser. The Company will bear its allocable portion of the costs of the compensation, benefits, administrative expenses (including travel expenses in accordance with the Adviser's travel and expense policy) and related overhead expenses of the Company's officers who provide operational, administrative, legal, compliance, finance and accounting services hereunder, their respective staffs and other professionals who are employed by any of the Adviser's affiliates that provide services to the Company, and who assist with the preparation, coordination and administration of the foregoing or provide other "back office" or "middle office" financial or operational services to the Company. The Company shall reimburse the Adviser (or its affiliate(s)) for an allocable portion of the compensation (including benefits) and overhead paid by the Adviser (or its affiliate(s)) to such individuals. The Administration Agreement may be terminated by either party without penalty upon 60 days' written notice to the other party.
For the three months ended March 31, 2024 and March 31, 2023, the Company incurred $404 and $0, respectively, in administrative service fees under the Administration Agreement. Fees incurred under the Administration Agreement are included in administrative service fees in the accompanying Consolidated Statements of Operations. As of March 31, 2024 and December 31, 2023, $404 and $390, respectively, was unpaid and included in administrative service fees payable in the accompanying Consolidated Statements of Assets and Liabilities.
Expense Support and Conditional Reimbursement Agreement
The Company has entered into an expense support and conditional reimbursement agreement (the "Expense Support Agreement") with the Adviser. The Adviser may elect to pay certain of the Company's expenses on the
22
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
Company's behalf (each, an "Expense Payment"), provided that no portion of the payment will be used to pay any interest expense or distribution and/or servicing fees of the Company. Any Expense Payment that the Adviser has elected to pay must be paid by the Adviser to the Company in any combination of cash or other immediately available funds no later than forty-five days after such election was made in writing, and/or offset against amounts due from the Company to the Adviser or its affiliates.
Following any calendar quarter in which Available Operating Funds (as defined below) exceed the cumulative distributions accrued to the Company's stockholders based on distributions declared with respect to record dates occurring in such calendar quarter (the amount of such excess being hereinafter referred to as "Excess Operating Funds"), the Company shall pay such Excess Operating Funds, or a portion thereof, to the Adviser until such time as all Expense Payments made by the Adviser to, or on behalf of, the Company within three years prior to the last business day of such calendar quarter have been reimbursed. Any payments required to be made by the Company shall be referred to herein as a "Reimbursement Payment." Reimbursement Payments are conditioned on (i) a distribution level (exclusive of return of capital and declared special dividends or special distributions, if any) equal to, or greater than, the rate at the time of the reimbursement, (ii) an operating expense ratio (excluding any interest expense, organizational and offering expenses, management or incentive fee) that is lower than the expense ratio (excluding any interest expense, organizational and offering expenses, management or incentive fee) at the time of the expense reimbursement and (iii) a distribution level (exclusive of return of capital, if any) equal to, or greater than, the rate at the time of the waiver or reimbursement. "Available Operating Funds" means the sum of (i) net investment company taxable income (including net short-term capital gains reduced by net long-term capital losses), (ii) net capital gains (including the excess of net long-term capital gains over net short-term capital losses) and (iii) dividends and other distributions paid to the Company on account of investments in portfolio companies (to the extent such amounts listed in clause (iii) are not included under clauses (i) and (ii) above).
The Company's obligation to make a Reimbursement Payment shall automatically become a liability of the Company on the last business day of the applicable calendar quarter, except to the extent the Adviser has waived its right to receive such payment for the applicable quarter. As of March 31, 2024 and December 31, 2023, $3,000 and $3,000, respectively, of the Company's expenses are subject to the Expense Support Agreement and $47 and $1,932, respectively, of the Company's expenses that are not subject to the Expense Support Agreement are presented as Due to Adviser on the Company's Consolidated Statements of Assets and Liabilities.
The follow table presents a summary of the Expense Payments and Reimbursement Payments since the Inception Date:
| As of |
Expense Payments Incurred by Adviser |
Reimbursement Payments to Adviser |
Unreimbursed Expense Payments |
|||
| March 31, 2024 | $ | 3,000 | $ | - | $ | 3,000 |
| December 31, 2023 | 3,000 | - | 3,000 |
Board of Directors
The Board currently consists of five members, three of whom are Independent Directors. The Board has established a Nominating and Corporate Governance Committee and an Audit Committee of the Board, and may establish additional committees in the future. For the three months ended March 31, 2024 and 2023, the Company incurred $68and $0, respectively, in fees and expenses associated with its Independent Directors' services on the Board and its committees. These fees are included in directors fees in the accompanying Consolidated Statements of Operations. As of March 31, 2024 and December 31, 2023, $68 and $59, respectively, was unpaid and included in accrued expense and other liabilities in the accompanying Consolidated Statements of Assets and Liabilities.
Capital Commitments
Total capital commitments as of March 31, 2024 and December 31, 2023, include a $50,000 capital commitment from VHG Capital, L.P., an entity affiliated with the Company and the Adviser. During the three months ended March 31, 2024, VHG Capital, L.P. purchased 218,684.510shares of common stock for a total purchase price of $4,286.
5. BORROWINGS
23
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
In accordance with the 1940 Act, the Company is currently only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 150%after such borrowing. As of March 31, 2024 and December 31, 2023, asset coverage was 236.5% and 196.7%, respectively.
SMBC Credit Facility
On November 14, 2023, the Company entered into a revolving credit facility (the "SMBC Credit Facility") with Sumitomo Mitsui Banking Corporation ("SMBC"). The SMBC Credit Facility provides for, among other things, a $200,000revolving credit facility with a stated maturity date of November 14, 2025. Borrowings under the SMBC Credit Facility may be base rate loans, eurocurrency loans or RFR loans (i.e., loans bearing interest based on SOFR or SONIA). For any base rate loan, the applicable margin will be 1.60%plus the highest of (a) the federal funds rate plus 50basis points (0.50%); (b) the prime rate; or (c) except during any period during which the applicable SOFR rate is unavailable, the applicable SOFR rate in effect on such day plus 105basis points (1.05%). Eurocurrency rate loans, daily simple SOFR loans, daily simple SONIA loans and term SOFR loans will accrue interest at a rate equal to one-month EURIBOR, SOFR, or SONIA or one-month term SOFR, respectively, plus, in each case, 2.60%. The Company will pay to SMBC an unused commitment fee, payable quarterly, equal to 0.35%per annum of the average unused portion of available borrowings under the SMBC Credit Facility.
The Company's obligations under the SMBC Credit Facility are secured by (i) its ability to call capital from its investors, (ii) the capital commitments and capital contributions of such investors and (iii) the bank accounts to which such capital contributions are funded into by the Company's investors. The Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. Borrowings under the SMBC Credit Facility are subject to the leverage restrictions contained in the 1940 Act. The Company was in compliance with all covenants and other requirements as of March 31, 2024 and December 31, 2023.
The SMBC CreditFacility consisted of the following as of March 31, 2024:
| As of March 31, 2024 | ||||||||
| Total Facility |
Borrowings Outstanding |
Unused Portion(1)
|
Amount Available(2)
|
|||||
| SMBC Credit Facility | $ | 200,000 | $ | 84,250 | $ | 115,750 | $ | 89,089 |
(1)The unused portion is the amount upon which commitment fees are based.
(2)Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.
The SMBC CreditFacility consisted of the following as of December 31, 2023:
| As of December 31, 2023 | ||||||||
| Total Facility |
Borrowings Outstanding |
Unused Portion(1)
|
Amount Available(2)
|
|||||
| SMBC Credit Facility | $ | 200,000 | $ | 77,250 | $ | 122,750 | $ | 115,874 |
(1)The unused portion is the amount upon which commitment fees are based.
