NEWS 3.31.15 10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________ 
FORM 10-Q
___________________________________________________________________ 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number 001-33211
 ______________________________________________________________________
NewStar Financial, Inc.
(Exact name of registrant as specified in its charter)
______________________________________________________________________ 
Delaware
 
54-2157878
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
500 Boylston Street, Suite 1250,
Boston, MA
 
02116
(Address of principal executive offices)
 
(Zip Code)
(617) 848-2500
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
_________________________________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of May 4, 2015, 45,948,447 shares of common stock, par value of $0.01 per share, were outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
  
 
Page
 
PART I
FINANCIAL INFORMATION
 
Item 1.
3

 
3

 
5

 
6

 
7

 
8

 
10

Item 2.
38

Item 3.
56

Item 4.
57

 
PART II
OTHER INFORMATION
 
Item 1.
57

Item 1A.
57

Item 2.
57

Item 6.
59

60


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Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q of NewStar Financial, Inc., contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These are statements that relate to future periods and include statements about:
our anticipated financial condition, including estimated loan losses;
our expected results of operation;
the anticipated timing of the closings of the investment by the Franklin Square Funds;
our growth and market opportunities;
trends and conditions in the financial markets in which we operate;
our future funding needs and sources and availability of funding;
our involvement in capital-raising transactions;
our ability to meet draw requests under commitments to borrowers under certain conditions;
our competitors;
our provision for credit losses;
our future development of our products and markets;
our ability to compete; and
our stock price.
Generally, the words “anticipates,” “believes,” “expects,” “intends,” “estimates,” “projects,” “plans” and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance, achievements or industry results to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other important factors include, among others:
acceleration of deterioration in credit quality that could result in levels of delinquent or non-accrual loans that would force us to realize credit losses exceeding our allowance for credit losses and deplete our cash position;
risks and uncertainties relating to the financial markets generally, including disruptions in the global financial markets;
the market price of our common stock prevailing from time to time;
our ability to obtain external financing;
the regulation of the commercial lending industry by federal, state and local governments;
risks and uncertainties relating to our limited operating history;
our ability to minimize losses, achieve profitability, and realize our deferred tax asset; and
the competitive nature of the commercial lending industry and our ability to effectively compete.
For a further description of these and other risks and uncertainties, we encourage you to carefully read section Item 1A. “Risk Factors” of our Annual Report on Form 10-K as amended for the year ended December 31, 2014.
The forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date of this report. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.


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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 Unaudited
 
March 31, 2015
 
December 31, 2014
 
($ in thousands, except share
and par value amounts)
Assets:
 
 
 
Cash and cash equivalents
$
28,666

 
$
33,033

Restricted cash
214,853

 
95,411

Cash collateral on deposit with custodian
49,082

 
38,975

Investments in debt securities, available-for-sale
79,891

 
46,881

Loans held-for-sale, net
149,609

 
200,569

Loans and leases, net
2,496,564

 
2,305,896

Deferred financing costs, net
29,397

 
26,514

Interest receivable
8,394

 
7,477

Property and equipment, net
613

 
660

Deferred income taxes, net
30,376

 
28,078

Income tax receivable
103

 
3,388

Other assets
32,712

 
24,127

Total assets
$
3,120,260

 
$
2,811,009

Liabilities:
 
 
 
Credit facilities
$
369,894

 
$
487,768

Term debt securitizations
1,572,484

 
1,193,187

Repurchase agreements
79,760

 
57,227

Corporate debt
238,300

 
238,500

Subordinated notes
136,578

 
156,831

Accrued interest payable
10,656

 
6,576

Other liabilities
56,300

 
29,923

Total liabilities
2,463,972

 
2,170,012

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share (5,000,000 shares authorized; no shares outstanding)

 

Common stock, par value $0.01 per share:
 
 
 
Shares authorized: 145,000,000 in 2015 and 2014;
 
 
 
Shares outstanding 46,031,393 in 2015 and 46,620,474 in 2014
460

 
466

Additional paid-in capital
742,699

 
718,825

Retained earnings
17,002

 
14,463

Common stock held in treasury, at cost $0.01 par value; 8,699,103 in 2015 and 7,581,646 in 2014
(103,924
)
 
(92,724
)
Accumulated other comprehensive income (loss), net
51

 
(33
)
Total stockholders’ equity
656,288

 
640,997

Total liabilities and stockholders’ equity
3,120,260

 
2,811,009

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
 
 
Three Months  Ended
March 31,
2015
 
2014
 
($ in thousands, except per share amounts)
Net interest income:
 
Interest income
$
39,749

 
$
33,127

Interest expense
22,334

 
12,501

Net interest income
17,415

 
20,626

Provision for credit losses
6,978

 
5,807

Net interest income after provision for credit losses
10,437

 
14,819

Non-interest income:
 
 
 
Fee income
1,158

 
770

Asset management income
920

 
25

Loss on derivatives
(9
)
 
(4
)
Loss on sale of loans, net
(15
)
 
(166
)
Other income
2,072

 
6,093

Total non-interest income
4,126

 
6,718

Operating expenses:
 
 
 
Compensation and benefits
6,733

 
7,759

General and administrative expenses
3,499

 
4,369

Total operating expenses
10,232

 
12,128

Operating income before income taxes
4,331

 
9,409

Results of Consolidated Variable Interest Entity:
 
 
 
Interest income

 
2,653

Interest expense – credit facilities

 
878

Interest expense – Fund membership interest

 
595

Other income

 
8

Operating expenses

 
60

Net results from Consolidated Variable Interest Entity

 
1,128

Income before income taxes
4,331

 
10,537

Income tax expense
1,792

 
4,334

Net income
$
2,539

 
$
6,203

Basic income per share
$
0.05

 
$
0.13

Diluted income per share
0.05

 
0.12

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
 
 
Three Months Ended
March 31,
 
 
2015
 
2014
 
 
($ in thousands, except per share amounts)
Net income
$
2,539

 
$
6,203

 
Other comprehensive income, net of tax:
 
 
 
 
Net unrealized securities gains, net of tax expense of $76 and $118, respectively
109

 
172

 
Net unrealized derivative losses, net of tax benefit of $22 and $1, respectively
(25
)
 
(3
)
 
Other comprehensive income
84

 
169

 
Comprehensive income
$
2,623

 
$
6,372

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Unaudited
 
 
NewStar Financial, Inc. Stockholders’ Equity
For the Three Months Ended March 31, 2015
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss), net
 
Common
Stockholders’
Equity
 
($ in thousands)
Balance at January 1, 2015
$
466

 
$
718,825

 
$
14,463

 
$
(92,724
)
 
$
(33
)
 
$
640,997

Net income

 

 
2,539

 

 

 
2,539

Other comprehensive income

 

 

 

 
84

 
84

Issuance of restricted stock
4

 
(4
)
 

 

 

 

Net shares reacquired from employee transactions

 

 

 
(140
)
 

 
(140
)
Tax benefit from vesting of stock awards

 
(109
)
 

 


 

 
(109
)
Repurchase of common stock
(11
)
 
11

 

 
(11,060
)
 

 
(11,060
)
Issuance of warrants

 
21,766

 

 

 

 
21,766

Exercise of common stock options
1

 
1,403

 

 

 

 
1,404

Tax benefit from exercise of common stock awards

 
77

 

 

 

 
77

Amortization of restricted common stock awards

 
730

 

 

 

 
730

Balance at March 31, 2015
$
460

 
$
742,699

 
$
17,002

 
$
(103,924
)
 
$
51

 
$
656,288


 
NewStar Financial, Inc. Stockholders’ Equity
For the Three Months Ended March 31, 2014
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income, net
 
Retained
Earnings of
Consolidated
VIE
 
Common
Stockholders’
Equity
 
($ in thousands)
Balance at January 1, 2014
487

 
655,143

 
2,624

 
$
(43,271
)
 
$
569

 
$
658

 
$
616,210

Net income

 

 
5,539

 

 

 
664

 
6,203

Other comprehensive income

 

 

 

 
169

 

 
169

Issuance of restricted stock
1

 
(1
)
 

 

 

 

 

Net shares reacquired from employee transactions

 

 

 
(385
)
 

 

 
(385
)
Tax benefit from vesting of restricted common stock awards

 
143

 

 

 

 

 
143

Exercise of common stock options
1

 
465

 

 

 

 

 
466

Amortization of restricted common stock awards

 
664

 

 

 

 

 
664

Balance at March 31, 2014
489

 
656,414

 
8,163

 
$
(43,656
)
 
$
738

 
$
1,909

 
$
624,057

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited 
  
Three Months Ended March 31,
 
2015
 
2014
 
($ in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
2,539

 
$
6,203

Adjustments to reconcile net income to net cash used for operations:
 
 
 
Provision for credit losses
6,978

 
5,807

Depreciation and amortization and accretion
(1,655
)
 
(3,488
)
Amortization of debt issuance costs
3,455

 
1,464

Equity compensation expense
730

 
664

Loss on sale of loans
15

 
166

Unrealized gain on total return swap
(1,203
)
 

