NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)
Note 1: Organization
These consolidated financial statements present the financial position, results of operations and cash flows of OHA Investment Corporation and its consolidated subsidiaries (collectively “we,” “us,” “our” and “OHAI”). We are a specialty finance company that was organized in July 2004 as a Maryland corporation. Our investment objective is to generate both current income and capital appreciation primarily through debt investments that at times may have certain equity components. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company, or a BDC, under the Investment Company Act of 1940, or the 1940 Act. For federal income tax purposes we operate so as to be treated as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. We have several direct and indirect subsidiaries that are single-member limited liability companies and wholly-owned limited partnerships established to hold certain portfolio investments or provide services to us in accordance with specific rules prescribed for a company operating as a RIC. We consolidate the financial results of our wholly-owned subsidiaries for financial reporting purposes, and we do not consolidate the financial results of our portfolio companies.
On September 30, 2014, our stockholders approved the appointment of Oak Hill Advisors, L.P., or OHA, as our investment advisor, replacing NGP Investment Advisor, LP, which had been our investment advisor since our inception. In connection with this change in investment advisor, we changed our name from NGP Capital Resources Company to OHA Investment Corporation. OHA is a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. OHA acts as our investment advisor and administrator pursuant to an investment advisory agreement and an administration agreement, respectively, each dated as of September 30, 2014, which we refer to as the Investment Advisory Agreement and the Administration Agreement, respectively. See Note 4.
Note 2: Basis of Presentation
These interim unaudited consolidated financial statements include the accounts of OHAI and its consolidated subsidiaries. The effects of all intercompany transactions between OHAI and its subsidiaries have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period presentation.
We prepare the interim consolidated financial statements in accordance with accounting principles generally accepted in United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946,
Financial Services - Investment Company
("ASC 946"). Under the investment company rules and regulations pursuant to Article 6 of Regulation S-X and ASC 946, the Company is precluded from consolidating portfolio company investments, including those in which it has a controlling interest, unless the portfolio company is another investment company. An exception to the general principle occurs if the Company holds a controlling interest in an operating company that provides all or substantially all of its services directly to the Company or to its portfolio companies. None of the portfolio investments made by the Company qualify for this exception. Therefore, the Company's investment portfolio is carried on the Consolidated Balance Sheets at fair value.
We omit certain information and footnote disclosures normally included in audited financial statements prepared in accordance with GAAP pursuant to such rules and regulations. We believe we include all adjustments which are of a normal recurring nature, so that these financial statements fairly present our financial position, results of operations and cash flows. Interim results are not necessarily indicative of results for a full year or any other interim period. You should read these unaudited consolidated financial statements in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Preparing interim consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes thereto, including the estimated fair values of our investment portfolio discussed in Note 7. Although we believe our estimates and assumptions are reasonable, actual results could differ materially from these estimates.
Distributions
We record distributions to stockholders on the ex-dividend date. We currently intend that our distributions each year will be sufficient to maintain our status as a RIC for federal income tax purposes and to eliminate federal excise tax liability. We currently intend to make distributions to stockholders on a quarterly basis so that substantially all of our net taxable income is
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
distributed on an annual basis. We also intend to make distributions of net realized capital gains, if any, at least annually. However, we may in the future decide to retain such capital gains for investment and designate such retained amounts as deemed distributions. Each quarter, we estimate our annual taxable earnings. The Board of Directors considers this estimate and determines the distribution amount, if any. We generally declare our distributions each quarter and pay them shortly thereafter. The following table summarizes our recent distribution history:
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Declaration Date
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Per Share
Amount
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Record Date
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Payment Date
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June 7, 2016
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$
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0.06
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June 30, 2016
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July 8, 2016
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September 15, 2016
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0.06
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September 30, 2016
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October 7, 2016
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December 8, 2016
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0.06
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December 31, 2016
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January 9, 2017
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March 14, 2017
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0.02
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March 31, 2017
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April 7, 2017
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June 16, 2017
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0.02
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June 30, 2017
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July 10, 2017
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September 18, 2017
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0.02
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September 30, 2017
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October 9, 2017
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Note 3: Credit Facilities and Borrowings
We are party to a Credit Agreement (the "Credit Facility"), dated September 9, 2016, with MidCap Financial Trust, as administrative agent, which replaced our prior Third Amended and Restated Revolving Credit Agreement (the "Investment Facility"), as amended, with SunTrust Bank, as administrative agent. The $56.5 million Credit Facility has a maturity date of March 9, 2018, which can be extended for a six-month period at our option, subject to certain conditions. The initial proceeds of $40.5 million from the Credit Facility were used to pay off the $38.5 million outstanding balance on the Investment Facility, pay transaction expenses and provide balance sheet cash. The remaining $16.0 million consisted of a delayed draw term loan, which was committed for one year, expired on September 9, 2017 and is no longer available.
As of
September 30, 2017
and December 31, 2016, the total amount outstanding under the Credit Facility was
$40.5 million
with
$0.0 million
available to draw. The total amount outstanding on the Credit Facility is shown net of unamortized debt issuance costs of
$0.5 million
and $1.4 million on our Consolidated Balance Sheet as of
September 30, 2017
and December 31, 2016, respectively. Substantially all of our assets, except our investments in U.S. Treasury Bills, are pledged as collateral for the obligations under the Credit Facility. The Credit Facility bears an interest rate of Adjusted LIBOR plus 5.35% for Eurodollar Loans, subject to a 1% LIBOR floor, and Base Rate plus 4.35% for Base Rate Loans. As of
September 30, 2017
, the interest rate on our outstanding principal balance of
$40.5 million
was
6.59%
.
On November 10, 2017, we entered into an amendment to the Credit Facility whereby we agreed to make a voluntary principal prepayment in the amount of $4.5 million, reducing the total principal amount outstanding to $36.0 million, and the lenders agreed not to test certain covenants at certain determination dates.
The Credit Facility contains affirmative and reporting covenants and certain financial ratio and restrictive covenants. We have complied with these covenants from the date of the Credit Agreement through
September 30, 2017
, and had no existing defaults or events of default under the Credit Facility, as of that date. The financial covenants, with terms as defined in the Credit Agreement, are:
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•
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maintain a Debt to Tangible Net Worth Ratio of not more than 0.80:1.00 as determined on the last day of each calendar month,
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•
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maintain at all times a minimum liquidity in the form of Cash or Cash Equivalents of at least $1.0 million,
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•
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maintain a Debt to Fair Market Value Ratio of not more than 0.50:1.00 at any time, and
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•
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maintain the Fair Market Value of Liquid Portfolio Investments as a percentage of outstanding aggregate principal balance to not be less than 80% through March 9, 2017, 90% through September 9, 2017 and 100% through March 9, 2018.