(2)Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.
24
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
For the three months ended March 31, 2024and 2023, the components of interest expense and credit facility fees were as follows:
| For the Three Months Ended | ||||
| March 31, 2024 | March 31, 2023 | |||
| Interest expense | $ | 1,182 | $ | - |
| Facility unused commitment fee | 125 | - | ||
| Amortization of deferred financing costs | 218 | - | ||
| Total interest expense and credit facility fees | $ | 1,525 | $ | - |
| Cash paid for interest expense | $ | 1,115 | $ | - |
| Average principal debt outstanding | $ | 58,734 | $ | - |
As of March 31, 2024and December 31, 2023, the components of interest and credit facility fees payable were as follows:
| As of | ||||
| March 31, 2024 | December 31, 2023 | |||
| Interest expense payable | $ | 506 | $ | 221 |
| Unused commitment fee payable | 125 | - | ||
| Total interest expense and credit facility fees payable | $ | 631 | $ | 221 |
|
Weighted average interest rate (1)
|
7.94 | % | 8.24 | % |
(1)Weighted average interest rate as of March 31, 2024 and December 31, 2023. All underlying interest rates contracts as of March 31, 2024 and December 31, 2023 are based on floating SOFR rates. Excludes facility unused commitment fees and amortization of deferred financing costs..
6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of its business, the Company enters into contracts or agreements that contain indemnification or warranties. Future events could occur that lead to the execution of these provisions against the Company. The Company believes that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in the consolidated financial statements as of March 31, 2024 or December 31, 2023, for any such exposure.
A summary of significant contractual payment obligations was as follows as of March 31, 2024:
| Payments Due by Period | ||||||||||
| As of March 31, 2024 | Total |
Less Than 1 Year |
1 to 3 Years |
3 to 5 Years |
More Than 5 Years |
|||||
| SMBC Credit Facility | $ | 84,250 | $ | - | $ | 84,250 | $ | - | $ | - |
The Company had the following unfunded commitments to fund delayed draw and revolving senior secured loans as of March 31, 2024and December 31, 2023:
| Par Value as of | ||||
|
March 31, 2024 |
December 31, 2023 |
|||
| Delayed draw loan commitments | $ | 42,580 | $ | 27,110 |
| Revolving loan commitments | 9,168 | 4,888 | ||
| Total unfunded commitments | $ | 51,748 | $ | 31,998 |
25
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
On June 20, 2023, the Adviser entered into a facility agreement (the "Facility Agreement") with a subsidiary of Cliffwater Corporate Lending Fund (the "Financing Provider"), an independent third party, to allow the Company to acquire portfolio investments ("Warehoused Assets") by purchasing all or a portion of certain loans, together with any unfunded commitments therein and/or equity instruments owned and held by the Financing Provider pursuant to the terms and provisions of the Facility Agreement (the "Warehousing Transaction"). Pursuant to the Facility Agreement, the Company may request the Financing Provider to acquire Warehoused Assets as it designates from time to time, which the Financing Provider can approve or reject in its sole and absolute discretion. The Facility Agreement is expected to terminate on or before June 30, 2024, subject to extension by the parties.
Subject to certain conditions, the Facility Agreement creates a forward obligation of the Financing Provider to sell and will require the Adviser to cause the Company to purchase, all or a portion of certain Warehoused Assets owned and held by the Financing Provider. The obligation to purchase such Warehoused Assets is conditional upon satisfying certain conditions, including that the Company has received capital commitments in an aggregate amount of at least $250 million and the Board has approved accepting such commitments (the "Capital Condition"). The Capital Condition was satisfied as of September 30, 2023. The Financing Provider will receive, prior to any settlement date related to a purchase of Warehoused Assets, all principal proceeds, interest, fees and other cash (other than original issue discounts and certain upfront and other similar or one-time fees ("OID and Fees")) accruing on any Warehoused Asset that is earned, accrued, paid or payable in respect of such Warehoused Asset. Following the settlement date, any Warehoused Asset shall be solely for the benefit of the Company.
Under the Facility Agreement, loans (other than unfunded commitments that remain unfunded as of the settlement date of the Warehouse Transaction) are purchased at a value (the "Loan Purchase Price") equal to (a) the initial principal amount, plus (b) any incremental principal amount of any loan as may be increased from time to time as the result of the capitalization of "payment-in-kind" interest under such loan plus (c) the amount of any uncapitalized "payment-in-kind" interest under such loan through the settlement date minus (d) any principal repayment amount, minus (e) the product of (i) OID and Fees paid or deemed paid on account of such loan, times (ii) the number of days from and including the settlement date of such loan to and excluding the 36-month anniversary of the initial purchase of the loan, divided by (iii) the number of days from and including the initial purchase date of such loan to and excluding the 36-month anniversary of the initial purchase of the loan. With respect to any remaining unfunded commitment that remains unfunded at the settlement date, the purchase price shall be a dollar amount equal to 0.25% of the amount of such unfunded commitment. Under the Facility Agreement, equity instruments are purchased based on an agreed-upon methodology (the "Equity Purchase Price, and together with the Loan Purchase Price, the "Purchase Price").
As additional consideration, with respect to any Warehoused Asset that is a loan, remaining unfunded commitment or any portion of the foregoing held by the Facility Provider for greater than or equal to nine months (such date, the "Incremental Pricing Date"), the Company may pay, at the time of purchase, an additional amount, depending on the Facility Provider's holding period of such Warehoused Asset beyond the Incremental Pricing Date, of the par value or unfunded amount, as applicable, of such loan, such remaining unfunded commitment or such portion of the foregoing. The Company has agreed to reimburse the Adviser for reasonable and documented fees and disbursements of outside legal counsel to the Financing Provider in connection with the preparation and negotiation of this Facility Agreement in an amount not to exceed $35. During the three months ended March 31, 2024, $0 of outside legal expenses were incurred.
During the three months ended March 31, 2024, the Company purchased debt investments from the Financing Provider in one portfolio company for a total cost of $6,557. The purchase price for each debt investment was calculated in accordance with the Facility Agreement. As of March 31, 2024 and December 31, 2023, the Financing Provider held debt investments in one and two portfolio companies, respectively, with an amortized cost of $3,064 and $9,609, respectively.
26
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
7. FINANCIAL HIGHLIGHTS
The following is a schedule of consolidated financial highlights for the three months ended March 31, 2024. Financial highlights are not required for the three months ended March 31, 2023 as there were no shareholders during this period.
|
For the Three Months Ended March 31, 2024 |
||
| Per Share Data: | ||
|
Net asset value per share, beginning of period
|
$ | 19.60 |
|
Net investment income (loss) (1)
|
0.02 | |
|
Net realized gains (loss) and change in unrealized appreciation (depreciation) on investments(2)
|
0.03 | |
| Net increase (decrease) in net assets resulting in operations | 0.05 | |
| Net asset value per share, end of period | $ | 19.65 |
| Number of shares outstanding, end of period | 5,850,392.831 | |
|
Total return based on net asset value(3)
|
0.26 | % |
| Net assets, end of period | $ | 114,978 |
|
Ratio to average net assets (4):
|
||
| Expenses before incentive fees and waivers and reimbursements of expenses | 3.93 | % |
| Expenses before incentive fees, after waivers and reimbursements of expenses | 3.60 | % |
| Expenses after incentive fees, before waivers and reimbursements of expenses | 3.96 | % |
| Expenses after incentive fees and waivers and reimbursements of expenses | 3.63 | % |
| Net investment income (loss) | 0.08 | % |
| Interest expense and credit facility fees | 1.61 | % |
| Ratio/Supplemental Data: | ||
| Asset coverage, end of period | 236.47 | % |
| Portfolio turnover | 9.47 | % |
| Total committed capital, end of period | $ | 466,637 |
| Ratio of total contributed capital to total committed capital, end of period | 24.90 | % |
| Weighted-average shares outstanding | 3,921,709.266 |
(1)Net investment income (loss) per share was calculated as net investment income (loss) for the period divided by the weighted average number of shares outstanding for the period.