Gain on sale of equipment
(137
)
 

Loss from equity method investments

 
1,553

Net change in deferred income taxes
(2,241
)
 
2,154

Loans held-for-sale originated
(68,511
)
 
(35,214
)
Proceeds from sale of loans held-for-sale
119,456

 
20,000

Net change in interest receivable
(917
)
 
335

Net change in other assets
(4,385
)
 
(16,641
)
Net change in accrued interest payable
4,080

 
(2,058
)
Net change in accounts payable and other liabilities
26,230

 
515

Consolidated Variable Interest Entity:
 
 
 
Amortization of debt issuance costs

 
59

Depreciation and amortization and accretion

 
(165
)
Net change in interest receivable

 
286

Net change in other assets

 
138

Net change in accrued interest payable

 
591

Net cash provided by (used in) operating activities
84,434

 
(17,631
)
Cash flows from investing activities:
 
 
 
Net change in restricted cash
(119,442
)
 
64,349

Net change in loans
(195,818
)
 
12,364

Purchase of debt securities, available-for-sale
(32,714
)
 

Proceeds from sale of other real estate owned
185

 

Acquisition of property and equipment
(7
)
 
(2
)
Consolidated Variable Interest Entity:
 
 
 
Net change in loans

 
7,439

Net change in restricted cash

 
(3,773
)
VIE cash dividends

 
(671
)
Net cash provided by (used in) investing activities
(347,796
)
 
79,706

Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options, net
1,403

 
465

Tax benefit from exercise of stock options
77

 

Tax benefit from vesting of stock awards
(109
)
 
143

Borrowings on credit facilities
488,016

 
253,561

Repayment of borrowings on credit facilities
(605,890
)
 
(285,211
)
Issuance of term debt
410,250

 

Borrowings on term debt
16,000

 
55,900

Repayment of borrowings on term debt
(46,953
)
 
(89,961
)
Borrowings on repurchase agreements
27,158

 

Repayment of borrowings on repurchase agreements
(4,625
)
 
(10,215
)
Repayment of corporate debt
(200
)
 
 
Payment of cash collateral
(10,107
)
 

Payment of deferred financing costs
(4,825
)
 
(210
)
Purchase of treasury stock
(11,200
)
 
(385
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
Unaudited
 
Three Months Ended March 31,
 
2015
 
2014
 
($ in thousands)
Consolidated Variable Interest Entity:
 
 
 
Borrowings on credit facilities

 

Repayment of borrowings on credit facilities

 
(5,500
)
Borrowings on subordinated debt

 

Repayment of borrowings on subordinated debt

 

Payment of deferred financing costs

 

Net cash provided by (used in) financing activities
258,995

 
(81,413
)
Net increase in cash during the period
(4,367
)
 
(19,338
)
Cash and cash equivalents at beginning of period
33,033

 
43,401

Cash and cash equivalents at end of period
$
28,666

 
$
24,063

Supplemental cash flows information:
 
 
 
Interest paid
$
18,254

 
$
14,560

Interest paid by VIE

 
1,460

VIE cash distribution

 
671

Taxes paid
891

 
246

Increase in fair value of investments in debt securities, available for sale
185

 
290



The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEWSTAR FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note 1. Organization
NewStar Financial, Inc. is an internally-managed, commercial finance company with specialized lending platforms focused on meeting the complex financing needs of companies and private investors in the middle market. The Company is also a registered investment adviser and provides asset management services to institutional investors through a series of managed credit funds that co-invest in certain types of loans originated by the Company. Through its specialized lending platforms, the Company provides a range of senior secured debt financing options to mid-sized companies to fund working capital, growth strategies, acquisitions and recapitalizations, as well as, purchases of equipment and other capital assets.
These lending activities require specialized skills and transaction experience, as well as a significant investment in personnel and operating infrastructure. To meet these demands, our loans and leases are originated directly by teams of credit-trained bankers and experienced marketing officers organized around key industry and market segments. These teams represent specialized lending groups that are supported by centralized credit management and operating platforms. This structure enables us to leverage common standards, systems, and industry and professional expertise across multiple businesses.
The Company targets its marketing and origination efforts at private equity firms, mid-sized companies, corporate executives, banks, real estate investors and a variety of other referral sources and financial intermediaries to develop new customer relationships and source lending opportunities. The Company's origination network is national in scope and it targets companies with business operations across a broad range of industry sectors. The Company employs highly experienced bankers, marketing officers and credit professionals to identify and structure new lending opportunities and manage customer relationships. The Company believes that the quality of its professionals, the breadth of their relationships and referral networks, and their ability to develop creative solutions for customers position it to be a valued partner and preferred lender for mid-sized companies and private equity funds with middle market investment strategies.
The Company's emphasis on direct origination is an important aspect of its marketing and credit strategy. The Company's national network is designed around specialized origination channels intended to generate a large set of potential lending opportunities. That allows the Company to be highly selective in its credit process and to allocate capital to market segments that we believe represent the most attractive opportunities. The Company's direct origination network also generates proprietary lending opportunities with yield characteristics that we believe would not otherwise be available through intermediaries. In addition, direct origination provides the Company with direct access to management teams and enhances its ability to conduct detailed due diligence and credit analysis of prospective borrowers. It also allows the Company to negotiate transaction terms directly with borrowers and, as a result, advise its customers on financial strategies and capital structures, which it believes benefits its credit performance.
The Company typically provides financing commitments to companies in amounts that range in size from $10 million to $50 million. The size of financing commitments depends on various factors, including the type of loan, the credit characteristics of the borrower, the economic characteristics of the loan, and the Company's role in the transaction. The Company also selectively arranges larger transactions that it may retain on its balance sheet or syndicate to other lenders, which may include funds that it manages for third party institutional investors. By syndicating loans to other lenders and the Company's managed funds, it is able to provide larger financing commitments to its customers and generate fee income, while limiting our risk exposure to single borrowers. From time to time, however, the Company's balance sheet exposure to a single borrower may exceed $30 million.
NewStar offers a set of credit products and services that have many common attributes, but which are highly specialized by lending group and market segment. Although both the Leveraged Finance and Business Credit lending groups structure loans as revolving credit facilities and term loans, the style of lending and approach to credit management is highly specialized. The Equipment Finance group broadens the Company's product offering to include a range of lease financing options. The operational intensity of each product also varies by lending group.
Although, the Company operates as a single segment, it derives revenues from its asset management activities and four specialized lending groups that target market segments in which it believes that it has competitive advantages:
Leveraged Finance, provides senior, secured cash flow loans and, to a lesser extent, second lien and unitranche loans, which are primarily used to finance acquisitions of mid-sized companies with annual cash flow (EBITDA) typically between $10 million and $50 million by private equity investment funds managed by established professional alternative asset managers;
Business Credit, provides senior, secured asset-based loans primarily to fund working capital needs of mid-sized companies with sales typically totaling between $25 million and $500 million;

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Real Estate, provides first mortgage debt primarily to finance acquisitions of commercial real estate properties typically valued between $10 million and $50 million by professional commercial real estate investors;
Equipment Finance, provides leases, loans and lease lines to finance equipment purchases and other capital expenditures typically for companies with annual sales of at least $25 million; and
Asset Management, provides opportunities for qualified institutions to invest in credit funds managed by the Company with strategies to co-invest in loans originated by its Leveraged Finance lending group.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
These interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries (collectively, “NewStar”) and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). All significant intercompany transactions have been eliminated in consolidation. These interim condensed financial statements include adjustments of a normal and recurring nature considered necessary by management to fairly present NewStar’s financial position, results of operations and cash flows. These interim condensed financial statements may not be indicative of financial results for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The estimates most susceptible to change in the near-term are the Company’s estimates of its (i) allowance for credit losses, (ii) recorded amounts of deferred income taxes, (iii) fair value measurements used to record fair value adjustments to certain financial instruments, (iv) valuation of investments and (v) determination of other than temporary impairments and temporary impairments. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K, as amended for the year ended December 31, 2014.
Consolidation
On June 26, 2014, the NewStar Arlington Senior Loan Program LLC (the “Arlington Program”) completed a $409.4 million term debt securitization comprised of all of the loans of NewStar Arlington Fund LLC (“Arlington Fund”) as well as a portion of the Company’s loans classified as held-for-sale. A portion of the proceeds from this term debt securitization were used to repay all advances under the Class A Notes and the Class B Notes. Following repayment, the Class A Notes and the Class B Notes were redeemed. The Company’s membership interests in Arlington Fund were also redeemed and new membership interests in the Arlington Program were issued to its equity investors. The Company acts as collateral manager for the Arlington Program. As a result of the repayment of the Company’s advances as the Class B lender under the warehouse facility and the redemption of its membership interests in the Arlington Fund, the Company has no ownership or financial interests in the Arlington Fund or its successors except to the extent that it receives management fees as collateral manager of the Arlington Program. Additionally, the Arlington Program employs an independent investment professional who is responsible for investment decision making on behalf of the program. As a result, the Company deconsolidated the Arlington Fund from its statement of financial position beginning on June 26, 2014. The Company is not the primary beneficiary of the Arlington Program and will not consolidate the Arlington Program’s operating results or statements of financial position as of that date.
Recently Issued Accounting Standards
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. ASU 2015-03 is effective for the interim or annual period beginning after December 15, 2015. Adoption of ASU 2015-3 will not have an impact on the Company's results of operations but will reduce its total assets and liabilities by an equal amount within its statement of financial position.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 changes the way reporting entities evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity ("VIE"), and (c) variable interests in a VIE held by related parties of a reporting entities require the reporting entity to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The new consolidation guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2015. At the effective date, all previous consolidation analyses that the guidance affects must be reconsidered. This includes the consolidation analyses for all VIEs and for all limited partnerships and similar entities that previously were consolidated by the general partner even though the entities were not VIEs. Early adoption is permitted, including early adoption in an interim period. If a reporting entity chooses to early adopt in an interim period,

