<..What happens if they win? No one is going to lend to them. The lenders still have a right to all their liquid assets...>


If they win, KCAP will not have to pay penalty interest which they are currently paying.

Why wouldn't lenders work with KCAP? You'd have a BDC that has done nothing wrong, and has not violated the terms of their facility, not to mention they are associated with Kohlberg & Co. I don't think this is an concern

The lender does not have a right to all of KCAP's assets. They only have a claim to the assets secured to the facility. These are $310mm of assets at fair value and the balance on KCAP's facility is $233mm.





<<.KCAP said they had plenty of assets to sell to payoff the lenders. My question is what assets...>>


They only have to sell their secured assets if necessary. If their assets secured to the facility do not cover their debt obligation, BMO would be out the difference.

KCAP has about $172mm in unencumbered assets including over $100mm in other debt securities that BMO has no claim on. KCAP will not be a forced seller of any of their unencumbered assets.

If the lender wins, KCAP pays default interest until they secure another facility or forfiet their secured assets.






<<..Also, if you look at all the other BDCs, they value their loan portfolio between 88% (ARCC) to mid 70% (most of the others). What does KCAP value their entire portfolio including the CLO equity 90%. That simply is outside the acceptable norm. ..>>




KCAP's debt securities portfolio is significantly higher quality than their peers. Look through their debt securities portfolio. They are most all Senior Secured debt yielding 5%-7%.

Then go to ARCC's 10-Q and look at all the 10%--14% Senior Secured loans.

Which one do you think is really top of the capital structure debt?



KCAP's model is kind of a barbell type strategy. About 70% of their portfolio is mostly true top of the capital structure Senior Secured debt, and on the other end is about 13% of high yielding CLO investments. In the middle is Katonah. Yes, they are exposed to the CLO market but not in an ownership position, they manage those assets.





<<<..So if the lenders win, where is the equity investors protection?...>>



Worst case scenario is if KCAP were lose all their assets secured to the facility. They can lose no more than that.

This would leave them with a total of about $170mm in unencumbered assets. Included in this would be over $100mm of debt securities, their CLO investments, Katonah, and a small amount of equity positions

If this were to happen they would be left with mostly their highest yielding assets (the lowest yielding are whats secured to the facility), and no debt.






<<<...Where are the income producing assets? Not the loan portfolio because the lenders have full rights to the income off of that. ..>>>


In Q209 44% of KCAP's investment income came from unencumbered assets.


This requirement of all the income from the assets secured to the facility to go toward paying the interest expense and then to pay down the principle on the facility has caused a tight cash flow situation.

But they were going to have to pay the interest in the facility anyway.

The only difference is that about $3.5mm per quarter is forced to be used to pay down the facility balance.




<<..Where are the income producing assets? ...Not the CLO equity investments because over half of them are not making equity distributions. ...>>


Your statement is misleading.

Yes, 4 of their 9 CLO equity investments are trapping cash, but those 4 CLO investments only represent about 18% of their CLO investments at cost. 82% of KCAP's CLO investments (at cost) are currently paying distributions.



RC