(2)Includes the impact of different share amounts as a result of calculating certain per share data based on weighted average shares outstanding during the period.
(3)Total return is based on the change in net asset value per common share during the year plus the declared dividends on shares, assuming reinvestment of dividends in accordance with the dividend reinvestment plan, divided by the beginning net asset value for the year. The total return has not been annualized.
(4)These ratios to average net assets have not been annualized. Average net assets are computed using the net assets at the end of each quarter of the reporting period.
8. NET ASSETS
The Company has the authority to issue 500,000,000 shares of common stock at $0.01 per share par value.
As of March 31, 2024 and December 31, 2023, the Company had $383,833 and $423,833, respectively, of uncalled capital commitments from Stockholders, $33,388 of which is contingent on the Company receiving additional capital commitments, ensuring that at all times, the aggregate commitments of an individual investor does not exceed 24.99% of the Company's aggregate commitments, and $37,552 and $41,838, respectively, of which is from entities
27
VISTA CREDIT STRATEGIC LENDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(dollar amounts in thousands, except share and per share data, unless otherwise stated)
affiliated with or related to the Adviser. A statement of changes in net assets for the three months ended March 31, 2023 was not presented given we had not commenced operations during that period and no shares had been issued.
Shares issued as of March 31, 2024 and December 31, 2023 were 5,850,392.831 and 3,809,576.503, respectively. There were no shares issued during the three months ended March 31, 2023. The following table summarizes activity in the number of shares outstanding from Inception Date through March 31, 2024:
| Date | Shares Issued | Proceeds Received | Issuance Price per Share | |
| 6/16/2023 | 1,250.000 | $ | 25 | $20.00 |
| 10/10/2023 | 58,326.500 | 1,167 | $20.00 | |
| 11/9/2023 | 2,250,000.002 | 45,000 | $20.00 | |
| 12/20/2023 | 1,500,000.001 | 30,000 | $20.00 | |
| 3/26/2024 | 2,040,816.328 | 40,000 | $19.60 |
There were no dividends declared or dividends reinvested from Inception Date through March 31, 2024.
The Company computes earnings per share in accordance with ASC 260. Basic earnings per share was calculated by dividing net increase (decrease) in net assets resulting from operations attributable to the Company by the weighted-average number of shares outstanding for the period. Basic and diluted earnings per share was as follows:
|
For the Three Months Ended March 31, 2024 |
For the Three Months Ended March 31, 2023 |
|||
| Net increase (decrease) in net assets resulting from operations | $ | 301 | $ | - |
| Weighted average shares outstanding | 3,921,709.266 | - | ||
| Basic and diluted earnings (loss) per share | $ | 0.08 | $ | - |
9. SUBSEQUENT EVENTS
The Company's management evaluated subsequent events through the date the consolidated financial statements were available to be issued. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, these consolidated financial statements, except as discussed below.
On April 1, 2024, the Company issued 253,146.256 shares of the Company's common stock and received aggregate proceeds of approximately $4,962.
On May 1, 2024, the Board of Directors declared a dividend for our Common Stock of $0.017 per share, payable on May 6, 2024 to shareholders of record as of May 2, 2024.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this section should be read in conjunction with "ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS". This discussion contains forward-looking statements, which relate to future events or the future performance or financial condition of Vista Credit Strategic Lending Corp. and involves numerous risks and uncertainties, including, but not limited to, those described in "ITEM 1A. RISK FACTORS" in the Annual Report on Form 10-K filed with the SEC on March 8, 2024. This discussion also should be read in conjunction with the "Forward Looking Statements" appearing elsewhere in this Quarterly Report on Form 10-Q. Actual results could differ materially from those implied or expressed in any forward- looking statements.
Overview
We were incorporated under the laws of the State of Maryland on March 15, 2022. We have elected to be treated as a business development company (a "BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). We also intend to elect to be treated, and intend to qualify annually thereafter, as a regulated investment company (a "RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") for U.S. federal income tax purposes. As a BDC, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in "qualifying" assets, source of income limitations, asset diversification requirements and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.
Our investment objective is to generate current income and, to a lesser extent, capital appreciation by investing in a portfolio of investments that will primarily consist of senior or subordinated debt, preferred stock or other interests senior to common equity as well as equity securities (or rights to acquire equity securities) acquired in connection with debt financing transactions in management buyouts, recapitalizations and other opportunities. Our investment strategy is intended to generate favorable returns across credit cycles with an emphasis on preserving capital. To achieve our investment objective, we will leverage an extensive network of relationships with other sophisticated institutions to source, evaluate and, as appropriate, partner with on transactions. There are no assurances that we will achieve our investment objective.
We expect to invest in "middle market companies," which we define to generally mean companies with earnings before interest, taxes, depreciation, and amortization ("EBITDA") of less than $250 million annually, and/or annual revenue of $25 million to $2.5 billion at the time of investment, in the enterprise software, data and technology-enabled sectors, which focus on designing and implementing software solutions specifically to meet the needs of large, complex organizations. We may on occasion invest in smaller or larger companies if an attractive opportunity presents itself, especially when we believe that there are dislocations in the capital markets such that assets are mispriced on an absolute or relative basis, including the high yield and syndicated loan markets. We generally intend to invest in companies with a low loan-to-value ratio, which we consider to be 50% or below. The loan-to-value ratio measures the relationship between our investment and the enterprise value of the related borrower/issuer (i.e., the aggregate assets securing the investment). Our target credit investments will typically have maturities between three and seven years and generally range in size between $10 million and $75 million. The investment size will vary based on numerous factors, including the size of our capital base.
We expect to generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, we anticipate that many of our debt investments will have floating interest rates that reset on a periodic basis and typically will not fully pay down principal prior to maturity, which could increase our risk of losing part or all of our investment. Under normal circumstances, we will invest at least 80% of our total assets (net assets plus borrowings for investment purposes) in credit investments (loans, bonds and other credit instruments). Our credit investments will typically consist of first lien, unitranche, and second lien debt facilities, and may include mezzanine debt, any of which may be "covenant-lite" (i.e., loans that do not have a complete set of financial maintenance covenants).
On June 16, 2023, Vista Credit BDC Management, L.P. (our "Adviser"), purchased 1,250.000 shares of our Common Stock at $20.00 per share, which represented the initial public offering price of such shares.
On September 8, 2023 and September 22, 2023, we held our initial closings and entered into subscription agreements with investors providing for the private placement of our shares of Common Stock. As of March 31, 2024, we had received capital commitments totaling $500.0 million, $33.4 million of which is contingent on receiving additional capital commitments, ensuring that at all times, the aggregate commitments of an individual investor does not exceed
29
24.99% of our aggregate commitments. As of March 31, 2024, we have issued 5,850,392.831 shares of our Common Stock, for gross proceeds of $116.2 million.
Total capital commitments as of March 31, 2024, include a $50.0 million capital commitment from VHG Capital, L.P., an entity affiliated with us and the Adviser. As of March 31, 2024, VHG Capital, L.P. had purchased 595,067.298 shares of common stock for a total purchase price of $12.4 million.
Investments
Our level of investment activity (both the number of investments and the size of each investment) can and will vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make.