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At the end of each quarter, we may take proactive steps to preserve investment flexibility for the next quarter by investing in cash equivalents, which includes purchasing U.S. Treasury Bills, by utilizing repurchase agreements on a temporary basis. On
September 27, 2017
, we purchased
$35.0 million
of U.S. Treasury Bills and contemporaneously entered into a
$34.3 million
repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred
$35.0 million
of U.S. Treasury Bills and
$0.7 million
of cash as collateral under the repurchase agreement. We
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
repaid the
$34.3 million
borrowed under the repurchase agreement, and was returned the
$0.7 million
cash collateral, net of a
$9 thousand
financing fee, upon maturity of the U.S. Treasury Bills on
October 5, 2017
. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as short-term debt at
September 30, 2017
.
On December 27, 2016, we purchased $40.0 million of U.S. Treasury Bills and contemporaneously entered into a $39.2 million repurchase arrangement with a global financial institution to finance such purchase. Under the repurchase arrangement, we transferred $40.0 million of U.S. Treasury Bills and $0.8 million of cash as collateral under the repurchase agreement. We repaid the $39.2 million borrowed under the repurchase agreement, and was returned the $0.8 million cash collateral, net of a $10 thousand financing fee, upon maturity of the U.S. Treasury Bills on January 5, 2017. We account for the transfer of the U.S. Treasury Bills under the repurchase agreement as a secured borrowing in accordance with GAAP. As a result, the U.S. Treasury Bills are recorded on our books as investments in U.S. Treasury Bills, and the amount outstanding under the repurchase agreement is recorded as short-term debt at December 31, 2016.
Note 4: Investment Management
Investment Advisory Agreement
On September 30, 2014, we entered into the Investment Advisory Agreement with OHA, an investment adviser registered under the Investment Advisers Act of 1940, or Advisers Act, pursuant to which OHA replaced NGP Investment Advisor, LP as our investment advisor. The Investment Advisory Agreement was most recently approved by our Board of Directors, a majority of whom are not “interested” persons (as defined in the 1940 Act) of us, on August 3, 2017. Pursuant to the Investment Advisory Agreement, OHA implements our business strategy on a day-to-day basis and performs certain services for us subject to the supervision of our Board of Directors. Under the Investment Advisory Agreement, we pay OHA a fee consisting of two components — a base management fee and an incentive fee.
Base Management Fee:
The base management fee is paid quarterly in arrears and is calculated by multiplying the average value of our total assets (excluding cash, cash equivalents and U.S. Treasury Bills that are purchased with borrowed funds solely for the purpose of satisfying quarter-end diversification requirements related to our election to be taxed as a RIC under the Code), as of the end of the two immediately prior fiscal quarters, by a rate of 1.75% per annum, with a 0.25% reduction in this 1.75% annual rate for the first year following September 30, 2014.
Three months ended September 30,
2017
and
2016
, we incurred
$0.4 million
and $0.7 million, respectively, in base management fees.
For the nine months ended September 30,
2017
and
2016
, we incurred
$1.5 million
and $2.3 million, respectively, in base management fees.
Incentive Fee:
The incentive fee consists of two parts. The first part, the investment income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the fiscal quarter for which the fee is being calculated. Pre-incentive fee net investment income means interest income, dividend income, royalty payments, net profits interest payments, and any other income (including any other fees, such as commitment, origination, syndication, structuring, diligence, monitoring and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Accordingly, we may pay an incentive fee based partly on accrued investment income, the collection of which is uncertain or deferred. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets (defined as total assets less liabilities at the end of the immediately preceding fiscal quarter) is compared to a “hurdle rate” of 1.75% per quarter (7% annualized). OHA receives no incentive fee for any fiscal quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate. OHA receives an incentive fee equal to 100% of our pre-incentive fee net investment income for any fiscal quarter in which our pre-incentive fee net investment income exceeds the hurdle rate but is less than 2.1875% (8.75% annualized) of net assets (also referred to as the “catch up” provision) plus 20% of our pre-incentive fee net investment income for such fiscal quarter greater than 2.1875% (8.75% annualized) of net assets.
For the three months ended September 30,
2017
, we did not incur any investment income incentive fees.
For the three months ended September 30,
2016
, we incurred $0.2 million of investment income incentive fees.
For the nine months ended September 30,
2017
we did not incur any investment income incentive fees.
For the nine months ended September 30,
2016
, we incurred $0.3 million of investment income incentive fees.
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
The second part of the incentive fee, the capital gains fee, is determined and payable in arrears as of the end of each fiscal year (or, upon termination of the Investment Advisory Agreement, as of the termination date). The capital gains fee is equal to 20% of our cumulative aggregate realized capital gains from September 30, 2014 through the end of that fiscal year, computed net of our cumulative aggregate realized capital losses and cumulative aggregate unrealized depreciation on investments for the same time period. The aggregate amount of any previously paid capital gains incentive fees to OHA is subtracted from the capital gains incentive fee calculated. If such amount is negative, then there is no capital gains fee for such year. For the purposes of the capital gains fee, any gains and losses associated with our investment portfolio as of September 30, 2014 shall be excluded from the capital gains fee calculation.
For the three months ended September 30,
2017
, we accrued $104,000 of capital gains fees. This is the first quarter we have accrued any capital gains fees since the Investment Advisory Agreement went into effect on September 30, 2014.
On November 10 2017, we entered into an Incentive Fee Waiver Agreement with OHA whereby OHA agreed to waive any incentive fees earned relating to fiscal years 2017 and 2018. Under the Incentive Fee Waiver Agreement, any capitalized gains fees that would have been earned and accrued during 2017 and 2018, which under our investment advisory agreement would not have been paid until 2018 and 2019, respectively, will be waived.
The Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, by a vote of our Board of Directors or a vote of the holders of at least a majority of our outstanding voting securities (within the meaning of the 1940 Act) on 60 days’ written notice to OHA, and would automatically terminate in the event of its “assignment” (within the meaning of the 1940 Act). OHA may terminate the Investment Advisory Agreement without penalty by providing us at least 60 days’ written notice.
Administration Agreement
Under the Administration Agreement, OHA furnishes us with certain administrative services, personnel and facilities. The Administration Agreement was most recently approved by our Board of Directors on August 3, 2017. Payments under the Administration Agreement are equal to our allocable portion of OHA’s overhead in performing its obligations under the Administration Agreement, including all administrative services necessary for our operation and the conduct of our business. The Administration Agreement may be terminated at any time, without penalty, by a vote of our Board of Directors or by OHA upon 60 days’ written notice to the other party.