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adjustments resulting from the revised consolidation analyses must be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact that the adoption of ASU 2015-02 will have on results from operations or financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a framework that replaces existing revenue recognition guidance. ASU 2014-09 is effective for annual periods and interim periods within that reporting period beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that the adoption of ASU 2015-02 will have on results from operations or financial position.
Note 3. Loans Held-for-Sale, Loans, Leases and Allowance for Credit Losses
Although the Company operates as a single segment, and derives revenues from its asset management activities and four specialized lending groups that target market segments in which it believes it has competitive advantages:
Leveraged Finance, provides senior, secured cash flow loans and, to a lesser extent, second lien and unitranche loans, which are primarily used to finance acquisitions of mid-sized companies by private equity investment funds managed by established professional alternative asset managers;
Business Credit, provides senior, secured asset-based loans primarily to fund working capital needs of mid-sized companies;
Real Estate, provides first mortgage debt primarily to finance acquisitions of commercial real estate properties;
Equipment Finance, provides leases, loans and lease lines to finance equipment purchases and other capital expenditures; and
Asset Management, provides opportunities for qualified institutions to invest in credit funds managed by the Company with strategies to co-invest in loans originated by its Leveraged Finance lending group.
The Company’s loan portfolio consists primarily of loans to small and medium-sized, privately-owned companies, most of which do not publicly report their financial condition. Compared to larger, publicly traded firms, loans to these types of companies may carry higher inherent risk. The companies that the Company lends to generally have more limited access to capital and higher funding costs, may be in a weaker financial position, may need more capital to expand or compete, and may be unable to obtain financing from public capital markets or from traditional sources, such as commercial banks.
Loans classified as held-for-sale may consist of loans originated by the Company and intended to be sold or syndicated to third parties (including credit funds managed by the Company) or impaired loans for which a sale of the loan is expected as a result of a workout strategy. At March 31, 2015 loans held-for-sale consisted of $151.0 million of leveraged finance loans.
These loans are carried at the lower of aggregate cost, net of any deferred origination costs or fees, or market value.
As of March 31, 2015 and December 31, 2014, loans held-for-sale consisted of the following:
 
March 31,
2015
 
December 31,
2014
 
($ in thousands)
Leveraged Finance
$
150,987

 
$
202,369

Gross loans held-for-sale
150,987

 
202,369

Deferred loan fees, net
(1,378
)
 
(1,800
)
Total loans held-for-sale, net
$
149,609

 
$
200,569

At March 31, 2015, loans held-for-sale include loans with an aggregate outstanding balance of $142.9 million that were intended to be sold to credit funds managed by the Company. As of May 4, 2015, the Company had sold $20.7 million of the loans intended to be sold to credit funds managed by the Company. The Company sold loans with an aggregate outstanding balance of $4.0 million for an aggregate loss of $0.01 million to entities other than credit funds during the three months ended March 31, 2015. The Company sold loans with an outstanding balance of $4.8 million for a loss of $0.2 million to entities other than credit funds during the three months ended March 31, 2014.
As of March 31, 2015, and December 31, 2014, loans and leases consisted of the following:

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March 31,
2015
 
December 31,
2014
 
($ in thousands)
Leveraged Finance
$
2,084,005

 
$
1,881,277

Business Credit
264,910

 
286,918

Real Estate
109,622

 
105,394

Equipment Finance
113,665

 
96,666

Gross loans and leases
2,572,202

 
2,370,255

Deferred loan fees, net
(25,702
)
 
(21,376
)
Allowance for loan and lease losses
(49,936
)
 
(42,983
)
Total loans and leases, net
$
2,496,564

 
$
2,305,896

The Company provides commercial loans, commercial real estate loans, and leases to customers throughout the United States. The Company’s borrowers may be susceptible to economic slowdowns or recessions and, as a result, may have a lower capacity to make scheduled payments of interest or principal on their borrowings during these periods. Adverse economic conditions also may decrease the estimated value of the collateral, particularly real estate, securing some of the Company’s loans. Although the Company has a diversified loan and lease portfolio, certain events may occur, including, but not limited to, adverse economic conditions and adverse events affecting specific clients, industries or markets, that could adversely affect the ability of borrowers to make timely scheduled principal and interest payments on their loans and leases.
The Company internally risk rates loans based on individual credit criteria on at least a quarterly basis. Borrowers provide the Company with financial information on either a quarterly or monthly basis. Loan ratings as well as identification of impaired loans are dynamically updated to reflect changes in borrower condition or profile. A loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due to it according to the contractual terms of the loan agreement. Impaired loans include all non-accrual loans, loans with partial charge-offs and loans which are troubled debt restructurings (“TDR”).
The Company utilizes a number of analytical tools for the purpose of estimating probability of default and loss given default for its four specialized lending groups. The quantitative models employed by the Company in its Leveraged Finance and Equipment Finance businesses utilize Moody’s KMV RiskCalc credit risk model in combination with a proprietary qualitative model, which generates a rating that maps to a probability of default estimate. Real Estate utilizes a proprietary model that has been developed to capture risk characteristics unique to the lending activities in that line of business. The model produces an obligor risk rating which corresponds to a probability of default and also produces a loss given default. In each case, the probability of default and the loss given default are used to calculate an expected loss for those lending groups. Due to the nature of its borrowers and the structure of its loans, Business Credit utilizes a proprietary model that produces a rating that corresponds to an expected loss, without calculating a probability of default and loss given default. For variable interest entities for which the Company is providing transitional capital, a qualitative analysis is used to determine expected loss. In each case, the expected loss is the primary component in a formulaic calculation of general reserves attributable to a given loan.
Loans and leases which are rated at or better than a specified threshold are typically classified as “Pass”, and loans and leases rated worse than that threshold are typically classified as “Criticized”, a characterization that may apply to impaired loans, including TDR. As of March 31, 2015, $146.5 million of the Company’s loans were classified as “Criticized”, including $121.5 million of the Company’s impaired loans, and $2.4 billion were classified as “Pass”. As of December 31, 2014, $133.2 million of the Company’s loans were classified as “Criticized”, including $121.8 million of the Company’s impaired loans, and $2.2 billion were classified as “Pass”.
When the Company rates a loan above a certain risk rating threshold and the loan is deemed to be impaired, the Company will establish a specific allowance, if appropriate, and the loan will be analyzed and may be placed on non-accrual. If the asset deteriorates further, the specific allowance may increase, and ultimately may result in a loss and charge-off.
A TDR that performs in accordance with the terms of the restructuring may improve its risk profile over time. While the concessions in terms of pricing or amortization may not have been reversed and further amended to “market” levels, the financial condition of the Borrower may improve over time to the point where the rating improves from the “Criticized” classification that was appropriate immediately prior to, or at, restructuring.
As of March 31, 2015, the Company had impaired loans with an aggregate outstanding balance of $215.7 million. Impaired loans with an aggregate outstanding balance of $174.3 million have been restructured and classified as TDR. As of March 31, 2015, the aggregate carrying value of equity investments in certain of the Company’s borrowers in connection with troubled debt restructurings totaled $12.0 million. Impaired loans with an aggregate outstanding balance of $100.3 million were also on non-accrual status. For impaired loans on non-accrual status, the Company’s policy is to reverse the accrued interest previously recognized as interest income subsequent to the last cash receipt in the current year. The recognition of interest income on the loan only resumes when factors indicating doubtful collection no longer exist and the non-accrual loan has been

