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Aug. 5, 2021, 5:41 p.m. EDT

10-Q: FIRST EAGLE ALTERNATIVE CAPITAL BDC, INC.

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(EDGAR Online via COMTEX) -- 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 the consolidated financial statements and notes thereto appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those contained in or implied by the forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" following the Table of Contents for further information regarding forward-looking statements. Certain amounts and percentages in this discussion and analysis have been rounded for convenience of presentation. Unless otherwise noted, the figures in the following discussions are unaudited.

Overview

First Eagle Alternative Capital BDC, Inc., or we, us, our or the Company, was organized as a Delaware corporation on May 26, 2009 and initially funded on July 23, 2009. We commenced principal operations on April 21, 2010. On January 31, 2020, First Eagle Alternative Credit, LLC, our investment advisor (the "Advisor"), and First Eagle Investment Management, LLC ("First Eagle") completed its acquisition of the Advisor (the "Transaction") and, in conjunction with the completion of the Transaction, the Advisor's name was changed to First Eagle Alternative Credit, LLC. Our investment activities are managed by First Eagle Alternative Credit, LLC ("FEAC") and supervised by our board of directors, a majority of whom are independent of FEAC and its affiliates. Our investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated investments in debt and equity securities of middle market companies.

As of June 30, 2021, we, together with our credit-focused affiliates, collectively had $20.3 billion of assets under management. This amount included our assets, assets of the managed funds and a separate account managed by us, and assets of the collateralized loan obligations (CLOs), separate accounts and various fund formats, as managed by the investment professionals of the Advisor or its consolidated subsidiary.

We are a direct lender to middle market companies and invest primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, we also make second lien, subordinated, or mezzanine, debt investments, which may include an associated equity component such as warrants, preferred stock or other similar securities and direct equity investments. Our first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. Unitranche structures combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the "last-out" tranche or subordinated tranche (or piece) of the unitranche loan. We may also provide advisory services to managed funds.

We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940 Act, as amended, or the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Under the relevant U.S. Securities and Exchange Commission, or SEC, rules the term "eligible portfolio company" includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.

We are also registered as an investment adviser under the Investment Advisers Act of 1940, as amended.

Since April 2010, after we completed our initial public offering and commenced principal operations, through June 30, 2021, we have been responsible for making, on behalf of ourselves, our managed funds and separately managed account, over $2.4 billion in aggregate commitments into 161 separate portfolio companies through a combination of both initial and follow-on investments. Since April 2010 through June 30, 2021, we, along with our managed funds and separately managed account, have received $1.9 billion of gross proceeds from the realization of investments. The Company alone has received $1.6 billion of gross proceeds from the realization of its investments during this same time period. As of June 30, 2021, our managed fund, First Eagle Greenway Fund II, LLC, or Greenway II, and its separately managed account, collectively Greenway II, have received $190.8 million, or 127.2% of committed capital, and $209.3 million, or 111.9% of the committed capital, respectively.

We have elected to be treated for tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. To qualify as a RIC, we must, among other things, meet certain source of income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level income taxes on any income we distribute to our stockholders.

COVID-19 Developments

There is an ongoing global outbreak of COVID-19, which has spread to over 100 countries, including the United States, and has spread to every state in the United States. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The global impact of the outbreak has been rapidly evolving, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operation of non-essential businesses. Such actions are creating disruption in global supply chains and adversely impacting many industries. With the introduction of vaccines, most countries have eased restrictions on travel and business. However, new variants of COVID-19 continue to raise questions about the possibility of new quarantines and restrictions around the world. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.

We have enhanced our portfolio monitoring practices to include a potential threat assessment of the impact of COVID-19 on our portfolio companies, and we are maintaining frequent contact with our borrowers, sponsors and co-lenders. We have continued to fund our existing debt commitments. We expect the impacts of COVID-19 are likely to continue to some extent as the outbreak persists, and potentially even longer as a resurgence across the globe is widely anticipated in winter. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our portfolio companies. The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the availability of vaccines, and uncertainty with respect to the duration of a global economic slowdown. Depending on the duration and extent of the disruptions to the operations of our portfolio companies, we expect that some of our portfolio companies may curtail business operations, reduce employee workforces or defer capital expenditures if subjected to prolonged financial distress, which could impair their business on a permanent basis. These impairments could possibly lead to defaults on their financial obligations to us and other capital providers. These developments may result in further losses and/or restructurings that may lead to decreased investment income.