We owed
$0.0 million
and $0.2 million to OHA under the Administration Agreement as of
September 30, 2017
and
December 31, 2016
, respectively, for expenses incurred on our behalf for the final month of the respective quarterly period. We include these amounts in due to affiliate on our Consolidated Balance Sheets.
Note 5: Federal Income Taxes
We operate so as to qualify, for tax purposes, as a RIC under Subchapter M of Chapter 1 of the Code. As a RIC, we are generally not subject to corporate-level U.S. federal income taxes on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we distribute to our stockholders. To qualify as a RIC, we are required, among other things, to distribute to our stockholders each year at least 90% of investment company taxable income, as defined by the Code, and to meet certain asset-diversification requirements.
Certain of our wholly-owned subsidiaries, or Taxable Subsidiaries, have elected to be taxed as corporations for federal income tax purposes. The Taxable Subsidiaries hold certain of our portfolio investments and are consolidated for financial reporting purposes, but not for income tax reporting purposes. These Taxable Subsidiaries permit us to hold equity investments in portfolio companies that are “pass through” entities for tax purposes, in order to comply with the “source-of-income” requirements that must be satisfied to maintain our qualification as a RIC. The Taxable Subsidiaries may generate net income tax expense or benefit, which is reflected on our consolidated statements of operations.
We have total capital loss carry forwards at the RIC entity level of $82.2 million, of which $22.4 million expire at December 31, 2018, and of which the remainder do not expire. Our Taxable Subsidiaries have federal net operating loss carryforwards ("NOLs") of $31.0 million that expire in various years through 2037. Federal and state laws impose limitations on the utilization of capital losses and NOLs in the event of an "ownership" change for tax purposes, as defined by Sections 382 and 383 of the Internal Revenue Code. An ownership change at either the RIC entity or Taxable Subsidiary level, if one were to occur, would limit our ability to use pre-ownership change NOLs to offset post-ownership change taxable income. An
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
ownership change would also limit our ability to use pre-ownership change capital losses to offset post-ownership change capital gains.
Note 6: Commitments and Contingencies
As of
September 30, 2017
, we had investments in 16 portfolio companies totaling
$169.5 million
. Of these 16 investments, the Company had already funded investments in the amount of $163.1 million and there were outstanding unfunded commitments of $6.4 million. As of December 31, 2016, we had investments in 12 portfolio companies totaling $174.5 million. Of these 12 portfolio companies, the Company had already funded investments in the amount of $174.5 million and there were no remaining outstanding unfunded commitments.
We have continuing obligations under the Investment Advisory Agreement and the Administration Agreement with OHA. See Note 4. The agreements provide that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its duties and obligations, OHA and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with OHA will be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of services under the agreements or otherwise as our investment advisor or administrator. The agreements also provide that OHA and its affiliates will not be liable to us or any stockholder for any error of judgment, mistake of law, any loss or damage with respect to any of our investments or any action taken or omitted to be taken by OHA in connection with the performance of any of its duties or obligations under the agreements or otherwise as investment advisor or administrator to us, except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services. In the normal course of business, we enter into a variety of undertakings containing a variety of representations that may expose us to some risk of loss. We do not expect significant losses, if any, from such undertakings.
Legal Proceedings
From time to time, we are involved in various legal proceedings arising in the normal course of business. While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal proceeding, other than those described below, individually or in the aggregate, would be material to our business, financial condition or cash flows.
ATP Litigation
. On August 17, 2012, ATP Oil & Gas Corporation, or ATP, filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas. Prior to the bankruptcy filing, we purchased limited term overriding royalty interests, or ORRIs, in certain offshore oil and gas producing properties operated by ATP (generally, the Gomez and Telemark properties). On August 23, 2012, on a motion filed by ATP, the bankruptcy judge presiding over ATP’s case signed an order (Bankr. Dkt. No. 191) requiring ATP to pay amounts received after August 17, 2012 to those parties it believes are entitled to receive them, including the ORRI holders, provided that the ORRI holders execute a disgorgement agreement providing for the repayment of any amounts that the bankruptcy court later finds to have been inappropriately paid. We executed the disgorgement agreement and began receiving monthly distributions in September 2012 from ATP of our share of production proceeds received by ATP after August 17, 2012.
Phase 1
. On October 17, 2012, we filed a lawsuit against ATP styled:
OHA Investment Corporation v. ATP Oil & Gas Corporation
, Adv. Proc. No. 12-03443, in the U.S. Bankruptcy Court for the Southern District of Texas, seeking a declaration that the ORRIs are our property and not property of ATP and that the conveyance and purchase and sale documents are not executory contracts that may be rejected in order to remove or recharacterize our interests in the properties (the “Adversary Proceeding”). Also, certain service companies claiming statutory liens or privileges intervened for the purpose of establishing that their alleged statutory liens and privileges are superior to our rights in the ORRIs and asserting related claims for disgorgement of royalties paid to us by ATP. The issues in the Adversary Proceeding were bifurcated such that the issues of (i) whether the conveyances and transactions between us and ATP constituted outright transfers of ownership and (ii) whether the conveyances are executory contracts or leases that ATP may reject, would be tried first as “Phase 1” of the proceeding. And, any additional claims, including the service company statutory lien claims and related issues, would be decided later in “Phase 2.” Phase 1 of the litigation proceeded into the discovery stage and dispositive motion practice.
On October 17, 2013, the bankruptcy court entered its Final Sale Order approving the sale of the Telemark properties (Bankr. Dkt. No. 2706) to Bennu Oil & Gas, LLC, or Bennu, a newly formed company owned by the DIP Lenders. (The Gomez properties were abandoned by ATP.)
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
After the bankruptcy case was converted to a case under Chapter 7 of the Bankruptcy Code, we settled Phase 1 of the litigation with the Trustee, Bennu and Credit Suisse AG, as agent to the DIP Lenders (Adv. Dkt. No. 270, 271). On February 4, 2016, an Agreed Final Judgment [Adv. Dkt. No. 276] was entered determining that, among other things, the ORRIs are a real property interest and a “production payment” within the meaning of Sections 101(42A) and 541(b) of the United States Bankruptcy Code. Likewise, our claims against ATP were dismissed without prejudice. The Agreed Judgment resolved Phase 1 of the Adversary Proceeding. It did not address any disputes between us and Bennu with respect to the proper calculation of the investment balance under the terms of the ORRIs, including our legal fees, default interest, or the claims asserted by the statutory lien claimants. Additional detail on Phase 1 and the ATP bankruptcy is set forth in our Form 10Q for the quarter ending March 31, 2016.
