(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.
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 September 30, 2021, we, together with our credit-focused affiliates, collectively had $20.1 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 September 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 168 separate portfolio companies through a combination of both initial and follow-on investments. Since April 2010 through September 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 September 30, 2021, our managed fund, First Eagle Greenway Fund II, LLC, or Greenway II, and its separately managed account, collectively Greenway II, have received $209.7 million, or 112.1% of the committed capital.
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.
There is an ongoing COVID-19 pandemic, which has spread to over 200 countries and territories, including the United States, and has spread to every state in the United States. The global impact of the pandemic has been rapidly evolving, and as cases of COVID-19, including new variants, have continued to be identified in additional countries, many countries have reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading, and limiting operations of non-essential businesses. Such actions have created disruption in global supply chains, and adversely impacted many industries. The pandemic has had a continued adverse impact on economic and market conditions and has triggered a period of global economic slowdown.
Although vaccines have been widely distributed in the U.S., certain U.S. states are planning on reopening and we believe the economy is beginning to rebound in certain respects, the uncertainty surrounding the COVID-19 pandemic, including uncertainty regarding new variants of COVID-19 and acceptance of vaccines and other factors have and may continue to contribute to significant volatility in the global markets. COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, financial condition, results of operations and ability to pay distributions.
Portfolio Composition and Investment Activity
As of September 30, 2021, we had $402.0 million of portfolio investments (at fair value), which represents a $64.3 million, or 19.0% increase from the $337.7 million (at fair value) as of December 31, 2020. Our portfolio consisted of 68 investments, including Greenway II, as of September 30, 2021, compared to 51 portfolio investments, including Greenway II, as of December 31, 2020. As of September 30, 2021, we had $101.2 million of controlled portfolio investments (at fair value) in three portfolio companies, which represents a $7.4 million, or 7.9%, 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 September 30, 2021 was approximately $28.7 million and $14.1 million at cost and fair value, respectively. Our investment in the Logan JV represented 18.2% and 20.2% of our portfolio investments at fair value as of September 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 September 30, 2021 December 31, 2020 Cost Fair Value Cost Fair Value Largest portfolio company investment - Logan JV $ 92.0 $ 73.0 $ 92.1 $ 68.1 Largest portfolio company investment - excluding Logan JV, Greenway II, investments 23.3 22.2 23.3 21.6 where we hold controlling equity position and investments where we hold equity only Average portfolio company investment 6.6 5.9 7.5 6.4 Average portfolio company investment - excluding Logan JV, Greenway II, investments 5.1 5.1 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 67.0 39.2 67.8 35.5 hold equity only, including Greenway II
At September 30, 2021 and at December 31, 2020, based upon fair value, 93.2% 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 September 30, December 31, Description: 2021 2020 First lien senior secured debt (1)(4)(5) 7.2 % 7.4 % Second lien debt (1)(4) 2.3 % 4.2 % Subordinated debt 11.0 % 11.0 % Debt and income-producing investments (1)(2)(4) 6.9 % 7.0 % Logan JV (3) 7.0 % 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 September 30, 2021 and December 31, 2020.
(2) Includes yields on controlled investments, but excludes the yield on the Logan JV.
(3) As of September 30, 2021 and December 31, 2020, the dividends declared and earned of $6.5 million and $7.1 million for the twelve months ended September 30, 2021 and December 31, 2020, respectively, represented a yield to us of 7.0% 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 September 30, 2021, the weighted average yield would be 7.3% on first lien senior secured debt, 11.7% on second lien debt, 7.5% on debt and income-producing investments and 7.4% 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 September 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 September 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 September 30, 2021. There can be no assurance that the weighted average yield will remain at its current level. As of September 30, 2021 and December 31, 2020, 1.8% 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 September 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 $19.9 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 September 30, 2021 and December 31, 2020, our median attachment point in the capital structure of our debt investments in portfolio companies is approximately 4.2 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 September 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 September 30, 2021, we have closed portfolio investments with 102 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 September 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) $ 298.8 $ 288.2 87.6 % $ 257.8 $ 239.9 90.0 % Unsponsored Investments (1) 58.2 40.8 12.4 % 46.4 26.7 10.0 % Total $ 357.0 $ 329.0 100.0 % $ 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 September 30, 2021 (in millions).