We will continue to monitor the rapidly evolving situation in relation to COVID-19, and the resulting impacts on our portfolio companies' operations. Given the dynamic nature, coupled with the significant uncertainties of the situation, we cannot reasonably estimate the impact of COVID-19 on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies are adversely impacted by the effects of COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas, it may have a material adverse impact on our performance, financial condition, results of operations and ability to pay distributions.

Portfolio Composition and Investment Activity

Portfolio Composition

As of June 30, 2021, we had $394.6 million of portfolio investments (at fair value), which represents a $56.9 million, or 16.8% increase from the $337.7 million (at fair value) as of December 31, 2020. Our portfolio consisted of 64 investments, including Greenway II, as of June 30, 2021, compared to 51 portfolio investments, including Greenway II, as of December 31, 2020. As of June 30, 2021, we had $101.3 million of controlled portfolio investments (at fair value) in three portfolio companies, which represents a $7.5 million, or 8.0%, increase from $93.8 million (at fair value) as of December 31, 2020 in three portfolio companies. The increase in controlled portfolio companies was largely the result of an increase in fair value of First Eagle Logan JV, LLC, or Logan JV. Our average controlling equity position at June 30, 2021 was approximately $28.8 million and $14.0 million at cost and fair value, respectively. Our investment in the Logan JV represented 18.6% and 20.2% of our portfolio investments at fair value as of June 30, 2021 and December 31, 2020, respectively. We are currently limiting new investments in new portfolio companies to 2.5% of our investment portfolio based upon the most recent fair market value.

The following table shows certain portfolio highlights based on cost and fair value (in millions).







                                                                              As of
                                                          June 30, 2021                December 31, 2020
                                                        Cost      Fair Value          Cost        Fair Value
        Largest portfolio company investment - Logan
        JV                                           $     92.0   $      73.3      $     92.1    $       68.1
        Largest portfolio company investment -
        excluding Logan JV, Greenway II, investments       23.3          22.0            23.3            21.6
        where we hold controlling equity position
        and investments where we hold equity only
        Average portfolio company investment                6.9           6.2             7.5             6.4
        Average portfolio company investment -
        excluding Logan JV, Greenway II, investments        5.3           5.3             5.8             5.7
        where we hold controlling equity position
        and investments where we hold equity only
        Total investments where we hold controlling
        equity position and investments where we           67.2          40.5            67.8            35.5
        hold equity only, including Greenway II
        


At June 30, 2021 and at December 31, 2020, based upon fair value, 93.0% and 96.8%, respectively, of our income-producing debt investments bore interest based on floating rates, which may be subject to interest rate floors, such as LIBOR.

The following table shows the weighted average yield by investment category at their current cost.







                                                                         As of
                                                            June 30,
         Description:                                         2021         December 31, 2020
         First lien senior secured debt (1)(4)(5)                 7.2 %                   7.4 %
         Second lien debt (1)(4)                                  2.7 %                   4.2 %
         Subordinated debt                                       11.0 %                  11.0 %
         Debt and income-producing investments (1)(2)(4)          6.8 %                   7.0 %
         Logan JV (3)                                             6.9 %                   7.6 %
         All investments including Logan JV (1)(3)(4)             6.9 %                   7.1 %
        


(1) Includes all loans on non-accrual status and restructured loans for which income is not being recognized as of June 30, 2021 and December 31, 2020.

(2) Includes yields on controlled investments, but excludes the yield on the Logan JV.

(3) As of June 30, 2021 and December 31, 2020, the dividends declared and earned of $6.3 million and $7.1 million for the twelve months ended June 30, 2021 and December 31, 2020, respectively, represented a yield to us of 6.9% and 7.6%, respectively, based on average capital invested. We expect the dividend yield to fluctuate as a result of the timing of additional capital invested, the changes in asset yields in the underlying portfolio and the overall performance of the Logan JV investment portfolio.

(4) Excluding restructured loans for which income is not being recognized as of June 30, 2021, the weighted average yield would be 7.3% on first lien senior secured debt, 11.8% on second lien debt, 7.5% on debt and income-producing investments and 7.3% on all investments including Logan JV. Excluding restructured loans for which income is not being recognized as of December 31, 2020, the weighted average would be 7.6% on first lien senior secured debt, 11.8% on second lien debt, 7.8% on debt and income-producing investments and 7.7% on all investments including Logan JV.

(5) The broadly syndicated loans are included as first lien senior secured debt. As of June 30, 2021, the weighted average yield of only the broadly syndicated loans is 5.7%.