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brought current. During the three months ended March 31, 2015, the Company recovered $0.1 million and did not charge off any outstanding non-accrual loans. During the three months ended March 31, 2015, the Company placed loans with an aggregate outstanding balance of $14.8 million on non-accrual status. During the three months ended March 31, 2015, the Company recorded $3.0 million of net specific provisions for impaired loans. At March 31, 2015, the Company had a $23.7 million specific allowance for impaired loans with an aggregate outstanding balance of $129.2 million. At March 31, 2015, additional funding commitments for impaired loans totaled $11.1 million. The Company’s obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower’s compliance with the terms of the credit agreement and the borrowing base availability for asset-based loans, or if the borrower is not in compliance additional funding commitments may be made at the Company’s discretion. As of March 31, 2015, $43.2 million of loans on non-accrual status were greater than 60 days past due and classified as delinquent by the Company. Included in the $23.7 million specific allowance for impaired loans was $9.3 million related to delinquent loans.
As of December 31, 2014, the Company had impaired loans with an aggregate outstanding balance of $217.2 million. Impaired loans with an aggregate outstanding balance of $175.6 million have been restructured and classified as TDR. As of December 31, 2014, the aggregate carrying value of equity investments in certain of the Company’s borrowers in connection with troubled debt restructurings totaled $16.4 million. Impaired loans with an aggregate outstanding balance of $87.8 million were also on non-accrual status. During 2014, the Company charged off $18.8 million of outstanding non-accrual loans. During 2014, the Company placed loans with an aggregate outstanding balance of $43.5 million on non-accrual status and returned loans with an aggregate outstanding balance of $1.9 million to performing status. During 2014, the Company recorded $22.2 million of net specific provisions for impaired loans. At December 31, 2014, the Company had a $20.7 million specific allowance for impaired loans with an aggregate outstanding balance of $103.2 million. At December 31, 2014, additional funding commitments for impaired loans totaled $10.9 million. As of December 31, 2014, $43.6 million of loans on non-accrual status were greater than 60 days past due and classified as delinquent by the Company. Included in the $20.7 million specific allowance for impaired loans was $8.7 million related to delinquent loans.
During 2012, as part of the resolution of two impaired commercial real estate loans, the Company took control of the underlying commercial real estate properties. The Company recorded a partial charge-off of $2.7 million and classified the commercial real estate properties as other real estate owned. During 2014, the Company sold one of the commercial real estate properties for $9.5 million resulting in a gain on sale of $0.01 million. The remaining commercial real estate property had a carrying value of $3.0 million as of March 31, 2015.
A summary of impaired loans is as follows:
 
Investment
 
Investment, Net of Unamortized Discount/Premium
 
Unpaid
Principal
 
($ in thousands)
March 31, 2015
 
Leveraged Finance
$
164,547

 
$
159,626

 
$
186,005

Business Credit

 

 

Real Estate
51,173

 
51,136

 
54,526

Equipment Finance

 

 

Total
$
215,720

 
$
210,762

 
$
240,531

December 31, 2014
 
Leveraged Finance
$
164,886

 
$
160,223

 
$
186,002

Business Credit

 

 
366

Real Estate
52,309

 
52,230

 
55,661

Equipment Finance

 

 

Total
$
217,195

 
$
212,453

 
$
242,029


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Recorded Investment with a
Related Allowance for
Credit Losses
 
Recorded Investment, net, with a
Related Allowance for
Credit Losses
 
Recorded Investment
without a Related Allowance
for Credit Losses
 
Recorded Investment, net,
without a Related Allowance
for Credit Losses
 
($ in thousands)
March 31, 2015
 
 
 
 
 
 
 
Leveraged Finance
$
101,503

 
96,620

 
$
63,044

 
63,006

Business Credit

 

 

 

Real Estate
27,661

 
27,659

 
23,512

 
23,477

Equipment Finance

 

 

 

Total
$
129,164

 
$
124,279

 
$
86,556

 
$
86,483

December 31, 2014
 
 
 
 
 
 
 
Leveraged Finance
$
103,159

 
98,528

 
$
61,727

 
61,695

Business Credit

 

 

 

Real Estate

 

 
52,309

 
52,230

Equipment Finance

 

 

 

Total
$
103,159

 
$
98,528

 
$
114,036

 
$
113,925

During the three months ended March 31, 2015, the Company recorded recoveries of $0.1 million, and during the three months ended March 31, 2014, the Company recorded net partial charge-offs of $8.1 million. During the three months ended March 31, 2015, the Company did not record any charge-offs and during the three months ended March 31, 2014, the Company did not record any recoveries of previously charged off loans. The Company’s general policy is to record a specific allowance for an impaired loan to cover the identified impairment of that loan. Any potential charge-off of such loan would typically occur in a subsequent period. The Company may record the initial specific allowance related to an impaired loan in the same period as it records a partial charge-off in certain circumstances such as if the terms of a restructured loan are finalized during that period. When a loan is determined to be uncollectible, the specific allowance is charged off, which reduces the gross investment in the loan.
While charge-offs typically have no net impact on the carrying value of net loans and leases, charge-offs lower the level of the allowance for loan and lease losses; and, as a result, reduce the percentage of allowance for loans and leases to total loans and leases, and the percentage of allowance for loan and leases losses to non-performing loans.
Below is a summary of the Company’s evaluation of its portfolio and allowance for loan and lease losses by impairment methodology:
 
Leveraged Finance
 
Business Credit
 
Real Estate
 
Equipment Finance
March 31, 2015
Investment
 
Allowance
 
Investment
 
Allowance
 
Investment
 
Allowance
 
Investment
 
Allowance
 
($ in thousands)
Collectively evaluated (1)
$
1,919,458

 
$
23,752

 
$
264,910

 
$
1,330

 
$
58,449

 
$
285

 
$
113,665

 
$
863

Individually evaluated (2)
164,547

 
23,637

 

 

 
51,173

 
69

 

 

Total
$
2,084,005

 
$
47,389

 
$
264,910

 
$
1,330

 
$
109,622

 
$
354

 
$
113,665

 
$
863

 
Leveraged Finance
 
Business Credit
 
Real Estate
 
Equipment Finance
December 31, 2014
Investment
 
Allowance
 
Investment
 
Allowance
 
Investment
 
Allowance
 
Investment
 
Allowance
 
($ in thousands)
Collectively evaluated (1)
$
1,716,391

 
$
20,045

 
$
286,918

 
$
1,334

 
$
53,085

 
$
257

 
$
96,666

 
$
622

Individually evaluated (2)
164,886

 
20,725

 

 

 
52,309

 

 

 

Total
$
1,881,277

 
$
40,770

 
$
286,918

 
$
1,334

 
$
105,394

 
$
257

 
$
96,666

 
$
622

(1)
Represents loans and leases collectively evaluated for impairment in accordance with ASC 450-20, Loss Contingencies, and pursuant to amendments by ASU 2010-20 regarding allowance for unimpaired loans and leases. These loans and

14

Table of Contents

leases had a weighted average risk rating of 5.1 based on the Company’s internally developed 12 point scale at each of March 31, 2015 and December 31, 2014, respectively.
(2)
Represents loans individually evaluated for impairment in accordance with ASU 310-10, Receivables, and pursuant to amendments by ASU 2010-20 regarding allowance for impaired loans.
Below is a summary of the Company’s investment in nonaccrual loans.
Recorded Investment in
Nonaccrual Loans
March 31, 2015
 
December 31, 2014
 
($ in thousands)
Leveraged Finance
$
98,071

 
$
84,704

Business Credit

 

Real Estate
2,230

 
3,103

Equipment Finance

 

Total
$
100,301

 
$
87,807

Loans being restructured typically develop adverse performance trends as a result of internal or external factors, the result of which is an inability to comply with the terms of the applicable credit agreement governing their obligations to the Company. In order to mitigate default risk and/or liquidation, assuming that liquidation proceeds are not viewed as a more favorable outcome to the Company and other lenders, the Company will enter into negotiations with the borrower and its shareholders on the terms of a restructuring. When restructuring a loan, the Company undertakes an extensive diligence process which typically includes (i) construction of a financial model that runs through the tenor of the restructuring term, (ii) meetings with management of the borrower, (iii) engagement of third party consultants and (iv) internal analysis. Once a restructuring proposal is developed, it is subject to approval by both the Company’s Underwriting Committee and the Company’s Investment Committee. Loans will only be removed from TDR classification after a period of performance following the refinancing of outstanding obligations on terms which are determined to be “market” in all material respects, or upon full payoff of the loan. The Company may modify loans that are not determined to be a TDR. Where a loan is modified or restructured but loan terms are considered market and no concessions were given on the loan terms, including price, principal amortization or obligation, or other restrictive covenants, a loan will not be classified as a TDR.
The Company has made the following types of concessions in the context of a TDR:
Group I:
extension of principal repayment term
principal holidays
interest rate adjustments
Group II:
partial forgiveness
conversion of debt to equity
A summary of the types of concessions that the Company made with respect to TDRs at March 31, 2015 and December 31, 2014 is provided below:
 