In addition, as part of our risk strategy on investments, we may reduce the levels of certain investments through partial sales or syndication to additional lenders.
Revenues
We generate revenues primarily in the form of interest income from the debt securities we hold and dividends and capital appreciation on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. Discounts from and premiums to par value on investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. To the extent loans contain payment-in-kind ("PIK") provisions, PIK interest, computed at the contractual rates is accrued and recorded as interest income and added to the principal balance of the loan. PIK interest income added to the principal balance is generally collected upon repayment of the outstanding principal. Repayments of our debt investments can reduce interest income from period to period. The frequency or volume of these repayments may fluctuate significantly. In addition, we may also generate revenue in the form of commitment, loan origination, structuring or diligence fees, fees for providing managerial assistance to our portfolio companies and possibly consulting fees. Certain of these fees may be capitalized and amortized as additional interest income over the life of the related loan. Our target credit investments will typically have maturities between three and seven years, and we anticipate that many of our debt investments will have floating interest rates that reset on a periodic basis and typically will not fully pay down principal prior to maturity.
We anticipate that many of our debt investments will typically not fully pay down principal prior to maturity and have floating interest rates that reset on a periodic basis, usually determined on the basis of a benchmark such as the Secured Overnight Financing Rate ("SOFR") and any other alternative reference rates which may affect our net investment income over the long term and increase the risk of losing part or all of the investment.
Dividend income on preferred equity is recorded on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. To the extent a preferred equity contains PIK provisions, PIK dividends, computed at the contractual rates, are accrued and recorded as dividend income and added to the principal balance of the preferred equity. PIK dividends added to the principal balance are generally collected upon redemption of the equity.
Our investment transactions will also reflect the proceeds from repayment or sales of investments. We will recognize realized gains or losses on investments based on the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized.
Expenses
Our primary operating expenses include the payment of the management fee, incentive fee, expenses reimbursable under the agreements between us our Adviser, including an administration agreement (the "Administration Agreement") and an investment advisory agreement (the "Investment Advisory Agreement"), legal and professional fees, interest and other debt expenses, offering and organization expenses, and other operating expenses.
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We expect, but cannot ensure, that our general and administrative expenses will increase in dollar terms during periods of asset growth but will decline as a percentage of total assets during such periods.
Portfolio and Investment Activity
Portfolio Composition
Below is a summary of certain characteristics of our investment portfolio as of March 31, 2024 and December 31, 2023. These calculations include all debt investments, as applicable, for which fair value is determined by the Adviser, in conjunction with third-party valuation firms and excludes non-accrual assets. Amounts are weighted based on fair market value of each respective investment. Portfolio company information utilized in certain calculations was derived from the most recently available portfolio company financial statements, which has not been independently reviewed by us, and may reflect a normalized or adjusted amount. Accordingly, we make no representation or warranty in respect of this information. Revenues, EBITDA, gross margins, and EBITDA margins reported by our portfolio companies and used in the calculations below are generally for the trailing twelve-month period.
| As of March 31, 2024 | As of December 31, 2023 | |||
| Number of investments | 32 | 24 | ||
| Number of portfolio companies | 19 | 16 | ||
|
Weighted average loan-to-value ("LTV")(1)
|
35.2 | % | 33.3 | % |
|
Weighted average gross margin(2)
|
73.7 | % | 71.6 | % |
|
Weighted average EBITDA margin(3)
|
43.8 | % | 40.4 | % |
|
Weighted average yield to maturity ("YTM")(4)
|
10.9 | % | 10.9 | % |
| Percentage of total investment fair value | ||||
| First-lien debt | 100.0 | % | 100.0 | % |
| Percentage of debt investment fair value | ||||
|
Floating rate(5)
|
100.0 | % | 100.0 | % |
|
Fixed interest rate
|
0.0 | % | 0.0 | % |
(1)LTV is the ratio of total debt minus cash, divided by the estimated enterprise value or value of the underlying collateral of the portfolio company. Total debt only includes the debt issued through the tranche in which we are a lender and excludes any debt that is legally and contractually subordinated in ranking to the debt owned by us. We believe this calculation method assists in describing the risk of our portfolio investments, as it takes into consideration the contractual rights of repayment of the tranche of debt owned by us relative to other senior and junior creditors of a portfolio company. "Value" represents an estimate of enterprise value of each portfolio company, a calculation that will vary by portfolio company.
(2)Gross margin is calculated as gross profit divided by total revenue of the portfolio company. Excludes one portfolio company investment where gross margin is not reported by the portfolio company.
(3)EBITDA margin is calculated as EBITDA divided by total revenue of the portfolio company. Excludes two portfolio company investments where EBITDA margin may not be the appropriate measure of credit risk as the investments were underwritten and covenanted based on recurring revenue as opposed to EBITDA.
(4)YTM is calculated based on the amortized cost and contractual interest rate for the investment at the end of the applicable reporting period, and assumes the investment is held until the sooner of actual maturity or a three year assumed life with no prepayments or losses and exited at par at maturity.
(5)Primarily subject to interest rate floors.
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Our investment activity for the three months ended March 31, 2024 and March 31, 2023 is presented below (information presented herein is at amortized cost unless otherwise indicated):
| (In thousands) |
For the Three Months Ended March 31, 2024 |
For the Three Months Ended March 31, 2023 |
||
| Investments: | ||||
| Total investments at amortized cost, beginning of period | $ | 104,685 | $ | - |
| New investments purchased | 88,698 | - | ||
| Net accretion of discount on investments | 202 | - | ||
| PIK interest capitalized | 2 | - | ||
| Investments sold or repaid | (13,509) | - | ||
| Total investments at amortized cost, end of period | $ | 180,078 | $ | - |
The industry(1)compositions of the portfolio at amortized cost and fair value as of March 31, 2024 and December 31, 2023 were as follows:
| As of March 31, 2024 | As of December 31, 2023 | |||||||
|
Amortized Cost |
Fair Value | Amortized Cost | Fair Value | |||||
| Health Care Technology | ||||||||
| Health Care Technology | 5.5 | % | 5.5 | % | 4.7 | % | 4.7 | % |
| Insurance | ||||||||
| Insurance Brokers | 0.2 | % | 0.2 | % | 0.3 | % | 0.3 | % |
| IT Services | ||||||||
| Data Processing & Outsourced Services | 8.2 | % | 8.3 | % | 11.9 | % | 11.9 | % |
| Internet Services & Infrastructure | 5.4 | % | 5.5 | % | 4.7 | % | 4.6 | % |
| Internet Software & Services | 2.2 | % | 2.2 | % | 3.9 | % | 3.9 | % |
| Systems Software | 10.9 | % | 10.9 | % | 14.1 | % | 14.1 | % |
| Oil, Gas and Consumable Fuel | ||||||||
| Oil & Gas Exploration & Production | 9.1 | % | 9.1 | % | 9.4 | % | 9.4 | % |
| Software | ||||||||
| Application Software | 24.9 | % | 24.8 | % | 18.9 | % | 19.0 | % |
| Health Care Technology | 4.5 | % | 4.4 | % | - | % | - | % |
| Industrial Conglomerates | 10.9 | % | 10.8 | % | 8.1 | % | 7.9 | % |
| Systems Software | 18.2 | % | 18.2 | % | 24.2 | % | 24.2 | % |
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
(1) The Company has used GICS® industry and sub-industry tier for the industry compositions of investments.