The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of our fees and expenses. The weighted average yield was computed using the effective interest rates as of June 30, 2021, including accretion of original issue discount and loan origination fees. This weighted average yield reflects the impact of loans on non-accrual status and restructured loans for which income is not being recognized as of June 30, 2021. There can be no assurance that the weighted average yield will remain at its current level. As of June 30, 2021 and December 31, 2020, 2.2% and 1.5%, respectively, of our investment portfolio at fair value was comprised of non-income producing equity and warrant investments. We intend to continue to reduce our non-income producing investments in 2021 and beyond. No assurance can be given that we will be successful in achieving this target.

As of June 30, 2021 and December 31, 2020, portfolio investments, in which we have debt investments, had a median adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $20.9 million and $18.5 million, respectively, based on the latest available financial information provided by the portfolio companies for each of these periods. As of June 30, 2021 and December 31, 2020, our median attachment point in the capital structure of our debt investments in portfolio

companies is approximately 4.0 times and 4.3 times the portfolio company's EBITDA, respectively, based on our latest available financial information for each of these periods.

We expect the percentage of our portfolio investments in unsponsored investments to decrease significantly over time as we work through restructurings, which may include providing additional liquidity through revolving loans, and ultimately exit our unsponsored investments. However, these portfolio investments may require follow-on capital as we work through restructurings, which will increase our exposure to these investments. Going forward, we expect unsponsored investments we make, if any, would only be in first lien senior secured investments. As of June 30, 2021, our portfolio of unsponsored debt investments included four investments, excluding our investment in Wheels Up Partners, LLC, which is a non-income producing equity security. Three are performing at or above our expectations and have an Investment Score of 1 or 2. The other unsponsored investment has an Investment Score of 5. As of December 31, 2020, our portfolio of unsponsored debt investments included two investments, excluding our investment in Wheels Up Partners, LLC. One was performing at or above our expectations and had an Investment Score of 2. The other unsponsored investment had an Investment Score of 5.

As of June 30, 2021, we have closed portfolio investments with 97 different sponsors since inception. As of December 31, 2020, we had closed portfolio investments with 86 different sponsors since inception.

The following table summarizes sponsored and unsponsored investments based on amortized cost and fair value (in millions).







                                                      As of June 30, 2021                     As of December 31, 2020
                                                                            Fair                                      Fair
                                                                           Value                                     Value
                                               Amortized       Fair       as % of       Amortized        Fair       as % of
                                                 Cost          Value       Total           Cost          Value       Total
        Sponsored Investments (1)             $     295.5     $ 285.0         88.7 %   $      257.8     $ 239.9         90.0 %
        Unsponsored Investments (1)                  52.9        36.3         11.3 %           46.4        26.7         10.0 %
        Total                                 $     348.4     $ 321.3        100.0 %   $      304.2     $ 266.6        100.0 %
        


(1) Excludes Greenway II and the Logan JV.

The following table summarizes the amortized cost and fair value of investments as of June 30, 2021 (in millions).







                                                   Amortized       Percentage of                            Percentage of
        Description                                  Cost              Total           Fair Value (1)           Total
        First lien senior secured debt            $     294.3                66.8 %   $          286.3                72.5 %
        Investment in Logan JV                           92.0                20.9 %               73.3                18.6 %
        Second lien debt                                 29.3                 6.7 %               17.3                 4.4 %
        Subordinated debt                                 5.9                 1.3 %                5.9                 1.5 %
        Equity investments                               15.5                 3.5 %                8.6                 2.2 %
        Investments in funds                              3.4                 0.8 %                3.2                 0.8 %
        Total investments                         $     440.4               100.0 %   $          394.6               100.0 %
        


All investments are categorized as Level 3 in the fair value hierarchy, except for 1) certain broadly syndicated loans which are categorized as Level 2 in the fair value hierarchy and noted as such on the Consolidated Schedule of Investments as of June 30, 2021 and 2) investments in funds and the Logan JV, which are excluded from the fair value hierarchy in accordance with ASU 2015-07. These assets are valued at net asset value.

The following table summarizes the amortized cost and fair value of investments as of December 31, 2020 (in millions).







                                                   Amortized       Percentage of                            Percentage of
        Description                                  Cost              Total           Fair Value (1)           Total
        First lien senior secured debt            $     245.9                61.6 %   $          233.7                69.2 %
        Investment in Logan JV                           92.1                23.1 %               68.1                20.2 %
        Second lien debt                                 34.7                 8.7 %               22.1                 6.5 %
        Subordinated debt                                 5.8                 1.5 %                5.8                 1.7 %
        Equity investments                               17.4                 4.3 %                5.1                 1.5 %
        Investments in funds                              3.4                 0.8 %                2.9                 0.9 %
        Total investments                         $     399.3               100.0 %   $          337.7               100.0 %
        


(1) All investments are categorized as Level 3 in the fair value hierarchy, except for investments in funds and the Logan JV, which are excluded from the fair value hierarchy in accordance with ASU 2015-07. These assets are valued at net asset value.