Group I
 
Group II
 
($ in thousands)
March 31, 2015
$
174,297

 
$
135,596

December 31, 2014
$
175,589

 
$
135,748

Note: A loan may be included in both restructuring groups, but not repeatedly within each group.
For the three months ended March 31, 2015, the Company did not have any partial charge-offs related to loans previously classified as TDR. As of March 31, 2015, the Company had not removed the TDR classification from any loan previously identified as such, but had charged-off, sold and received repayments of outstanding TDRs.
The Company measures TDRs similarly to how it measures all loans for impairment. The Company performs a discounted cash flow analysis on cash flow dependent loans and we assess the underlying collateral value less reasonable costs of sale for collateral dependent loans. Management analyzes the projected performance of the borrower to determine if it has the ability to service principal and interest payments based on the terms of the restructuring. Loans will typically not be returned to accrual status until at least six months of contractual payments have been made in a timely manner or the borrower

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Table of Contents

shows significant ability to maintain servicing of the restructured debt. Additionally, at the time of a restructuring and quarterly thereafter, an impairment analysis is undertaken to determine the measurement of specific reserve, if any, on each impaired loan.
Below is a summary of the Company’s loans which were classified as TDR.
For the Three Months Ended
March 31, 2015
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Investment in TDR
Subsequently
Defaulted
 
($ in thousands)
Leveraged Finance
$

 
$

 
$

Business Credit

 

 

Real Estate

 

 

Equipment Finance

 

 

Total
$

 
$

 
$

 
 
 
 
 
 
For the Year Ended
December 31, 2014
Pre-Modification
Outstanding
Recorded
Investment
 
Post-Modification
Outstanding
Recorded
Investment
 
Investment in TDR
Subsequently
Defaulted
 
($ in thousands)
Leveraged Finance
$

 
$

 
$
25,933

Business Credit

 

 

Real Estate

 

 

Equipment Finance

 

 

Total
$

 
$

 
$
25,933

The following sets forth a breakdown of troubled debt restructurings at March 31, 2015 and December 31, 2014:
As of March 31, 2015
Accrual Status
 
 
 
 
 
For the three months
($ in thousands)
Loan Type
Accruing
 
Nonaccrual
 
Impaired
Balance
 
Specific
Allowance
 
Charged-
off
Leveraged Finance
$
66,475

 
$
84,310

 
$
150,785

 
$
22,543

 
$

Business Credit

 

 

 

 

Real Estate
21,282

 
2,230

 
23,512

 

 

Equipment Finance

 

 

 

 

Total
$
87,757

 
$
86,540

 
$
174,297

 
$
22,543

 
$

 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
Accrual Status
 
 
 
 
 
For the year
($ in thousands)
Loan Type
Accruing
 
Nonaccrual
 
Impaired
Balance
 
Specific
Allowance
 
Charged-
off
Leveraged Finance
$
80,182

 
$
70,734

 
$
150,916

 
$
19,885

 
$
18,709

Business Credit

 

 

 

 

Real Estate
21,570

 
3,103

 
24,673

 

 

Equipment Finance

 

 

 

 

Total
$
101,752

 
$
73,837

 
$
175,589

 
$
19,885

 
$
18,709

The Company classifies a loan as past due when it is over 60 days delinquent.
An age analysis of the Company’s past due receivables is as follows:

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Table of Contents

 
60-89 Days
Past Due
 
Greater than
90 Days
 
Total Past
Due
 
Current
 
Total Loans
and Leases
 
Investment in
> 60 Days &
Accruing
 
($ in thousands)
March 31, 2015
 
Leveraged Finance
$

 
$
43,240

 
$
43,240

 
$
2,040,765

 
$
2,084,005

 
$

Business Credit

 

 

 
264,910

 
264,910

 

Real Estate

 

 

 
109,622

 
109,622

 

Equipment Finance

 

 

 
113,665

 
113,665

 

Total
$

 
$
43,240

 
$
43,240

 
$
2,528,962

 
$
2,572,202

 
$

 
60-89 Days
Past Due
 
Greater than
90 Days
 
Total Past
Due
 
Current
 
Total Loans
and Leases
 
Investment in
> 60 Days &
Accruing
 
($ in thousands)
December 31, 2014
 
Leveraged Finance
$
25,412

 
$
18,151

 
$
43,563

 
$
1,837,714

 
$
1,881,277

 
$

Business Credit

 

 

 
286,918

 
286,918

 

Real Estate

 

 

 
105,394

 
105,394

 

Equipment Finance

 

 

 
96,666

 
96,666

 

Total
$
25,412

 
$
18,151

 
$
43,563

 
$
2,326,692

 
$
2,370,255

 
$

A general allowance is provided for loans and leases that are not impaired. The Company employs a variety of internally developed and third-party modeling and estimation tools for measuring credit risk, which are used in developing an allowance for loan and lease losses on outstanding loans and leases. The Company’s allowance framework addresses economic conditions, capital market liquidity and industry circumstances from both a top-down and bottom-up perspective. The Company considers and evaluates a number of factors, including but not limited to, changes in economic conditions, credit availability, industry, loss emergence period, and multiple obligor concentrations in assessing both probabilities of default and loss severities as part of the general component of the allowance for loan and lease losses.
On at least a quarterly basis, loans and leases are internally risk-rated based on individual credit criteria, including loan and lease type, loan and lease structures (including balloon and bullet structures common in the Company’s Leveraged Finance and Real Estate cash flow loans), borrower industry, payment capacity, location and quality of collateral if any (including the Company’s Real Estate loans). Borrowers provide the Company with financial information on either a monthly or quarterly basis. Ratings, corresponding assumed default rates and assumed loss severities are dynamically updated to reflect any changes in borrower condition and/or profile.
For Leveraged Finance loans and Equipment Finance loans and leases, the data set used to construct probabilities of default in its allowance for loan losses model, Moody’s CRD Private Firm Database, primarily contains middle market loans that share attributes similar to the Company’s loans. The Company also considers the quality of the loan or lease terms and lender protections in determining a loan loss in the event of default.
For Business Credit loans, the Company utilizes a proprietary model to risk rate the loans on a monthly basis. This model captures the impact of changes in industry and economic conditions as well as changes in the quality of the borrower’s collateral and financial performance to assign a final risk rating. The Company has also evaluated historical net loss trends by risk rating from a comprehensive industry database covering more than twenty-five years of experience of the majority of the asset based lenders operating in the United States. Based upon the monthly risk rating from the model, the reserve is adjusted to reflect the historical average for expected loss from the industry database.
For Real Estate loans, the Company employs two mechanisms to capture the impact of industry and economic conditions. First, a loan’s risk rating, and thereby its assumed default likelihood, can be adjusted to account for overall commercial real estate market conditions. Second, to the extent that economic or industry trends adversely affect a substandard rated borrower’s loan-to-value ratio enough to impact its repayment ability, the Company applies a stress multiplier to the loan’s probability of default. The multiplier is designed to account for default characteristics that are difficult to quantify when market conditions cause commercial real estate prices to decline.
For consolidated VIEs to which the Company is providing transitional capital, we utilize a qualitative analysis which considers the business plans related to the entity, including expected hold periods, the terms of the agreements related to the entity, the Company’s historical credit experience, the credit migration of the entity’s loans in determining expected loss, as well as conditions in the capital markets.
If the Company determines that changes in its allowance for credit losses methodology are advisable, as a result of changes in the economic environment or otherwise, the revised allowance methodology may result in higher or lower levels of

17

Table of Contents

allowance. Moreover, given uncertain market conditions, actual losses under the Company’s current or any revised allowance methodology may differ materially from the Company’s estimate.
Additionally, when determining the amount of the general allowance, the Company supplements the base amount with an environmental reserve amount which is governed by a score card system comprised of ten individually weighted risk factors. The risk factors are designed based on those outlined in the Comptrollers of the Currency’s Allowance for Loan and Lease Losses Handbook. The Company also performs a ratio analysis of comparable money center banks, regional banks and finance companies. While the Company does not rely on this peer group comparison to set the level of allowance for credit losses, it does assist management in identifying market trends and serves as an overall reasonableness check on the allowance for credit losses computation.
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The measurement of impairment of a loan is based upon (i) the present value of expected future cash flows discounted at the loan’s effective interest rate, (ii) the loan’s observable market price, or (iii) the fair value of the collateral if the loan is collateral dependent, depending on the circumstances and our collection strategy. Impaired loans are identified based on the loan-by-loan risk rating process described above. It is the Company’s policy during the reporting period to record a specific provision for credit losses for all loans for which we have serious doubts as to the ability of the borrowers to comply with the present loan repayment terms.
A summary of the activity in the allowance for credit losses is as follows: 
 
Three Months Ended March 31, 2015
 
Leveraged
Finance
 
Business
Credit
 
Real Estate
 
Equipment
Finance
 
Total
 
($ in thousands)
Balance, beginning of period
$
41,480

 
$
1,334

 
$
257

 
$
622

 
$
43,693

Provision for credit losses—general
3,734

 
(4
)
 
26

 
241

 
3,997

Provision for credit losses—specific
2,912

 

 
69

 

 
2,981

Loans charged off, net of recoveries
68

 

 

 