As of March 31, 2024 and December 31, 2023, investments consisted of the following:
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| (In thousands) |
Amortized Cost |
Fair Value | Amortized Cost | Fair Value | ||||
| First-Lien Term Loans | $ | 180,078 | $ | 180,487 | $ | 104,685 | $ | 104,869 |
| Total | $ | 180,078 | $ | 180,487 | $ | 104,685 | $ | 104,869 |
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The weighted average investment income yields(1)for ourfirst lien debt, based on the amortized cost and fair value as of March 31, 2024 and December 31, 2023, were as follows:
| As of March 31, 2024 | As of December 31, 2023 | |||||||
|
Amortized Cost |
Fair Value | Amortized Cost | Fair Value | |||||
| First-lien debt | 10.9 | % | 10.9 | % | 10.6 | % | 10.6 | % |
| Total | 10.9 | % | 10.9 | % | 10.6 | % | 10.6 | % |
(1) Weighted average investment income yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of March 31, 2024 and December 31, 2023. Weighted average yields does not consider unsettled positions and unfunded commitments for which interest is not being earned as of March 31, 2024 and December 31, 2023. Weighted average yield on debt and income producing securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first-lien and second-lien debt at fair value included in such securities. Weighted average yield on debt and income producing securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first-lien and second-lien debt at amortized cost included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above.
As of March 31, 2024, all of our first-lien debt investments were performing and current on their interest payments.
As part of the monitoring process, our Investment Adviser has developed risk assessment policies pursuant to which it regularly assesses the risk profile of each of our debt investments and rates each of them based on the following categories, which we refer to as "Internal Risk Ratings." Pursuant to these risk policies, an Internal Risk Rating of 1 to 4, which ratings are defined below, is assigned to each debt investment in our portfolio. Key drivers of internal risk ratings include financial metrics, financial covenants, liquidity and enterprise value coverage.
Internal Risk Ratings Definitions
| Rating | Description |
| 1 |
Investments with a grade of 1 involve the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit.
|
| 2 |
Investments with a grade of 2 involve a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing as expected and/or unchanged; and the risk factors to our ability to ultimately recoup the cost of our investment are neutral to favorable. There is no concern about repayment of both interest and our costs basis. All investments or acquired investments in new portfolio companies are initially assessed a grade of 2.
|
| 3 |
Investments with a grade of 3 indicate that the portfolio company is performing materially below expectations and the risk to our ability to recoup the initial cost basis of such investment has increased materially since origination or acquisition, including as a result of other factors such as non-compliance with debt covenants; however, payments are generally not more than 120 days past due.
|
| 4 |
Investments with a grade 4 indicate that the risk to our ability to recoup the initial cost basis of such investment has substantially increased since origination or acquisition, and the portfolio company likely has materially declining performance. For debt investments with an investment grade of 4, most or all of the debt covenants are out of compliance and payments are substantially delinquent. For investments graded 4, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis upon exit.
|
Our Investment Adviser monitors and, when appropriate, changes the risk ratings assigned to each debt investment in our portfolio. Our Investment Adviser reviews our investment ratings in connection with our quarterly
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valuation process. The below table summarizes the Internal Risk Ratings assigned as of March 31, 2024 and December 31, 2023.
| As of March 31, 2024 | As of December 31, 2023 | |||||||
| (In thousands) | Fair Value |
% of Fair Value |
Fair Value |
% of Fair Value |
||||
| Internal Risk Rating 1 | $ | 9,950 | 5.5 | % | $ | 8,447 | 8.1 | % |
| Internal Risk Rating 2 | 170,537 | 94.5 | 96,422 | 91.9 | ||||
| Internal Risk Rating 3 | - | - | - | - | ||||
| Internal Risk Rating 4 | - | - | - | - | ||||
| Total | $ | 180,487 | 100.0 | % | $ | 104,869 | 100.0 | % |
As of March 31, 2024 and December 31, 2023, the weighted average Internal Risk Rating of our investment portfolio was 1.94 and 1.92, respectively.
Warehousing Transaction
On June 20, 2023, the Adviser entered into a facility agreement (the "Facility Agreement") with a subsidiary of Cliffwater Corporate Lending Fund (the "Financing Provider"), an independent third party, to allow the Company to acquire portfolio investments ("Warehoused Assets") by purchasing all or a portion of certain loans, together with any unfunded commitments therein and/or equity instruments owned and held by the Financing Provider pursuant to the terms and provisions of the Facility Agreement (the "Warehousing Transaction"). The Warehousing Transaction was designed to assist us in deploying capital upon receipt of subscriptions.
During the three months ended March 31, 2024, we purchased one debt investment from the Financing Provider in one portfolio company for a total cost of $6,557. As of March 31, 2024 and December 31, 2023, the Financing Provider held debt investments in one and two portfolio companies, respectively.
Consolidated Results of Operations
For the three months March 31, 2024 and 2023
Net increase (decrease) in net assets resulting from operations can vary from period to period as a result of various factors, including the level of new investment commitments, expenses, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation on the investment portfolio. As a result, comparisons may not be meaningful. As we did not commence investing activities until the fourth calendar quarter of 2023, there were no investments or investment income for the three months ended March 31, 2023.
Investment Income
Investment income for the three months ended March 31, 2024 and 2023:
| (In thousands) |
For the Three Months Ended
March 31, 2024
|
For the Three Months Ended
March 31, 2023
|
||
| First-lien debt | $ | 3,520 | $ | - |
| Total Investment Income | $ | 3,520 | $ | - |
Interest income on our debt investments is dependent on the composition and credit quality of the portfolio. Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan's credit agreement. As of March 31, 2024, there were no debt investments on non-accrual status.
Total investment income increased from $0 for the three months ended March 31, 2023 to $3.5 million for the three months ended March 31, 2024, due to the increase in our investment portfolio from $0 at December 31, 2023 to $180.1 million at March 31, 2024. As of March 31, 2023, there were no investments. Total investment income increased from $780 thousand for the three months ended December 31, 2023 to $3.5 million for the three months ended March 31, 2024, primarily due to the increase in our investment portfolio from $104.7 million at December 31, 2023 to $180.1 million
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at March 31, 2024. Our weighted average investment income yield on total investments at amortized cost and fair value was 10.9% and 10.9%, respectively, as of March 31, 2024, and 10.6% and 10.6%, respectively, as of December 31, 2023. The increase in the weighted average yield on total investments was primarily due to the purchase of investments with higher base rates.
Net investment income after giving effect to any expenses support and waivers of expenses for the three months ended March 31, 2024 and 2023 was as follows:
| (In thousands) |
For the Three Months Ended
March 31, 2024
|
For the Three Months Ended
March 31, 2023
|
||
| Total investment income | $ | 3,520 | $ | - |
| Total expenses | 3,757 | 289 | ||
| Expense support and waivers | (313) | (289) | ||
| Net expenses after expense support and waivers | $ | 3,444 | $ | - |
| Net investment income (loss) | $ | 76 | $ | - |
Waivers and reimbursement of expenses represents the amounts reimbursed by the Investment Adviser pursuant to the Reimbursement Agreement. See Note 4, Related-Party Transactions, to the consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q for more information on the expense waivers and reimbursement of expenses.