Amortized Percentage of Percentage of Description Cost Total Fair Value (1) Total First lien senior secured debt $ 304.0 67.7 % $ 295.9 73.6 % Investment in Logan JV 92.0 20.5 % 73.0 18.2 % Second lien debt 28.3 6.3 % 16.6 4.1 % Equity investments 15.4 3.5 % 7.2 1.8 % Subordinated debt 6.0 1.3 % 6.0 1.5 % Investments in funds 3.3 0.7 % 3.3 0.8 % Total investments $ 449.0 100.0 % $ 402.0 100.0 %
All investments are categorized as Level 3 in the fair value hierarchy, except for i) our equity investment in Wheels Up Experience Inc. which is categorized as Level 1 in the fair value hierarchy and noted as such on the Consolidated Schedule of Investments as of September 30, 2021, ii) 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 September 30, 2021 and
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 September 30, 2021 (in millions).
Amortized % of Total % of Net Industry Cost Fair Value Portfolio Assets Investment Funds and Vehicles $ 95.2 $ 76.2 19.00 % 38.97 % Healthcare & Pharmaceuticals 63.1 63.8 15.89 % 32.59 % Consumer Goods: Non-Durable 57.9 55.7 13.85 % 28.44 % High Tech Industries 31.1 30.5 7.57 % 15.55 % Capital Equipment 45.7 25.2 6.27 % 12.87 % Services: Consumer 24.6 24.5 6.08 % 12.49 % Services: Business 22.3 22.8 5.67 % 11.65 % Retail 12.8 13.8 3.44 % 7.06 % Banking 12.7 12.8 3.19 % 6.54 % Finance 12.2 12.3 3.06 % 6.29 % Energy: Oil & Gas 22.0 12.3 3.06 % 6.27 % Insurance 9.3 9.4 2.34 % 4.81 % Environmental Industries 7.3 7.3 1.81 % 3.73 % Media: Broadcasting & Subscription 5.2 5.2 1.29 % 2.66 % Containers, Packaging, & Glass 4.1 4.2 1.05 % 2.15 % Automotive 3.9 4.0 0.99 % 2.03 % Chemicals, Plastics, & Rubber 3.8 3.9 0.96 % 1.97 % Construction & Building 3.4 3.4 0.86 % 1.76 % Telecommunications 3.3 3.3 0.81 % 1.67 % Hotel, Gaming, & Leisure 3.0 3.1 0.76 % 1.57 % Transportation: Consumer 1.0 3.0 0.75 % 1.55 % Sovereign & Public Finance 2.8 2.9 0.71 % 1.46 % Transportation: Cargo 2.3 2.4 0.59 % 1.21 % Total Investments $ 449.0 $ 402.0 100.00 % 205.29 %
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 nine months ended September 30, 2021 and 2020 (in millions). Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 New portfolio investments $ 33.4 $ 10.9 $ 99.4 $ 28.5 Existing portfolio investments: Follow-on investments (1) 4.2 0.3 8.9 0.6 Delayed draw and revolver investments 0.5 (1) 4.1 8.4 21.2 Total existing portfolio investments 8.3 0.8 17.3 21.8 Total portfolio investment activity $ 41.7 $ 11.7 $ 116.7 $ 50.3 Number of new portfolio investments 8 4 26 7 Number of follow-on investments 5 4 10 16 First lien senior secured debt $ 41.6 $ 11.7 $ 116.6 $ 50.3 Equity investments 0.1 - 0.1 - Total portfolio investments $ 41.7 $ 11.7 $ 116.7 $ 50.3 Weighted average yield of new debt 7.5 % 8.8 % 7.2 % 6.8 % investments Weighted average yield, including all 7.5 % 8.8 % 7.2 % 6.8 % new income-producing investments
(1) Includes follow-on investments in controlled investments. Refer to Schedule 12-14 for additional detail.
For the three and nine months ended September 30, 2021, we had prepayments and sales of our investments, including any prepayment premiums, totaling $33.8 . . .
Nov 04, 2021
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