 
68

Balance, end of period
$
48,194

 
$
1,330

 
$
352

 
$
863

 
$
50,739

Balance, end of period—specific
$
23,637

 
$

 
$
69

 
$

 
$
23,706

Balance, end of period—general
$
24,557

 
$
1,330

 
$
283

 
$
863

 
$
27,033

Average balance of impaired loans
$
164,902

 
$

 
$
51,723

 
$

 
$
216,625

Interest recognized from impaired loans
$
2,189

 
$

 
$
567

 
$

 
$
2,756

Loans and leases
 
 
 
Loans individually evaluated with specific allowance
$
101,503

 
$

 
$
27,661

 
$

 
$
129,164

Loans individually evaluated with no specific allowance
63,044

 

 
23,512

 

 
86,556

Loans and leases collectively evaluated without specific allowance
1,919,458

 
264,910

 
58,449

 
113,665

 
2,356,482

Total loans and leases
$
2,084,005

 
$
264,910

 
$
109,622

 
$
113,665

 
$
2,572,202


18

Table of Contents

 
Three Months Ended March 31, 2014
 
Leveraged
Finance
 
Business
Credit
 
Real Estate
 
Equipment
Finance
 
Total
 
($ in thousands)
Balance, beginning of period
$
36,803

 
$
973

 
$
3,653

 
$
425

 
$
41,854

Provision for credit losses—general
1,563

 
29

 
39

 
79

 
1,710

Provision for credit losses—specific
4,232

 

 
(135
)
 

 
4,097

Loans charged off, net of recoveries
(8,062
)
 

 

 

 
(8,062
)
Balance, end of period
$
34,536

 
$
1,002

 
$
3,557

 
$
504

 
$
39,599

Balance, end of period—specific
$
15,997

 
$
200

 
$
3,142

 
$

 
$
19,339

Balance, end of period—general
$
18,539

 
$
802

 
$
415

 
$
504

 
$
20,260

Average balance of impaired loans
$
185,188

 
$
484

 
$
62,005

 
$

 
$
247,677

Interest recognized from impaired loans
$
37

 
$

 
$
1

 
$

 
$
38

Loans and leases
 
 
 
Loans individually evaluated with specific allowance
$
116,863

 
$
281

 
$
30,046

 
$

 
$
147,190

Loans individually evaluated with no specific allowance
62,960

 

 
32,000

 

 
94,960

Loans and leases collectively evaluated without specific allowance
1,759,281

 
175,710

 
60,757

 
64,109

 
2,059,857

Total loans and leases
$
1,939,104

 
$
175,991

 
$
122,803

 
$
64,109

 
$
2,302,007

Included in the allowance for credit losses at March 31, 2015 and December 31, 2014 is an allowance for unfunded commitments of $0.8 million and $0.7 million, respectively, which is recorded as a component of other liabilities on the Company’s consolidated balance sheet with changes recorded in the provision for credit losses on the Company’s consolidated statement of operations. The methodology for determining the allowance for unfunded commitments is consistent with the methodology for determining the allowance for loan and lease losses.
During the three months ended March 31, 2015, the Company recorded a total provision for credit losses of $7.0 million. The Company increased its allowance for credit losses to $50.7 million as of March 31, 2015 from $43.7 million at December 31, 2014 as a result of the increase in Loans and leases, net and an increase in the specific allowance for credit losses. The Company had $0.1 million of recoveries of impaired loans with a specific allowance, increased its general allowance for credit losses by 8 basis points during the three months ended March 31, 2015, and recorded new specific provisions for credit losses of $3.0 million. The general allowance for credit losses covers probable losses in the Company’s loan and lease portfolio with respect to loans and leases for which no specific impairment has been identified. When a loan is classified as impaired, the loan is evaluated for a specific allowance and a specific provision may be recorded, thereby removing it from consideration under the general component of the allowance analysis. Loans that are deemed to be uncollectible are charged off and deducted from the allowance, and recoveries on loans previously charged off are netted against loans charged off. A specific provision for credit losses is recorded with respect to impaired loans for which it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement for which there is impairment recognized. The outstanding balance of impaired loans, which include all of the outstanding balances of the Company’s delinquent loans and its troubled debt restructurings, as a percentage of “Loans and leases, net” was 9% as of March 31, 2015 and as of December 31, 2014.
The Company closely monitors the credit quality of its loans and leases which is partly reflected in its credit metrics such as loan delinquencies, non-accruals and charge-offs. Changes in these credit metrics are largely due to changes in economic conditions and seasoning of the loan and lease portfolio.
The Company continually evaluates the appropriateness of its allowance for credit losses methodology. Based on the Company’s evaluation process to determine the level of the allowance for loan and lease losses, management believes the allowance to be adequate as of March 31, 2015 in light of the estimated known and inherent risks identified through its analysis.
Note 4. Restricted Cash
Restricted cash as of March 31, 2015 and December 31, 2014 was as follows:
 

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March 31,
2015
 
December 31,
2014
 
($ in thousands)
Collections on loans pledged to credit facilities
$
38,899

 
$
34,508

Principal and interest collections on loans held in trust and prefunding amounts
175,866

 
60,013

Customer escrow accounts
88

 
890

Total
$
214,853

 
$
95,411

As of March 31, 2015, the Company had the ability to use $29.3 million of restricted cash to fund new or existing loans.
Note 5. Investments in Debt Securities, Available-for-Sale
Amortized cost of investments in debt securities as of March 31, 2015 and December 31, 2014 was as follows:
 
March 31,
2015
 
December 31,
2014
 
($ in thousands)
Investments in debt securities—gross
$
87,318

 
$
53,098

Unamortized discount
(7,623
)
 
(6,228
)
Investments in debt securities—amortized cost
$
79,695

 
$
46,870

The amortized cost, gross unrealized holding gains, gross unrealized holding losses, and fair value of available-for-sale securities at March 31, 2015 and December 31, 2014 were as follows:
 
Amortized
cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Fair value
 
($ in thousands)
March 31, 2015
 
 
 
 
 
 
 
Collateralized loan obligations
$
79,695

 
$
560

 
$
(364
)
 
$
79,891

 
$
79,695

 
$
560

 
$
(364
)
 
$
79,891

 
Amortized
cost
 
Gross
unrealized
holding gains
 
Gross
unrealized
holding losses
 
Fair value
 
($ in thousands)
December 31, 2014
 
 
 
 
 
 
 
Collateralized loan obligations
$
46,870

 
$
214

 
$
(203
)
 
$
46,881

 
$
46,870

 
$
214

 
$
(203
)
 
$
46,881

During the three months ended March 31, 2015, the Company purchased $32.9 million of debt securities.
The Company did not sell any debt securities during the three months ended March 31, 2015 and 2014.
The Company did not record any net Other-Than-Temporary Impairment charges during the three months ended March 31, 2015 and 2014.
The following is an analysis of the continuous periods during which the Company has held investment positions which were carried at an unrealized loss as of March 31, 2015 and December 31, 2014:

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March 31, 2015
 
Less than
12 Months
 
Greater than
or Equal to
12 Months
 
Total
 
($ in thousands)
Number of positions
9

 

 
9

Fair value
$
44,884

 
$

 
$
44,884

Amortized cost
45,248

 

 
45,248

Unrealized loss
$
364

 
$

 
$
364

 
December 31, 2014
 
Less than
12 Months
 
Greater than
or Equal to
12 Months
 
Total
 
($ in thousands)
Number of positions
8

 

 
8

Fair value
$
38,740

 
$

 
$
38,740

Amortized cost
38,943

 

 
38,943

Unrealized loss
$
203

 
$

 
$
203

As a result of the Company’s evaluation of the securities, management concluded that the unrealized losses at March 31, 2015 and December 31, 2014 were caused by changes in market prices driven by interest rates and credit spreads. The Company’s evaluation of impairment include quotes from third party pricing services, adjustments to prepayment speeds, delinquency, an analysis of expected cash flows, interest rates, market discount rates, other contract terms, and the timing and level of losses on the loans and leases within the underlying trusts. At March 31, 2015, the Company has determined that it is not more likely than not that it will be required to sell the securities before the Company recovers its amortized cost basis in the security. The Company has also determined that there has not been an adverse change in the cash flows expected to be collected. Based upon the Company’s impairment review process, and the Company’s ability and intent to hold these securities until maturity or a recovery of fair value, the decline in the value of these investments is not considered to be “Other Than Temporary.”
Maturities of debt securities classified as available-for-sale were as follows at March 31, 2015 and December 31, 2014: 
 
March 31, 2015
 
December 31, 2014
 
Amortized
cost
 
Fair value
 
Amortized
cost
 
Fair value
 
($ in thousands)
Available-for-sale:
 
 
 
 
 
 
 
Due one year or less
$

 
$

 
$

 
$

Due after one year through five years

 

 

 

Due after five years through ten years
8,567

 
8,735

 
46,870

 
46,881

Due after ten years through fifteen years
71,128

 
71,156

 

 