Expenses
Expenses for the operating results for the three months ended March 31, 2024 and 2023:
|
(In thousands)
|
For the Three Months Ended
March 31, 2024
|
For the Three Months Ended
March 31, 2023
|
||
| Expenses: | ||||
| Interest expense and credit facility fees | 1,525 | - | ||
| Offering costs | 629 | - | ||
| Professional fees | 439 | - | ||
| Administrative service fees | 404 | - | ||
| Other general and administrative expenses | 363 | - | ||
| Management fees | 240 | - | ||
| Directors fees | 68 | - | ||
| Insurance costs | 61 | - | ||
| Incentive fees | 28 | - | ||
| Organization costs | $ | - | $ | 289 |
| Total expenses before expense support and waivers | $ | 3,757 | $ | 289 |
| Expense support and waivers | (313) | (289) | ||
| Net expenses after expense support and waivers | $ | 3,444 | $ | - |
Under the terms of the Administration Agreement, we reimburse the Adviser for services performed for us. In addition, pursuant to the terms of the Administration Agreement, the Adviser may delegate its obligations under the Administration Agreement to an affiliate or to a third party and we reimburse the Adviser for any services performed for us by such affiliate or third party. We have entered into an expense support agreement with the Adviser. The Adviser may elect to pay the certain expenses on our behalf (the "Expense Payments"), provided that no portion of the payment will be used to pay any interest expense or distribution and/or servicing fees incurred by us. Any Expense Payment that the Adviser has elected to pay must be paid by the Adviser to us in any combination of cash or other immediately available
35
funds no later than 45 days after such election was made in writing, and/or offset against amounts due from us to the Adviser or its affiliates.
The following table presents a summary of the Expense Payments and reimbursements of Expense Payments since our inception:
|
As of (In thousands)
|
Expense Payments Incurred by Adviser |
Reimbursement Payments to Adviser |
Unreimbursed Expense Payments |
|||
| March 31, 2024 | $ | 3,000 | $ | - | $ | 3,000 |
| December 31, 2023 | 3,000 | $ | - | 3,000 |
For the Three Months Ended March 31, 2024
Interest expense and credit facility fees represents interest and fees incurred under the SMBC Credit Facility (defined below). Organization and offering costs include expenses incurred in the initial formation of the Company and in the offering of our Common Stock. Professional fees include legal, rating agencies, tax, valuation, technology and other professional fees incurred related to the management of the Company. Administrative service fees represent fees paid to the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including our allocable portion of the cost of certain of our executive officers and their respective staff. Other general and administrative expenses include sub-administrative service fees, filing, research, subscriptions, and other costs. Sub-administrative service fees represent fees paid to State Street pursuant to the State Street Sub-Administration Agreement. Waivers and reimbursements of expenses represents the amounts reimbursed by the Investment Adviser pursuant to the Expense Support Agreement.
For the Three Months Ended March 31, 2023
Expenses incurred for the three months ended March 31, 2023 of $289 thousand were primarily due to initial organization expenses.
Net Change in Unrealized Appreciation (Depreciation) on Investments
During the three monthsended March 31, 2024, we recorded unrealized appreciation on 15 investments totaling approximately $272 thousand and unrealized depreciation on 16 investments of approximately $(47) thousand.
Net realized gain (loss) and net change in unrealized appreciation (depreciation) for the three months ended March 31, 2024 and 2023 were as follows:
| (In thousands) |
For the Three Months Ended
March 31, 2024
|
For the Three Months Ended
March 31, 2023
|
||
| Net realized gain (loss) on investments | $ | - | $ | - |
| Net unrealized gain (loss) on investments | 225 | - | ||
| Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments | $ | 225 | $ | - |
Income Taxes, Including Excise Taxes
We intend to elect to be treated and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our investment company taxable income, determined without regard to any deduction for dividends paid.
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If we fail to distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (to the extent that income tax was not imposed on such amounts) less certain over-distributions in prior years (together, the "Excise Tax Distribution Requirements"), we will be liable for a 4% nondeductible excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the Excise Tax Distribution Requirements. For this purpose, however, any ordinary income or capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). We currently intend to make sufficient distributions each taxable year to satisfy the Excise Tax Distribution Requirements.
We did not incur any excise tax expense for any of the periods presented.
Liquidity and Capital Resources
We expect to generate cash primarily from (i) the net proceeds of capital drawdowns of our privately placed capital commitments, (ii) cash flows from our operations, (iii) any financing arrangements we may enter into in the future and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks and issuances of senior securities. Our primary use of cash will be for (a) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (b) the cost of operations (including paying the Adviser), (c) debt service of any borrowings, (d) cash distributions to the holders of our common stock and (e) repurchases of our common stock. We believe our current cash position and net cash provided by operating activities, along with capital drawdowns from the private offering of our Shares and borrowings from financial institutions, will provide us with sufficient resources to meet our obligations and continue to support our investment objectives, including reserving for the capital needs that may arise at our portfolio companies, for the next 12 months and beyond.
On November 14, 2023, we entered into a $200.0 million revolving credit facility (the "SMBC Credit Facility") with Sumitomo Mitsui Banking Corporation ("SMBC"). Borrowings under the SMBC Credit Facility may be base rate loans, eurocurrency loans or RFR loans (i.e., loans bearing interest based on SOFR or SONIA). For any base rate loan, the applicable margin will be 1.60% plus the highest of (a) the federal funds rate plus 50 basis points (0.50%); (b) the prime rate; or (c) except during any period during which the applicable SOFR rate is unavailable, the applicable SOFR rate in effect on such day plus 105 basis points (1.05%). Eurocurrency rate loans, daily simple SOFR loans, daily simple SONIA loans and term SOFR loans will accrue interest at a rate equal to one-month EURIBOR, SOFR, or SONIA or one-month term SOFR, respectively, plus, in each case, 2.60%. The Company will pay to SMBC an unused commitment fee, payable quarterly, equal to 0.35% per annum of the average unused portion of available borrowings under the SMBC Credit Facility.
Our Company's obligations under the SMBC Credit Facility are secured by (a) our ability to call capital from Stockholders, (b) the capital commitments and capital contributions of Stockholders and (c) the bank accounts to which such capital contributions are funded into by the Stockholders. We have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. Borrowings under the SMBC Credit Facility are subject to the leverage restrictions contained in the Investment Company Act of 1940, as amended.
Although we believe that we will remain in compliance, there are no assurances that we will continue to comply with the covenants in the SMBC Credit Facility, as applicable. Failure to comply with these covenants could result in a default under the SMBC Credit Facility that, if we were unable to obtain a waiver from the applicable lenders, could result in the immediate acceleration of the amounts due under the facility, and thereby have a material adverse impact on our business, financial condition and results of operations. Moreover, to the extent that we cannot meet our financing obligations, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.
As of March 31, 2024, there was $84.3million outstanding under the SMBC Credit Facility and we were in compliance in all material respects with the terms of the SMBC Credit Facility. For more information on the SMBC Credit Facility, see Note 5. Borrowings, to the consolidated financial statements in Part I, Item 1, of this Quarterly Report on Form 10-Q.
As of March 31, 2024 and December 31, 2023, we had $53.4 million and $61.9 million, respectively, in cash, cash equivalents and restricted cash. For the three months ended March 31, 2024, our cash and cash equivalents balance
37
decreased by $(8.5) million. During that period, $(55.5) million was used in operating activities, primarily due to investment purchases of $(67.6) million, offset by $13.5 million in repayments of investments in portfolio companies. During the same period, $47.0 million was provided by financing activities, consisting primarily of proceeds from issuance of common shares of $40.0 million and net proceeds from secured borrowings of $7.0 million. In accordance with the 1940 Act, the Company is currently only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 150% after such borrowing. Asset coverage ratio per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage ratio per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. As of March 31, 2024, asset coverage was 236.5% and the asset coverage per unit was $2,365.
The SMBC Credit Facility consisted of the following as of March 31, 2024:
| As of March 31, 2024 | ||||||||
| (In thousands) | Total Facility |
Borrowings Outstanding |
Unused Portion(1)
|
Amount Available(2)
|
||||
| SMBC Credit Facility | $ | 200,000 | $ | 84,250 | $ | 115,750 | $ | 89,089 |
(1)The unused portion is the amount upon which unused commitment fees are based.