Phase 2
. On February 3, 2016, we filed our Amended Motion to Dismiss the Complaints in Intervention Filed by the Statutory Lien Claimants, which was subsequently amended [Adv. Dkt. No. 284]. The Amended Motion to Dismiss asserted, among other things, that under the terms of the applicable Louisiana Oil Well Lien Statute, the alleged statutory liens of the lien claimants either cannot attach to overriding royalties, or alternatively, that OHA purchased the ORRIs free and clear of the statutory liens because the lien claimants did not provide notice of the liens as required under the statute. We also filed a Motion to Withdraw the Reference of the Phase II Claims from the Bankruptcy Court to the District Court. On May 13, 2016, the Court entered its order granting in part and denying in part OHA’s Motion to Dismiss and Motion to Withdraw Reference [Adv. Dkt. No. 294] and its Report and Recommendation and Memorandum Opinion [Adv. Dkt. No. 293]. Pursuant to the Memorandum Opinion and the Order, the Court determined that under the Louisiana statute, if we purchased our ORRIs without notice of the lien claimants’ liens, in a bona fide transaction, we would take the ORRIs free and clear of the lien claimants’ rights. The Court granted the lien claimants leave to file amended complaints to specifically plead whether we had notice of their alleged privileges at the time we paid the purchase price. To that end, the Court stated that the Amended Motion to Dismiss was denied as to all issues other than the issue of whether we had notice of the lien claimants’ liens and that the Court would review the amended complaints (to determine whether they sufficiently pleaded a claim) [Adv. Dkt. No. 294]. The Bankruptcy Court recommended that the District Court grant the Motion to Withdraw the Reference, but that the Adversary Proceeding remain in the Bankruptcy Court until the time of trial. The District Court entered an order consistent with the Bankruptcy Court’s recommendation on the Motion to Withdraw the Reference.
On May 27, 2016, the Intervenors filed their amended complaints, which made new allegations with respect to the issue of notice. Accordingly, on June 9, 2016, we filed our Motion to Dismiss the amended complaints [Adv. Dkt. No. 310] asserting that the allegations regarding notice are insufficient to state a claim under the statute.
On August 19, 2016, the Bankruptcy Court entered its order [Adv. Dkt. No. 325] and its related Report and Recommendation [Adv. Dkt. No. 326] dismissing, with prejudice, the Intervenors’ amended complaints. The Bankruptcy Court’s order and the related Report and Recommendation recommends, to the District Court, that Phase II of the lawsuit be fully resolved in our favor. The Report and Recommendation was docketed in the United States District Court for the Southern District of Texas, Case No. 4:16-CV-02556. On September 2, 2016, certain of the Intervenors filed their Objection to Judge Isgur’s Report and Recommendation [Dist. Dkt. No. 3] arguing that the Bankruptcy Court’s conclusions were erroneous, and that the Intervenors were not required to give notice to OHA in order for their alleged liens to attach. We filed a limited objection to the Report and Recommendation arguing that the Report and Recommendation should be affirmed, but even if notice were not required under the statute, the Intervenors’ alleged liens could not have attached to the ORRIs in the first instance. On March 9, 2017, the District Court entered a Memorandum Opinion and Order [Dist. Dkt. No. 17] (the “District Court’s Order”) adopting the Bankruptcy Court’s Report and Recommendation and dismissing the Intervenors’ claims with prejudice.
On April 3, 2017, the Intervenors filed their notice to appeal the District Court’s Order to the United States Court of Appeals for the Fifth Circuit. On April 11, 2017, we filed a notice of (protective) cross appeal in order to preserve our alternative bases for dismissal which were denied by the Bankruptcy Court and District Court. The matter remains pending before the Fifth Circuit under Case No. 17-20224. The parties briefed the issues for appellate review. As of this time, oral argument has not been scheduled.
As of
September 30, 2017
, our unrecovered investment was
$34.4 million
, and we had received aggregate royalty payments of
$37.8 million
since the date of ATP’s bankruptcy filing. As of
September 30, 2017
, we had incurred legal and consulting fees totaling
$6.2 million
in connection with the enforcement of our rights under the ORRIs. On various occasions, we have provided notice that such legal expenses will be added to our unrecovered investment balance to the extent they are not reimbursed. To date, we have not received any payments on account of legal expenses aside from our receipt of regular monthly production payments. As a result, we add our legal expenses to the unrecovered investment balance in accordance with our
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
transaction documents. As of
September 30, 2017
,
$5.4 million
of the
$6.2 million
in legal and consulting fees have been added to, and are thus included in the unrecovered investment balance under the terms of our transaction documents. No legal expenses have been added to our unrecovered investment balance during the three months and
nine months ended
September 30, 2017
. We note that the fair value of our investment in ATP ORRI remains at $0 as of
September 30, 2017
due to the cessation of monthly production payments beginning in December 2016.
Through
September 30, 2017
, we received post-petition royalty payments from the Gomez properties and the Telemark properties in the amount of $8.3 million and
$0.3 million
, respectively. It is estimated that the statutory lien claims asserted by the intervenors in the Adversary Proceeding against our ORRIs are in the principal amount of approximately $35.2 million. At this time, we estimate that there are potential statutory lien claims (including the claims of the intervenors in the Adversary Proceeding, without regard to the validity of such claims) in the principal amount of approximately $54.2 million. To the extent the District Court’s Order is reversed on appeal, we have or will assert that we have viable defenses with respect to all of the claims of the statutory lien claimants or any other claim which seeks to avoid or disgorge any pre-petition or post-petition royalty payment which we received in respect of the Telemark or Gomez properties. In the event that the District Court’s Order is reversed on appeal, and to the extent we do not prevail on our defenses to the statutory lien claims or any other claim seeking to avoid or disgorge pre-petition or post-petition royalty payments, we contend that, pursuant to the terms of our transaction documents, we are entitled to include any amounts disgorged on account of any such claims into the unrecovered investment balance of our ORRIs. Moreover, to the extent we do not prevail on our defenses to any action brought by the holder of a statutory lien claim, we contend that we would be permitted to seek contribution from other ORRI and net profits interest holders with respect to any disgorged amounts.
However, in the event the District Court’s Order is reversed on appeal and our defenses to the claims of the statutory lien claimants are unsuccessful or we otherwise become liable for disgorgement of any pre-petition or post-petition royalty payments which we have received from either the Gomez or Telemark properties, the remaining oil and gas reserves associated with the Telemark properties may be insufficient to provide for a full recovery on our investment. In the event that it is determined that we are not entitled to include amounts disgorged on account of statutory lien claims or other claims, if any, into the unrecovered investment balance of our ORRIs, any disgorged amounts will result in a failure to achieve our anticipated return and/or a loss on our investment.