We expect the percent of our core assets, which we define as first lien senior secured loans and the Logan JV, to continue to increase as a percent of total investments as we exit non-qualifying BDC assets as defined under the 1940 Act and our controlled equity investments, through sales or repayments, and redeploy these proceeds. We intend to continue our efforts to reposition the portfolio towards these core assets, which we believe will reduce our exposure to portfolio company risks and potential changes in interest rates.

The following is a summary of the industry classification in which we invest as of June 30, 2021 (in millions).







                                           Amortized                        % of Total      % of Net
         Industry                            Cost          Fair Value       Portfolio        Assets
         Investment Funds And Vehicles    $      95.3     $       76.4            19.38 %       38.98 %
         Healthcare & Pharmaceuticals            66.3             67.0            16.98 %       34.14 %
         Consumer Goods: Non-Durable             55.2             53.2            13.50 %       27.15 %
         High Tech Industries                    28.0             27.9             7.07 %       14.23 %
         Finance                                 25.6             25.6             6.49 %       13.05 %
         Capital Equipment                       45.8             25.0             6.33 %       12.73 %
         Services: Consumer                      24.4             24.2             6.14 %       12.35 %
         Services: Business                      22.9             23.2             5.88 %       11.83 %
         Banking                                 14.0             13.9             3.53 %        7.11 %
         Energy: Oil & Gas                       22.1             12.7             3.21 %        6.46 %
         Environmental Industries                 6.9              6.9             1.76 %        3.54 %
         Retail                                   5.9              6.6             1.67 %        3.35 %
         Transportation: Consumer                 1.0              4.5             1.14 %        2.29 %
         Containers, Packaging, & Glass           4.1              4.2             1.06 %        2.13 %
         Automotive                               4.0              4.0             1.00 %        2.02 %
         Chemicals, Plastics, & Rubber            3.9              3.9             0.99 %        1.99 %
         Construction & Building                  3.4              3.5             0.87 %        1.76 %
         Telecommunications                       3.3              3.3             0.83 %        1.67 %
         Hotel, Gaming, & Leisure                 3.0              3.1             0.78 %        1.57 %
         Sovereign & Public Finance               2.8              2.9             0.73 %        1.47 %
         Insurance                                2.5              2.6             0.66 %        1.32 %
         Total Investments                $     440.4     $      394.6           100.00 %      201.14 %
        


The following is a summary of the industry classification in which we invest as of December 31, 2020 (in millions).







                                            Amortized                        % of Total      % of Net
        Industry                              Cost          Fair Value       Portfolio        Assets
        Investment Funds And Vehicles      $      92.1     $       68.1            20.17 %       36.78 %
        Healthcare & Pharmaceuticals              47.9             47.4            14.03 %       25.58 %
        Consumer Goods: Non-Durable               49.8             44.0            13.03 %       23.75 %
        High Tech Industries                      28.3             28.2             8.36 %       15.23 %
        Finance                                   29.4             28.2             8.35 %       15.23 %
        Capital Equipment                         44.9             23.5             6.97 %       12.71 %
        Services: Business                        22.1             22.6             6.69 %       12.20 %
        Services: Consumer                        22.0             21.7             6.42 %       11.71 %
        Banking                                   12.0             11.9             3.52 %        6.41 %
        Energy: Oil & Gas                         21.8             11.3             3.36 %        6.12 %
        Retail                                     8.8              8.8             2.60 %        4.74 %
        Telecommunications                         8.3              8.3             2.46 %        4.48 %
        Chemicals, Plastics, & Rubber              3.3              3.3             0.97 %        1.76 %
        Construction & Building                    3.1              3.2             0.95 %        1.73 %
        Transportation: Consumer                   1.0              2.6             0.76 %        1.39 %
        Insurance                                  2.5              2.5             0.75 %        1.37 %
        Containers, Packaging, & Glass             2.0              2.1             0.61 %        1.11 %
        Total Investments                  $     399.3     $      337.7           100.00 %      182.30 %
        








        Investment Activity
        The following is a summary of our investment activity, presented on a cost
        basis, for the three and six months ended June 30, 2021 and 2020 (in millions).
                                                   Three months ended June 30,            Six months ended June 30,
                                                     2021                  2020              2021                 2020
        New portfolio investments              $        45.7         $           -     $        66.0         $     17.6
        Existing portfolio investments:
        . . .
        


Aug 05, 2021

COMTEX_391038872/2041/2021-08-05T17:40:39

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