Total
$
79,695

 
$
79,891

 
$
46,870

 
$
46,881

Note 6. Borrowings
Credit Facilities
As of March 31, 2015 the Company had four credit facilities through certain of its wholly-owned subsidiaries: (i) a $425 million credit facility with Wells Fargo Bank, National Association (“Wells Fargo”) to fund leveraged finance loans, (ii) a $125 million credit facility with DZ Bank AG Deutsche Zentral-Genossenschaftbank Frankfurt (“DZ Bank”) to fund asset-based loans, (iii) a $110 million credit facility with Wells Fargo to fund asset-based loans, and (iv) a $75 million credit facility with Wells Fargo to fund equipment leases and loans.
The Company must comply with various covenants under these facilities. The breach of certain of these covenants could result in a termination event and the exercise of remedies if not cured. At March 31, 2015, the Company was in compliance with all such covenants. These covenants are customary and vary depending on the type of facility. These covenants include, but are not limited to, failure to service debt obligations, failure to meet liquidity covenants and tangible net worth covenants,

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and failure to remain within prescribed facility portfolio delinquency, charge-off levels, and overcollateralization tests. In addition, the Company is required to make termination or make‑whole payments in the event that certain of its existing credit facilities are prepaid. These termination or make-whole payments, if triggered, could be material to the Company individually or in the aggregate, and in the case of certain facilities, could be caused by factors outside of the Company’s control, including as a result of loan prepayment by the borrowers under the loan facilities that collateralize these credit facilities.
The Company has a $425.0 million credit facility with Wells Fargo to fund leveraged finance loans. On March 6, 2015, the Company entered into an amendment to this facility which, among other things, increased the commitment amount to $425.0 million from $375.0 million, with the ability to further increase the commitment amount to $475.0 million, subject to lender approval and other customary conditions, and modified certain concentration amounts and specified threshold amounts. The credit facility had an outstanding balance of $163.8 million and unamortized deferred financing fees of $3.1 million as of March 31, 2015. Interest on this facility accrues at a variable rate per annum. The facility provides for a revolving reinvestment period which ends on November 5, 2015 with a two-year amortization period.
The Company has a $125.0 million credit facility with DZ Bank that had an outstanding balance of $89.9 million and unamortized deferred financing fees of $0.1 million as of March 31, 2015. Interest on this facility accrues at a variable rate per annum. As part of the agreement, there is a minimum interest charge of $1.6 million per annum. If the facility is not utilized to cover this minimum requirement, then a make-whole fee is assessed to satisfy the minimum requirement. The Company is permitted to use the proceeds of borrowings under the credit facility to fund advances under asset-based loan commitments. The commitment amount under the credit facility provides for reinvestment until it matures on June 30, 2015 with no amortization period.
The Company has a $110.0 million credit facility with Wells Fargo to fund asset-based loan origination. The credit facility had an outstanding balance of $89.3 million and unamortized deferred financing fees of $0.7 million as of March 31, 2015. The credit facility may be increased to an amount up to $300.0 million subject to lender approval and other customary conditions. Interest on this facility accrues at a variable rate per annum. The credit facility provides for reinvestment until it matures on December 7, 2017 with no amortization period.
The Company has a note purchase agreement with Wells Fargo under the terms of which Wells Fargo agreed to provide a $75.0 million credit facility to fund equipment leases and loans. The credit facility had an outstanding balance of $27.0 million and unamortized deferred financing fees of $0.9 million as of March 31, 2015. Interest on this facility accrues at a variable rate per annum. On April 10, 2015, the Company entered into an amendment to this facility which, among other things, extended the reinvestment period to April 10, 2017 and the final maturity date to April 10, 2019, and modified certain concentration amounts and specified threshold amounts.
On April 4, 2013, Arlington Fund entered into an agreement establishing $147.0 million of Class A Notes and $28.0 million of Class B Notes to partially fund eligible leveraged loans. Wells Fargo funded the Class A Notes as the initial Class A lender and the Company funded the Class B Notes as the initial Class B lender. On June 26, 2014, the Class A Notes and the Class B notes were redeemed in connection with the completion of the Arlington Program term debt securitization.
Corporate Credit Facility
On January 5, 2010, the Company entered into a note agreement with Fortress Credit Corp., which was subsequently amended on August 31, 2010, January 27, 2012, November 5, 2012, and December 4, 2012. The agreement was amended and restated on May 13, 2013 and further amended on June 3, 2013. On March 6, 2014, as permitted under the corporate credit facility with Fortress Credit Corp., the Company requested and received an increase of $28.5 million to the Initial Funding under this credit facility. On May 15, 2014, as permitted under the corporate credit facility with Fortress Credit Corp., the Company requested and received a new $10.0 million term loan (the “Term C Loan”). The credit facility, as amended, consists of a $238.5 million term note with Fortress Credit Corp. as agent, which consists of the existing outstanding balance of $100.0 million (the “Existing Funding”), an initial funding of $98.5 million (the “Initial Funding”), and three subsequent borrowings, of $5.0 million (the “Delay Draw Term A”), $25.0 million (the “Delay Draw Term B”) and the $10.0 million Term C Loan. The Existing Funding, the Initial Funding, the Delay Draw Term A, and the Term C Loan mature on May 11, 2018. The Delay Draw Term B matures on June 3, 2016. The Initial Funding, the Existing Funding and the Delay Draw Term A accrue interest at the London Interbank Offered Rate (LIBOR) plus 4.50% with an interest rate floor of 1.00%. The Delay Draw Term B accrues interest at LIBOR plus 3.375% with an interest rate floor of 1.00%. The Term C Loan accrues interest at LIBOR plus 4.25% with an interest rate floor of 1.00%.
The Company is permitted to use the proceeds of borrowings under the credit facility for general corporate purposes including, but not limited to, funding loans, working capital, paying down outstanding debt, acquisitions and repurchasing capital stock and dividend payments up to $37.5 million, The $37.5 million may be adjusted upward by the amount of fiscal year-end net income excluding depreciation and amortization expense.

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The term note may be prepaid at any time without a prepayment penalty. The term note may be prepaid at par in the event of a change of control. As of March 31, 2015, the term note had an outstanding principal balance of $238.3 million and unamortized deferred financing fees of $3.9 million. On April 22, 2015, we paid off the term note with Fortress Credit Corp.
Subordinated notes
On December 4, 2014, the Company completed the initial closing of an investment of long-term capital from funds sponsored by Franklin Square Capital Partners ("Franklin Square") and sub-advised by GSO Capital Partners. The Franklin Square funds purchased $200.0 million of 10-year subordinated notes (the "Subordinated Notes") that rank junior to the Company's existing and future senior debt. The Company is required to borrow an additional $100.0 million of notes in increments of at least $25.0 million by December 2015. The Subordinated Notes were recorded at par less the initial relative fair value of the warrants issued in connection with the investment on December 4, 2014 and January 23, 2015 (see Note 8) which was $43.2 million as of December 31, 2014 and $63.4 million as of March 31, 2015. The debt discount will amortize over the life of the notes and will be recorded as non-cash interest expense as the Subordinated Notes accrete to par value. As of March 31, 2015, unamortized deferred financing fees were $5.9 million. The Subordinated Notes bear interest at 8.25% and include a Payment-in-Kind ("PIK Toggle") feature that allows the Company, at its option, to elect to have interest accrued at a rate of 8.75% added to the principal of the Subordinated Notes instead of paying it in cash. The Subordinated Notes have a ten year term and mature on December 4, 2024. They are callable during the first three years with payment of a make-whole premium. The prepayment premium decreases to 103% and 101% after the third and fourth anniversaries of the closing, respectively. They are callable at par after December 4, 2019. The Subordinated Notes require a mandatory payment at the end of each accrual period, beginning on December 5, 2019. The Company is required to make a cash payment of principal plus accrued interest in an amount required to prevent the Subordinated Notes from being treated as an "Applicable High Yield Discount Obligation" within the meaning of Section 163(i)(1) of the Internal Revenue Code of 1986, as amended. Events of default under the Subordinated Notes include failure to pay interest or principal when due subject to applicable grace periods, material uncured breaches of the terms of the Subordinated Notes, and bankruptcy/insolvency events.
Term Debt Securitizations
In June 2007 the Company completed a term debt securitization transaction. In conjunction with this transaction the Company established a separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Trust 2007-1 (the “2007-1 CLO Trust”) and sold and contributed $600.0 million in loans and investments (including unfunded commitments), or portions thereof, to the 2007-1 CLO Trust. The Company remains the servicer of the loans. Simultaneously with the initial sale and contribution, the 2007-1 CLO Trust issued $546.0 million of notes to institutional investors. The Company retained $54.0 million, comprising 100% of the 2007-1 CLO Trust’s trust certificates. At March 31, 2015, the $280.3 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $334.3 million. At March 31, 2015, deferred financing fees were $0.3 million. The 2007-1 CLO Trust permitted reinvestment of collateral principal repayments for a six-year period which ended in May 2013. During 2012, the Company purchased $0.2 million of the 2007-1 CLO Trust’s Class C notes. During 2010, the Company purchased $5.0 million of the 2007-1 CLO Trust’s Class D notes. During 2009, the Company purchased $1.0 million of the 2007-1 CLO Trust’s Class D notes.
During 2009, Moody’s downgraded all of the notes of the 2007-1 CLO Trust. As a result of the downgrade, amortization of the 2007-1 CLO Trust changed from pro rata to sequential, resulting in scheduled principal payments thereafter made in order of the notes seniority until all available funds are exhausted for each payment. During 2010, Standard and Poor’s downgraded the Class A-1 notes, the Class A-2 notes, the Class C notes and the Class D notes of the 2007-1 CLO Trust. The downgrade did not have any material consequence as the amortization of the 2007-1 CLO Trust changed from pro rata to sequential after the Moody’s downgrade in 2009. During the second quarter of 2011, Moody’s upgraded the Class C notes, the Class D notes, and the Class E notes. During 2011, Standard and Poor’s upgraded the Class D notes. During the fourth quarter of 2011, Moody’s upgraded all of the notes of the 2007-1 CLO Trust. During the third quarter of 2012, Fitch affirmed its ratings of all of the notes of the 2007-1 CLO Trust. During the second quarter of 2013, Moody’s upgraded the Class B notes, the Class C notes, the Class D notes, and the Class E notes and affirmed its ratings of the Class A-1 notes and the Class A-2 notes of the 2007-1 CLO Trust. During the third quarter of 2013, Fitch affirmed its ratings on all of the notes of the 2007-1 CLO Trust. During the first quarter of 2014, Standard and Poor’s upgraded its ratings on all notes of the 2007-1 CLO Trust. During the second quarter of 2014, Moody’s affirmed the ratings of the Class B notes, the Class C notes, and the Class D notes of the 2007-1 CLO Trust. During the third quarter of 2014, Fitch affirmed its ratings of all of the notes of the 2007-1 CLO Trust.
The Company receives a loan collateral management fee and excess interest spread. The Company also receives payments with respect to the classes of notes it owns in accordance with the transaction documents. The Company expects to receive a principal distribution as owner of the trust certificates when the term debt is retired. If loan collateral in the 2007-1 CLO Trust is in default under the terms of the indenture, the excess interest spread from the 2007-1 CLO Trust could not be distributed until the undistributed cash plus recoveries equals the outstanding balance of the defaulted loan or if the Company elected to remove the defaulted collateral.