(2)Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.
The SMBC Credit Facility consisted of the following as of December 31, 2023:
| As of December 31, 2023 | ||||||||
| (In thousands) | Total Facility |
Borrowings Outstanding |
Unused Portion(1)
|
Amount Available(2)
|
||||
| SMBC Credit Facility | $ | 200,000 | $ | 77,250 | $ | 122,750 | $ | 115,874 |
(1)The unused portion is the amount upon which unused commitment fees are based.
(2)Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.
Equity
As of March 31, 2024, we had $383.8 million of uncalled capital commitments from Stockholders, $33.4 million of which is contingent on us receiving additional capital commitments, ensuring that at all times, the aggregate commitments of an individual investor does not exceed 24.99% of our aggregate commitments, including $37.6 million from entities affiliate with or related to our Adviser.
| As of March 31, 2024 | As of December 31, 2023 | ||||||||||||
| (In thousands) |
Capital Commitments |
Unfunded Capital Commitments |
% of
Capital
Commitments
Funded
|
Capital Commitments |
Unfunded Capital Commitments |
% of
Capital
Commitments
Funded
|
|||||||
| Common Stock | $ | 466,637 |
(1)
|
$ | 350,445 | 24.9 | % | $ | 466,637 | $ | 390,445 | 16.3 | % |
(1) Excludes $33.4 million of capital commitments that are contingent on us receiving additional capital commitments, ensuring that at all times, the aggregate commitments of an individual investor does not exceed 24.99% of our aggregate commitments.
Subscriptions and Drawdowns
We have the authority to issue 500,000,000 shares of common stock at $0.01 per share par value.
38
Shares issued as of March 31, 2024 were 5,850,392.831. There were no shares outstanding as of March 31, 2023. The following table summarizes activity in the number of shares outstanding during the three months ended March 31, 2024:
| Date | Shares Issued |
Proceeds Received
(In thousands)
|
Issuance Price per Share | |
| June 16, 2023 | 1,250.000 | $ | 25 | $20.00 |
| October 10, 2023 | 58,326.500 | 1,167 | $20.00 | |
| November 9, 2023 | 2,250,000.002 | 45,000 | $20.00 | |
| December 20, 2023 | 1,500,000.001 | 30,000 | $20.00 | |
| March 26, 2024 | 2,040,816.328 | 40,000 | $19.60 |
Dividends and Distributions
To the extent that we have taxable income available, we intend to make quarterly distributions to our common shareholders. Dividends and distributions to common shareholders are recorded on the applicable record date. The amount to be distributed to common shareholders is determined by our Board each quarter and is generally based upon the taxable earnings estimated by management and available cash. Net realized capital gains, if any, will generally be distributed at least annually, although we may decide to retain such capital gains for investment.
We have adopted a dividend reinvestment plan under which shareholders will automatically receive dividends and other distributions in cash unless they elect to have their dividends and other distributions reinvested in additional shares. As a result of the foregoing, if our Board authorizes, and we declare, a cash dividend or distribution, shareholders that have "opted in" to our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares rather than receiving cash.
There were no dividends declared from inception through March 31, 2024.
Contractual Obligations
We have entered into an Investment Advisory Agreement with the Adviser pursuant to the 1940 Act to provide us with investment advisory services, and an Administration Agreement with the Administrator to provide us with administrative services. For more information about payments for services provided under these agreements, see "Item 1. Consolidated Financial Statements-Notes to Consolidated Financial Statements-Note 4. Related-Party Transactions."
The following tables show the contractual maturities of our debt obligations as of March 31, 2024:
| (In thousands) | Payments Due by Period | |||||||||
| As of March 31, 2024 | Total |
Less Than 1 Year |
1 to 3 Years |
3 to 5 Years |
More Than 5 Years |
|||||
| SMBC Credit Facility | $ | 84,250 | $ | - | $ | 84,250 | $ | - | $ | - |
Off-Balance Sheet Arrangements
In the ordinary course of our business, we enter into contracts or agreements that contain indemnification or warranties. Future events could occur that lead to the execution of these provisions against us. We believe that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in the consolidated financial statements as of March 31, 2024, or December 31, 2023, for any such exposure.
We currently are and may in the future become obligated to fund commitments such as revolving credit facilities, bridge financing commitments, or delayed draw commitments.
39
We had the following unfunded commitments to fund delayed draw and revolving senior secured loans as of March 31, 2024 and December 31, 2023:
| Par Value as of | ||||
| (In thousands) | March 31, 2024 | December 31, 2023 | ||
| Unfunded delayed draw commitments | $ | 42,580 | $ | 27,110 |
| Unfunded revolving commitments | 9,168 | 4,888 | ||
| Total unfunded commitments | $ | 51,748 | $ | 31,998 |
Warehousing Transaction
In connection with the Warehousing Transaction, during the three months ended March 31, 2024, we purchased the entire commitment and par balance outstanding on Enverus Holdings Inc. for $6.6 million from the Financing Provider. The Financing Provider intends to retain the entire investment in ASG III, LLC as a long-term investment.
The following is a list of each Warehoused Asset as of March 31, 2024 (in thousands):
| Company |
Investment Type
|
Spread Above Reference Rate1
|
Maturity Date |
Commitment | Par Balance |
Amortized Cost |
|||
| ASG III, LLC |
First-lien term loan, revolver, delayed draw term loan2
|
S + 5.50% | 10/31/2029 | $ | 5,000 | $ | 3,167 | $ | 3,064 |
| Total debt investments | $ | 5,000 | $ | 3,167 | $ | 3,064 |
____________________
1The investment bears interest at rates that may be determined by reference to Secured Overnight Financing Rate ("SOFR" or "S"), which resets monthly.
2The negative amortized cost is the result of the capitalized discount on the loan or the unfunded commitment being valued below par. The negative amortized cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
The following is a list of each Warehoused Asset as of December 31, 2023 (in thousands):
| Company |
Investment Type
|
Spread Above Reference Rate1
|
Maturity Date |
Commitment | Par Balance |
Amortized Cost |
|||
| ASG III, LLC |
First-lien term loan, revolver, delayed draw term loan2
|
S + 5.50% | 10/31/2029 | $ | 5,000 | $ | 3,167 | $ | 3,061 |
| Enverus Holdings Inc. |
First-lien term loan, revolver, delayed draw term loan2
|
S + 5.50% | 12/22/2029 | 7,500 | 6,660 | 6,548 | |||
| Total debt investments | $ | 12,500 | $ | 9,827 | $ | 9,609 |
____________________
1The investment bears interest at rates that may be determined by reference to Secured Overnight Financing Rate ("SOFR" or "S"), which resets monthly.
2The negative amortized cost is the result of the capitalized discount on the loan or the unfunded commitment being valued below par. The negative amortized cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
As of March 31, 2024 and December 31, 2023, the Warehoused Assets had $2.7 million and $1.8 million, respectively, of unfunded commitments on revolvers and delay draw term loans. There is no guarantee that these amounts will be funded to the borrowing party now or in the future. The unfunded commitments relate to loans with various maturity dates, but the entire amount was eligible for funding to the borrowers, subject to the terms of each loan's respective credit agreement.
40
Related-Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
•the Investment Advisory Agreement;
•the Administration Agreement;
•the Expense Support and Condition Reimbursement Agreement; and
•the License Agreement.