While we intend to vigorously defend our legal positions in the Adversary Proceeding, there can be no assurance that we will ultimately prevail in any or all of these matters.
Bennu Titan Bankruptcy
. On August 11, 2016, an involuntary Chapter 11 bankruptcy petition was filed by Beal Bank USA against Bennu Titan LLC (formerly known as ATP Titan LLC), an indirect subsidiary of Bennu Oil & Gas, LLC, and the owner of the floating production platform in the Gulf of Mexico that processes and transports hydrocarbons produced from the Telemark properties, in which OHA owns the ORRI. An order for relief was entered on September 9, 2016, in the case styled
In re Bennu Titan LLC (f/k/a ATP Titan LLC)
, Case No. 16-11870, in the United States Bankruptcy Court for the District of Delaware. We are not a creditor in this bankruptcy case.
Bennu Oil & Gas Bankruptcy
. On November 30, 2016, Bennu Oil & Gas, LLC filed a Chapter 7 bankruptcy in the Bankruptcy Court for the Southern District of Texas, Case No. 16-35930. Two of its affiliates, Bennu Blocker, Inc., Case No. 16-35931, and Bennu Holdings, LLC, Case No. 16-35932, likewise filed on that date.
On November 30, 2016, Bennu Oil & Gas, LLC moved to reject the Platform Use Agreement with Bennu Titan, LLC for the drilling and production platform commonly known as the Titan Platform. On January 4, 2017, the Bankruptcy Court entered an order approving the rejection of the Platform Use Agreement effective November 30, 2016.
On January 26, 2017, the Delaware Bankruptcy Court entered an order transferring the Bennu Titan case to the Bankruptcy Court for the Southern District of Texas so that the affiliated cases will be in the same court.
On July 12, 2017, the Chapter 7 Trustee filed a motion to approve auction and bidding procedures and for other relief relating to a proposed sale of the "Clipper Assets" [Bankr. Dkt. No. 144], which do not include Telemark properties, The motion provides an overview of the Trustee's efforts to market and sell the estate's assets. The Telemark properties are comprised of three leases: Mississippi Canyon Block 942 known as OCS-G 24130 (“
MC 942
”); Mississippi Canyon Block 941 known as OCS-G 16661 (“
MC 941
”); and Atwater Valley Block 63 known as OCS-G 13198 (“
AT 63
”). At the meeting of creditors, Bennu officers testified that the well on the AT 63 lease stopped producing in May 2016. Prior to filing bankruptcy, Bennu Oil & Gas shut in all of the wells on the other two Telemark leases on November 30, 2016. The leases will expire in 180 days from the date of last production unless production is resumed or the BOEM grants a deferral of the requirement to produce (known as
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
a Suspense of Operations (“SOO”) or Suspense of Production (“SOP”). Bennu Oil & Gas applied for SOPs on MC 941, MC942 and AT 63.
In July 2017 and August 2017, the Company received $220 thousand and $76 thousand, respectively, in monthly royalty payments from the Trustee related to October 2016 and November 2016 production. These production payments were reflected as interest income in the period received.
On August 17, 2017, the Trustee filed a motion to authorize a sale of certain assets including MC 941 and MC 942 to Statoil USA E&P, Inc.[Bankr. Dkt. No. 179] for $.5 million and the assumption of the decommissioning obligations related to those leases that were owed by Bennu Oil & Gas to the United States of America. The Court authorized the sale by order entered on September 14, 2017 [Bankr. Dkt. No. 187]. It is possible that Statoil will resume oil and gas production from one or more wells on the MC 941 and MC 942 leases. If production resumes, the Company expects that Statoil will distribute monthly royalty payments due under the ORRIs during the period that production occurs.
On August 25, 2017, the Trustee filed an Emergency Motion to abandon certain oil and gas leases and rights-of-way including AT 63. Although, the request was granted, the Trustee subsequently obtained authority to amend the order as a result of a “contingent offer” from Energy Resource Technology, LLC to purchase certain interests from the Trustee, including AT 63 [Bankr. Dkt. No. 192]. To date, the Trustee has not sought authorization to sell AT 63 or any other assets to Energy Resource Technology, LLC. Accordingly, any interest of Bennu Oil & Gas in the AT 63 lease remains property of the bankruptcy estate.
On October 4, 2017, Statoil filed a notice in the Bennu Titan bankruptcy case that it had acquired the senior secured claim of Beal Bank USA, in the amount of $187.4 million. On November 1, 2017, the Bankruptcy Court approved the sale of the Titan production facility to Statoil. The Company believes that Statoil is in the process of seeking easements and regulatory approvals necessary to operate the Titan production facility.
Note 7: Fair Value
Our investments consisted of the following as of
September 30, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
(Dollar amounts in thousands)
|
|
Cost
|
|
% of total
|
|
Fair Value
|
|
% of total
|
|
Cost
|
|
% of total
|
|
Fair Value
|
|
% of total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
$
|
44,442
|
|
|
21.8
|
%
|
|
$
|
45,351
|
|
|
39.9
|
%
|
|
$
|
48,002
|
|
|
22.3
|
%
|
|
$
|
35,966
|
|
|
24.8
|
%
|
|
Subordinated debt
|
|
38,288
|
|
|
18.8
|
%
|
|
32,782
|
|
|
28.8
|
%
|
|
38,958
|
|
|
18.2
|
%
|
|
33,704
|
|
|
23.2
|
%
|
|
Limited term royalties
|
|
27,845
|
|
|
13.6
|
%
|
|
—
|
|
|
—
|
%
|
|
27,845
|
|
|
13.0
|
%
|
|
—
|
|
|
—
|
%
|
|
Redeemable preferred units
|
|
56,315
|
|
|
27.5
|
%
|
|
—
|
|
|
—
|
%
|
|
55,662
|
|
|
26.0
|
%
|
|
32,876
|
|
|
22.7
|
%
|
|
CLO residual interests
|
|
85
|
|
|
—
|
%
|
|
334
|
|
|
0.3
|
%
|
|
1,529
|
|
|
0.7
|
%
|
|
1,773
|
|
|
1.2
|
%
|
|
Equity securities
|
|
2,500
|
|
|
1.2
|
%
|
|
243
|
|
|
0.2
|
%
|
|
2,500
|
|
|
1.2
|
%
|
|
686
|
|
|
0.5
|
%
|
|
Total portfolio investments
|
|
169,475
|
|
|
82.9
|
%
|
|
78,710
|
|
|
69.2
|
%
|
|
174,496
|
|
|
81.4
|
%
|
|
105,005
|
|
|
72.4
|
%
|
|
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
34,995
|
|
|
17.1
|
%
|
|
34,995
|
|
|
30.8
|
%
|
|
39,997
|
|
|
18.6
|
%
|
|
39,997
|
|
|
27.6
|
%
|
|
Total investments
|
|
$
|
204,470
|
|
|
100.0
|
%
|
|
$
|
113,705
|
|
|
100.0
|
%
|
|
$
|
214,493
|
|
|
100.0
|
%
|
|
$
|
145,002
|
|
|
100.0
|
%
|
We account for all of the assets in our investment portfolio at fair value, following the provisions of the FASB ASC
Fair Value Measurements
, or ASC 820. ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
On a quarterly basis, the investment team of our investment advisor prepares fair value recommendations for all of the assets in our portfolio in accordance with ASC 820 and presents them to the Audit Committee of our Board of Directors. The Audit Committee recommends fair values of each asset for which market quotations are not readily available to our Board of Directors, which in good faith determines the final fair value for each investment.