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The following table sets forth selected information with respect to the 2007-1 CLO Trust:
 
Notes
originally
issued
 
Outstanding
balance
March 31, 2015
 
Interest
rate
 
Legal final
maturity
 
Ratings
(S&P/Moody’s/
Fitch)(1)
 
($ in thousands)
 
 
 
 
 
 
2007-1 CLO Trust
 
 
 
 
 
 
 
 
 
Class A-1
$
336,500

 
$
134,675

 
Libor+0.24%
 
September 30, 2022
 
AAA/Aaa/AAA
Class A-2
100,000

 
42,365

 
Libor+0.26%
 
September 30, 2022
 
AAA/Aaa/AAA
Class B
24,000

 
24,000

 
Libor+0.55%
 
September 30, 2022
 
AA+/Aa1/AA
Class C
58,500

 
58,293

 
Libor+1.30%
 
September 30, 2022
 
A-/A2/A
Class D
27,000

 
21,000

 
Libor+2.30%
 
September 30, 2022
 
BBB-/Baa2/BBB+
 
$
546,000

 
$
280,333

 
 
 
 
 
 
 
(1)
These ratings were initially given in June 2007, are unaudited and are subject to change from time to time. During the first quarter of 2009 Fitch affirmed its ratings on all of the notes. During the first quarter of 2009, Moody’s downgraded the Class C notes and the Class D notes. During the third quarter of 2009, Moody’s downgraded the Class A-1 notes, the Class A-2 notes and the Class B notes. During the second quarter of 2010, Standard and Poor’s downgraded the Class A-1 notes, the Class A-2 notes, the Class C notes, and the Class D notes. During the second quarter of 2011, Moody’s upgraded the Class C notes and the Class D notes. During the second quarter of 2011, Standard and Poor’s upgraded the Class D notes. During the fourth quarter of 2011, Moody’s upgraded all of the notes. During the third quarter of 2012, Fitch affirmed its ratings on all of the notes. During the second quarter of 2013, Moody’s upgraded the Class B notes, the Class C notes, the Class D notes and the Class E notes to the ratings shown above, and affirmed its ratings of the Class A-1 notes and the Class A-2 notes. During the third quarter of 2013, Fitch affirmed its ratings on all of the notes. During the first quarter of 2014, Standard and Poor’s upgraded its ratings on all notes to the ratings shown above. During the second quarter of 2014, Moody’s affirmed the above ratings of the Class B notes, the Class C notes, and the Class D notes. During the third quarter of 2014, Fitch affirmed its ratings on all of the notes.
On December 18, 2012, the Company completed a term debt securitization transaction. In conjunction with this transaction the Company established a separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2012-2 LLC (the “2012-2 CLO”) and sold and contributed $325.9 million in loans and investments (including unfunded commitments), or portions thereof, to the 2012-2 CLO. The Company remains the servicer of the loans. Simultaneously with the initial sale and contribution, the 2012-2 CLO issued $263.3 million of notes to institutional investors. The Company retained $62.6 million, comprising 100% of the 2012-2 CLO’s membership interests, Class E notes, Class F notes, and subordinated notes. At March 31, 2015, the $263.3 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $325.9 million. At March 31, 2015, deferred financing fees were $2.0 million. The 2012-2 CLO permits reinvestment of collateral principal repayments for a three-year period ending in January 2016. Should the Company determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
The Company receives a loan collateral management fee and excess interest spread. The Company also receives payments with respect to the classes of notes it owns in accordance with the transaction documents. The Company expects to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2012-2 CLO is in default under the terms of the indenture, the excess interest spread from the 2012-2 CLO may not be distributed if the overcollateralization ratio, or if other collateral quality tests, are not satisfied.
The following table sets forth selected information with respect to the 2012-2 CLO:

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Table of Contents

 
Notes
originally
issued
 
Outstanding
balance
March 31,
2015
 
Interest
rate
 
Legal final
maturity
 
Ratings
(Moody’s/
S&P)(1)
 
($ in thousands)
 
 
 
 
 
 
2012-2 CLO
 
 
 
 
 
 
 
 
 
Class A
$
190,700

 
$
190,700

 
Libor+1.90%
 
January 20, 2023
 
Aaa/AAA
Class B
26,000

 
26,000

 
Libor+3.25%
 
January 20, 2023
 
Aa2/N/A
Class C
35,200

 
35,200

 
Libor+4.25%
 
January 20, 2023
 
A2/N/A
Class D
11,400

 
11,400

 
Libor+6.25%
 
January 20, 2023
 
Baa2/N/A
 
$
263,300

 
$
263,300

 
 
 
 
 
 
 
(1)
These ratings were initially given in December 2012, are unaudited and are subject to change from time to time.
On September 11, 2013, the Company completed a term debt securitization transaction through its separate single-purpose bankruptcy-remote subsidiary, NewStar Commercial Loan Funding 2013-1 LLC (the “2013-1 CLO”) and sold and contributed $247.6 million in loans and investments (including unfunded commitments), or portions thereof, to the 2013-1 CLO. The Company remains the servicer of the loans. Simultaneously with the initial sale and contribution, the 2013-1 CLO issued $338.6 million of notes to institutional investors. The Company retained $61.4 million, comprising 100% of the 2013-1 CLO’s membership interests, Class F notes, Class G notes, and subordinated notes. At March 31, 2015, the $329.1 million of outstanding drawn notes were collateralized by the specific loans and investments, principal collection account cash and principal payment receivables totaling $390.5 million. At March 31, 2015, deferred financing fees were $4.3 million. The 2013-1 CLO permits reinvestment of collateral principal repayments for a three-year period ending in September 2016. Should the Company determine that reinvestment of collateral principal repayments are impractical in light of market conditions or if collateral principal repayments are not reinvested within a prescribed timeframe, such funds may be used to repay the outstanding notes.
The Company receives a loan collateral management fee and excess interest spread. The Company also receives payments with respect to the classes of notes it owns in accordance with the transaction documents. The Company expects to receive a principal distribution as owner of the membership interests when the term debt is retired. If loan collateral in the 2013-1 CLO is in default under the terms of the indenture, the excess interest spread from the 2013-1 CLO may not be distributed if the overcollateralization ratio, or if other collateral quality tests, are not satisfied.

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The following table sets forth selected information with respect to the 2013-1 CLO:
 
Notes
originally
issued
 
Outstanding
balance
March 31, 2015
 
Interest
rate
 
Legal final
maturity
 
Ratings
(S&P/
Moody’s)(2)
 
($ in thousands)
 
 
 
 
 
 
2013-1 CLO
 
 
 
 
 
 
 
 
 
Class A-T
$
202,600

 
$
202,600

 
Libor+1.65%
 
September 20, 2023
 
AAA/Aaa
Class A-R
35,000

 
25,500