In addition to the aforementioned agreements, we rely on exemptive relief that has been granted to us and certain of its affiliates to permit us to co-invest with other funds managed by the Adviser or certain affiliates, in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. See "Item 8. Notes to Consolidated Financial Statements - Note 4. Related-Party Transactions" for further details.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an ongoing basis, we evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Fair Value Measurements
One of the critical accounting estimates inherent in the preparation of our financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurements ("ASC 820"), as amended, establishes a framework for measuring fair value in accordance with U.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, we consider its principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
•Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
•Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
•Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
41
In addition to using the above inputs in investment valuations, the Adviser will apply a valuation policy approved by our Board of Directors that is consistent with ASC 820. Consistent with the valuation policy, we will evaluate the source of the inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When an investment is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), we will subject those prices to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, we, or the independent valuation firm(s), will review pricing support provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected herein.
Revenue Recognition
Interest income is recorded on an accrual basis and includes the accretion of discounts, amortization of premiums and PIK interest. Discounts from and premiums to par value on investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. To the extent loans contain PIK provisions, PIK interest, computed at the contractual rates is accrued and recorded as interest income and added to the principal balance of the loan. PIK interest income added to the principal balance is generally collected upon repayment of the outstanding principal.
Loans are generally placed on non-accrual status when interest and/or principal payments become materially past due and there is reasonable doubt that principal or interest will be collected in full. Recognition of interest income of that loan will be ceased until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon our judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid or there is no longer any reasonable doubt that such principal or interest will be collected in full and, in our judgment, are likely to remain current. We may make exceptions to this policy if the loan has sufficient collateral value or is in the process of collection. Accrued interest is written-off when it becomes probable that the interest will not be collected, and the amount of uncollectible interest can be reasonably estimated.
Investment Transactions
Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized.
Other income may include income such as consent, waiver, amendment, unused, and prepayment fees associated with our investment activities, as well as any fees for managerial assistance services rendered by us to its portfolio companies. Such fees are recognized as income when earned or the services are rendered.
42
Income Taxes
We intend to elect to be treated, and intend to qualify annually to maintain our election to be treated, as a RIC under Subchapter M of the Code. To maintain our RIC tax election, we must, among other requirements, meet certain annual source-of-income and quarterly asset diversification requirements. We also must annually distribute dividends for U.S. federal income tax purposes to our stockholders out of the assets legally available for distribution of an amount generally at least equal to 90% of the sum of our investment company taxable income, determined without regard to any deduction for dividends paid.
If we fail to distribute in a timely manner an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year (to the extent that income tax was not imposed on such amounts) less certain over-distributions in prior years (together, the "Excise Tax Distribution Requirements", we will be liable for a 4% nondeductible excise tax on the portion of the undistributed amounts of such income that are less than the amounts required to be distributed based on the Excise Tax Distribution Requirements. For this purpose, however, any net ordinary income or capital gain net income retained by us that is subject to corporate income tax for the tax year ending in that calendar year will be considered to have been distributed by year end (or earlier if estimated taxes are paid). We currently intend to make sufficient distributions each taxable year to satisfy the Excise Tax Distribution Requirements.
Recent Developments
On April 1, 2024, the Company issued 253,146.256 shares of the Company's common stock and received aggregate proceeds of approximately $5.0 million.
On May 1, 2024, the Board of Directors declared a dividend for our Common Stock of $0.017 per share, payable on May 6, 2024 to shareholders of record as of May 2, 2024.
43
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates.
Valuation Risk
We plan to invest primarily in illiquid debt and equity securities of private companies. Most of our investments will not have a readily available market price, and we will value these investments at fair value as determined in good faith in accordance with valuation policy and procedures established by our Board of Directors. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make.
Interest Rate Risk
Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we expect to borrow money to make investments, our net investment income will depend in part upon the difference between the rate at which we borrow funds and the rate at which we invest these funds as well as our level of leverage. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income or net assets.
We may hedge against interest rate and foreign currency fluctuations by using standard hedging instruments such as futures, options and forward contracts or a credit facility subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates and foreign currencies, such activities may also limit our ability to participate in benefits of lower interest rates or higher exchange rates with respect to the portion of our portfolio of investments, if any, with fixed interest rates or denominated in foreign currencies.
As of March 31, 2024 and December 31, 2023, on a fair value basis, approximately 0% of our debt investments bear interest at a fixed rate and approximately 100% of our debt investments bear interest at a floating rate. Additionally, our SMBC Credit Facility is also subject to floating interest rates and is currently paid based on floating SOFR rates.
The following table estimates the potential changes in net cash flow generated from interest income and expenses, should interest rates increase or decrease by 100, 200 or 300 basis points. Interest income is calculated as revenue from interest generated from our portfolio of investments held on March 31, 2024 and December 31, 2023. Interest expense is calculated based on the terms of the SMBC Credit Facility, using the outstanding balance as of March 31, 2024 and December 31, 2023. Interest expense on the SMBC Credit Facility is calculated using the interest rate as of March 31, 2024 and December 31, 2023, adjusted for the impact of hypothetical changes in rates, as shown below. The base interest rate case assumes the rates on our portfolio investments remain unchanged from the actual effective interest rates as of March 31, 2024 and December 31, 2023. These hypothetical calculations are based on a model of the investments in our portfolio, held as of March 31, 2024 and December 31, 2023, and are only adjusted for assumed changes in the underlying base interest rates. Actual results could differ significantly from those estimated in the table (dollar amounts in thousands).
Based on our March 31, 2024 consolidated statements of assets and liabilities, the following table shows the annualized impact on net income of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:
| Changes in Interest Rates | Interest Income | Interest Expense | Net Interest Income | |||
| -100 Basis Points | $ | 2,829 | $ | 986 | $ | 1,843 |
| -200 Basis Points | 2,536 | 844 | 1,692 | |||
| -300 Basis Points | 2,243 | 701 | 1,541 | |||
| +100 Basis Points | 3,415 | 1,271 | 2,144 | |||
| +200 Basis Points | 3,708 | 1,413 | 2,295 | |||
| +300 Basis Points | 4,001 | 1,555 | 2,446 |
44
Item 4. Controls and Procedures.
(a)Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. The Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures are effective as of the end of the period covered by the Quarterly Report on Form 10-Q.
(b)Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
45
PART II
Item 1. Legal Proceedings
As of March 31, 2024, we, our consolidated subsidiaries and the Adviser are not subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us or them. From time to time, we, our consolidated subsidiaries and/or the Adviser may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is subject to extensive regulation, which may result in regulatory proceedings against us.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in "ITEM 1A. RISK FACTORS" of our Annual Report on Form 10-K, filed with the SEC on March 8, 2024. There have been no material changes from the risk factors disclosed in the Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
All sales of unregistered securities during the period covered by the Quarterly Report were reported in a Form 8-K filed with the SEC.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Insider Trading Arrangements
None.
46
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
| 3.1 |
Articles of Amendment and Restatement of Vista Credit Strategic Lending Corp. (incorporated by reference to Exhibit 3.1 to the Company's Form 10 filed on June 15, 2023)
|
| 3.2 |
Amended and Restated Bylaws of Vista Credit Strategic Lending Corp. (incorporated by reference to Exhibit 3.2 to the Company's Form 10 filed on June 15, 2023)
|
| 31.1* |
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| 31.2* |
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
| 32.1* |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
| 101.INS* |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
|
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF* | Inline XBRL Taxonomy Definition Linkbase Document |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 104* | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
_________________________________
*Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Vista Credit Strategic Lending Corp.
|
||
|
Date: May 3, 2024
|
By:
|
/s/ Greg Galligan
|
|
Greg Galligan
|
||
|
Chief Executive Officer and President
|
||
|
Vista Credit Strategic Lending Corp.
|
||
|
Date: May 3, 2024
|
By: |
/s/ Ross Teune
|
|
Ross Teune
|
||
| Chief Financial Officer and Treasurer |
47