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
|
|
|
|
•
|
Investment Team Valuation.
The investment professionals of our investment advisor prepare fair value recommendations for each investment.
|
|
|
|
|
•
|
Investment Team Valuation Documentation.
The investment team documents and discusses its preliminary fair value recommendations with the investment committee and senior management of our investment advisor.
|
|
|
|
|
•
|
Third Party Valuation Activity.
We may, at our discretion, retain an independent valuation firm to review any or all of the valuation analyses and fair value recommendations provided by the investment team of our investment advisor. Our general practice is that we have an independent valuation firm review all Level 3 investments (those whose value is determined using significant unobservable inputs) with recommended fair values in excess of $10 million on a quarterly basis, and review all Level 3 investments with recommended fair values greater than zero at least annually to provide positive assurance on our valuations.
|
|
|
|
|
•
|
Presentation to Audit Committee
. Our investment advisor and senior management present the valuation analyses and fair value recommendations to the Audit Committee of our Board of Directors.
|
|
|
|
|
•
|
Board of Directors and Audit Committee.
The Board of Directors and the Audit Committee review and discuss the valuation analyses and fair value recommendations provided by the investment team of our investment advisor and the independent valuation firm, if applicable.
|
|
|
|
|
•
|
Final Valuation Determination.
Our Board of Directors discusses the fair values recommended by the Audit Committee and determines the fair value of each investment in our portfolio for which market quotations are not readily available, in good faith, based on the input of the investment team of our investment advisor, our Audit Committee and the independent valuation firm, if applicable.
|
ASC 820 defines fair value as the price that a seller would receive for an asset or pay to transfer a liability in an orderly transaction between independent, knowledgeable and willing market participants at the measurement date. The fair value definition focuses on exit price in the principal, or most advantageous, market and prioritizes the use of observable market inputs over unobservable entity-specific inputs. In accordance with ASC 820, we categorize our investments based on the inputs to our valuation methodologies as follows:
|
|
|
|
•
|
Level 1
— Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
|
|
|
|
|
•
|
Level 2
— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or instances where prices vary substantially over time or among brokered market makers.
|
|
|
|
|
•
|
Level 3
— Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding what market participants would use to price the asset or liability based on the best available information.
|
Fair value accounting classifies financial assets and liabilities in their entirety based on the lowest level of input that is significant to the estimated fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment that may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels. We did not have any liabilities measured at fair value at
September 30, 2017
or
December 31, 2016
. Amounts outstanding under our Credit Facility are carried at amortized cost in the Consolidated Balance Sheets. As of
September 30, 2017
, the estimated fair value of our Credit Facility approximated its carrying value of
$40.0 million
. As of
December 31, 2016
, the fair value of our Credit Facility approximated its carry value of
$39.1 million
. The estimated fair value of the Credit Facility is determined by discounting projected remaining payments using market interest rates for borrowings of the Company.
We record investments in securities for which market quotations are readily available at such market quotations in our financial statements as of the valuation date. For investments in securities for which market quotations are unavailable, or which have various degrees of trading restrictions, the investment team of our investment advisor prepares valuation analyses and fair value estimates, using the most recently available financial statements, forecasts and, when applicable, comparable transaction data. These valuation analyses rely on estimates of the asset values and enterprise values of portfolio companies issuing securities.
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
The methodologies for determining asset valuations include estimates based on: the liquidation or sale value of a portfolio company’s assets, the discounted value of expected future net cash flows from the assets and third party valuations of a portfolio company’s assets, such as asset appraisal reports, futures prices and engineering reserve reports of oil and natural gas properties. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated asset value of a portfolio company.
The methodologies for determining enterprise valuations include estimates based on: valuations of comparable companies, recent sales of comparable companies, the value of recent investments in the equity securities of a portfolio company and on the methodologies used for asset valuations. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated enterprise value of a portfolio company.
The methodologies for determining estimated current market values of comparable securities include estimates based on: recent initial offerings of comparable securities of public and private companies; recent secondary market sales of comparable securities of public and private companies; current market implied interest rates for comparable securities in general; and current market implied interest rates for non-comparable securities in general, with adjustments for such elements as size of issue, terms, and liquidity. The investment team of our investment advisor considers some or all of the above valuation methods to determine the estimated current market value of a comparable security.
For some of our securities, quoted prices in active markets for identical assets (Level 1 valuation inputs) or other significant observable inputs, including quoted prices of similar securities, interest rates, prepayments, credit risk, etc. (Level 2 valuation inputs) are readily available from independent sources and are used to value such securities. For other securities, there will be no readily available Level 1 or Level 2 pricing information, and therefore significant unobservable inputs (Level 3 valuation inputs), including the assumptions of OHA, must be relied upon in determining fair value for these securities.
If prices or quotes for securities are either not readily available, or a price or quote is deemed not reflective of the security’s fair market value, we employ a fair valuation technique for that security. In determining the fair value of a security, we may take into consideration (either individually or in combination) the financial condition and operating results of the underlying portfolio company, nature of the investment, restrictions on marketability, liquidity, market conditions, earnings multiple analyses using comparable companies, discounted cash flow analyses, appraisals, and other factors we deem appropriate.
Due to the inherent uncertainty in the valuation process, the fair values of our investments may differ materially from the values that would have been used had a ready market for the securities existed. Additionally, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on our investments to be materially different than the valuations currently assigned.
We occasionally have investments in our portfolio that contain payment-in-kind, or PIK, interest or dividend provisions. We compute PIK interest income or PIK dividend income at the contractual rate specified in each investment agreement, and we add that amount to the principal balance of the investment. For investments with PIK interest or PIK dividends, we calculate our income accruals on the principal balance plus any PIK amounts. If the portfolio company’s projected cash flows, further supported by estimated total enterprise value, are not sufficient to cover the contractual principal and interest or dividend amounts, as applicable, we do not accrue PIK interest income or PIK dividend income on the investment. To maintain our RIC status, we must pay out this non-cash income to stockholders in the form of distributions, even though we have not yet collected the cash. We recorded net PIK interest income of
$0.9 million
and
$0.1 million
in the
three months ended
September 30, 2017
and
2016
, respectively, and
$2.5 million
and
$0.4 million
in the
nine months ended
September 30, 2017
and
2016
, respectively. We recorded PIK dividend income from our investment in Castex Energy 2005, LP, of
$0.0 million
and
$1.0 million
for the
three months ended
September 30, 2017
, and
2016
, respectively, and
$0.0 million
and
$3.5 million
in the
nine months ended
September 30, 2017
and
2016
, respectively. During the first quarter of 2017, we placed our investment in Castex on non-accrual status based on our March 31, 2017 valuation, which reflected a determination that future payments received from this investment will no longer be sufficient to cover all of the contractual principal and dividend amounts on this investment.
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
The following tables set forth the fair value of our investments by level within the fair value hierarchy as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Portfolio investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
18,015
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,015
|
|
|
Equity securities
|
|
243
|
|
|
—
|
|
|
—
|
|
|
243
|
|
|
Total affiliate investments
|
|
18,258
|
|
|
—
|
|
|
—
|
|
|
18,258
|
|
|
Non-affiliate investments
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
45,351
|
|
|
—
|
|
|
36,028
|
|
|
9,323
|
|
|
Subordinated debt
|
|
14,767
|
|
|
—
|
|
|
14,767
|
|
|
—
|
|
|
Limited term royalties
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Redeemable preferred units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
CLO residual interests
|
|
334
|
|
|
—
|
|
|
—
|
|
|
334
|
|
|
Total non-affiliate investments
|
|
60,452
|
|
|
—
|
|
|
50,795
|
|
|
9,657
|
|
|
Total portfolio investments
|
|
78,710
|
|
|
—
|
|
|
50,795
|
|
|
27,915
|
|
|
Government securities
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
34,995
|
|
|
34,995
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
|
$
|
113,705
|
|
|
$
|
34,995
|
|
|
$
|
50,795
|
|
|
$
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Portfolio investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
16,464
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,464
|
|
|
Equity securities
|
|
686
|
|
|
—
|
|
|
—
|
|
|
686
|
|
|
Total affiliate investments
|
|
17,150
|
|
|
—
|
|
|
—
|
|
|
17,150
|
|
|
Non-affiliate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien secured debt
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Second lien debt
|
|
35,966
|
|
|
—
|
|
|
26,829
|
|
|
9,137
|
|
|
Subordinated debt
|
|
17,240
|
|
|
—
|
|
|
17,240
|
|
|
—
|
|
|
Limited term royalties
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Redeemable preferred units
|
|
32,876
|
|
|
—
|
|
|
—
|
|
|
32,876
|
|
|
CLO residual interests
|
|
1,773
|
|
|
—
|
|
|
—
|
|
|
1,773
|
|
|
Total non-affiliate investments
|
|
87,855
|
|
|
—
|
|
|
44,069
|
|
|
43,786
|
|
|
Total portfolio investments
|
|
105,005
|
|
|
—
|
|
|
44,069
|
|
|
60,936
|
|
|
Government securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
39,997
|
|
|
39,997
|
|
|
—
|
|
|
—
|
|
|
Total investments
|
|
$
|
145,002
|
|
|
$
|
39,997
|
|
|
$
|
44,069
|
|
|
$
|
60,936
|
|
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
The following tables present roll-forwards of the changes in fair value for all investments for which we determine fair value using unobservable (Level 3) factors for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Lien Secured
Debt and
Limited Term
Royalties
|
|
Second
Lien Debt
|
|
Subordinated
Debt and
Redeemable
Preferred Units
|
|
Equity
Securities
|
|
CLO Residual Interests
|
|
Total
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2017
|
|
Fair value at June 30, 2017
|
|
$
|
—
|
|
|
$
|
9,323
|
|
|
$
|
25,641
|
|
|
$
|
336
|
|
|
$
|
352
|
|
|
$
|
35,652
|
|
|
Total gains, (losses) and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net unrealized gains (losses)
|
|
—
|
|
|
(6
|
)
|
|
(8,538
|
)
|
|
(93
|
)
|
|
23
|
|
|
(8,614
|
)
|
|
Net amortization of premiums, discounts and fees
|
|
|
|
6
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
New investments, repayments and settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
PIK
|
|
—
|
|
|
—
|
|
|
895
|
|
|
—
|
|
|
—
|
|
|
895
|
|
|
Repayments and settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(41
|
)
|
|
(41
|
)
|
|
Fair value at September 30, 2017
|
|
$
|
—
|
|
|
$
|
9,323
|
|
|
$
|
18,015
|
|
|
$
|
243
|
|
|
$
|
334
|
|
|
$
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2017
|
|
Fair value at December 31, 2016
|
|
$
|
—
|
|
|
$
|
9,137
|
|
|
$
|
49,340
|
|
|
$
|
686
|
|
|
$
|
1,773
|
|
|
$
|
60,936
|
|
|
Total gains, (losses) and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized losses
|
|
—
|
|
|
(12,659
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,659
|
)
|
|
Net unrealized gains (losses)
|
|
—
|
|
|
12,830
|
|
|
(34,552
|
)
|
|
(443
|
)
|
|
5
|
|
|
(22,160
|
)
|
|
Net amortization of premiums, discounts and fees
|
|
—
|
|
|
15
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
New investments, repayments and settlements, net:
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
New investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
PIK
|
|
—
|
|
|
—
|
|
|
3,180
|
|
|
—
|
|
|
—
|
|
|
3,180
|
|
|
Repayments and settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,444
|
)
|
|
(1,444
|
)
|
|
Fair value at September 30, 2017
|
|
$
|
—
|
|
|
$
|
9,323
|
|
|
$
|
18,015
|
|
|
$
|
243
|
|
|
$
|
334
|
|
|
$
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses) from investments still held as of reporting date:
|
|
September 30, 2017
|
|
$
|
—
|
|
|
$
|
12,830
|
|
|
$
|
(34,552
|
)
|
|
$
|
(443
|
)
|
|
$
|
5
|
|
|
$
|
(22,160
|
)
|
|
September 30, 2016
|
|
10,256
|
|
|
(8,523
|
)
|
|
(11,007
|
)
|
|
(1,545
|
)
|
|
—
|
|
|
(10,819
|
)
|
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Lien Secured
Debt and
Limited Term
Royalties
|
|
Second
Lien Debt
|
|
Subordinated
Debt and
Redeemable
Preferred Units
|
|
Equity
Securities
|
|
Total
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2016
|
|
|
Fair value at June 30, 2016
|
|
$
|
16,117
|
|
|
$
|
12,814
|
|
|
$
|
55,645
|
|
|
$
|
2,277
|
|
|
$
|
86,853
|
|
|
|
Total gains, (losses) and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Net unrealized gains (losses)
|
|
(1,313
|
)
|
|
49
|
|
|
(5,371
|
)
|
|
(1,239
|
)
|
|
(7,874
|
)
|
|
|
Net amortization of premiums, discounts and fees
|
|
2
|
|
|
51
|
|
|
14
|
|
|
—
|
|
|
67
|
|
|
|
New investments, repayments and settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
New investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
PIK
|
|
—
|
|
|
—
|
|
|
1,104
|
|
|
—
|
|
|
1,104
|
|
|
|
Repayments and settlements
|
|
—
|
|
|
(3,777
|
)
|
|
—
|
|
|
|
|
(3,777
|
)
|
|
|
Fair value at September 30, 2016
|
|
$
|
14,806
|
|
|
$
|
9,137
|
|
|
$
|
51,392
|
|
|
$
|
1,038
|
|
|
$
|
76,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2016
|
|
|
Fair value at December 31, 2015
|
|
$
|
15,185
|
|
|
$
|
21,354
|
|
|
$
|
68,169
|
|
|
$
|
2,583
|
|
|
$
|
107,291
|
|
|
|
Total gains, (losses) and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains
|
|
(10,777
|
)
|
|
—
|
|
|
(800
|
)
|
|
1,435
|
|
|
(10,142
|
)
|
|
|
Net unrealized gains (losses)
|
|
10,256
|
|
|
(8,523
|
)
|
|
(11,007
|
)
|
|
(1,545
|
)
|
|
(10,819
|
)
|
|
|
Net amortization of premiums, discounts and fees
|
|
6
|
|
|
68
|
|
|
136
|
|
|
—
|
|
|
210
|
|
|
|
New investments, repayments and settlements, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
PIK
|
|
136
|
|
|
15
|
|
|
3,894
|
|
|
—
|
|
|
4,045
|
|
|
|
Repayments and settlements
|
|
—
|
|
|
(3,777
|
)
|
|
(9,000
|
)
|
|
(1,435
|
)
|
|
(14,212
|
)
|
|
|
Fair value at September 30, 2016
|
|
$
|
14,806
|
|
|
$
|
9,137
|
|
|
$
|
51,392
|
|
|
$
|
1,038
|
|
|
$
|
76,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and
nine months ended
September 30, 2017
and
2016
, none of our investments in portfolio companies changed among the categories of Control Investments, Affiliate Investments and Non-Affiliate Investments, and there were no transfers among Levels 3, 2 or 1.
We present net unrealized gains (losses) on our consolidated statements of operations as “Net unrealized appreciation (depreciation) on investments.”
OHA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2017
(unaudited)
The following table summarizes the significant unobservable inputs in the fair value measurements of our Level 3 investments by category of investment and valuation technique as of
September 30, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value
|
|
Valuation Technique
|
|
Significant Unobservable Inputs
|
|
Range of Inputs
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Energy Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Second lien debt
|
|
$
|
9,323
|
|
|
Market comparables
|
|
EBITDA multiples
|
|
11.0x - 16.0x
|
|
12.5x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
18,015
|
|
|
Market comparables
|
|
EBITDA multiples
|
|
5.0x - 6.0x
|
|
5.5x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLO residual interest
|
|
334
|
|
|
Net asset value with discount rate
|
|
Discount rate
|
|
15.0%
|
|
15.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
243
|
|
|
Market comparables
|
|
EBITDA multiples
|
|
6.0x - 7.0x
|
|
6.5x
|
|
|
|
27,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Investments:
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable preferred units
|
|
—
|
|
|
Estimated recovery analysis
|
|
Residual value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 investments
|
|
$
|
27,915
|
|
|
|
|
|
|
|
|
|
____________________________________
(1)
On October 16, 2017, Castex announced that it (together with certain affiliates) had filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. According to the filing, Castex and its affiliates in bankruptcy have entered into a restructuring support agreement ("RSA") with pre-petition lenders holding approximately 86% in principal amount of claims under the pre-petition credit facility. The RSA outlines a plan of reorganization for Castex and its affiliates in bankruptcy. As currently proposed, the RSA does not provide for any recovery to the holder of the preferred limited partnership units of Castex, including those preferred limited partnership unit holders who have exercised their put rights. OHAI is not a party to the RSA and is exploring all available options in and out of bankruptcy for recovery on its investment in Castex. At this time we are unable to determine the form and value of a recovery, if any, we expect to receive due in large part to the inherent risks and uncertainty associated with bankruptcy and litigation. Therefore, until we are in a position to determine the form, value, and likelihood of a recovery, we are estimating $0 fair market value of our investment in Castex at September 30, 2017 for financial statement purposes.
As noted above, the income and market approaches were used in the determination of fair value of certain Level 3 assets as of
September 30, 2017
. The significant unobservable inputs used in the income approach are the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include future principal and interest payments. An increase in the discount rate or market yield would result in a decrease in the fair value. The significant unobservable inputs used in the market approach are based on market comparable transactions and market multiples of publicly traded comparable companies. Increases or decreases in market multiples would result in an increase or decrease, respectively in the fair value.
Note 8: Common Stock
On October 31, 2011, our Board of Directors approved a stock repurchase plan, pursuant to which we may, from time to time, repurchase up to $10.0 million of our common stock in the open market at prices not to exceed the net asset value of our shares. During 2012 and 2013, we repurchased an aggregate of 1,129,014 shares of our common stock in the open market at an average price of $6.71 per share, totaling $7.6 million, in accordance with the stock repurchase plan. These repurchases were made at approximate discounts to our most recently published net asset value of 30%, 26% and 28% in May and November 2012 and May 2013, respectively.
In March 2015, our Board of Directors authorized the Company to repurchase up to the remaining $
2.4 million
available to be repurchased under this plan. As of July 14, 2015, we completed the stock repurchases under the stock repurchase plan. During 2015, we repurchased a total of
444,030
shares for $
2.4 million
at a weighted average price of $
5.46
per share, a
27%
discount to net asset value at December 31, 2014. Repurchases initiated after March 31, 2015 were made pursuant to a plan executed in accordance with Rule 10
b5-1 under the Securities Exchange Act of 1934. Our current Credit Facility does not allow us to repurchase common stock.
