UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 814-01064

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Maryland

46-2961489

(State or other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

200 Park Avenue, 7 ^th Floor
New York, NY	10166
(Address of Principal Executive Offices)	(Zip Code)

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share	ABDC	The NASDAQ Global Select Market

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 ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 12,875,566 shares of the Registrant’s common stock outstanding as of November 5, 2019.

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

		Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Financial Statements of Alcentra Capital Corporation:

	Consolidated Statements of Assets and Liabilities as of September 30, 2019 (unaudited) and December 31, 2018	3

	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited)	4

	Consolidated Statements of Changes in Net Assets for the Three and Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited)	5

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited)	7

	Consolidated Schedules of Investments as of September 30, 2019 (unaudited) and December 31, 2018	8

	Notes to Unaudited Consolidated Financial Statements	16

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	45

PART II. OTHER INFORMATION		45

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

Item 3.	Defaults Upon Senior Securities	49

Item 4.	Mine Safety Disclosures	49

Item 5.	Other Information	49

Item 6.	Exhibits	49

SIGNATURES		50

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Assets and Liabilities

	As of September 30, 2019 (Unaudited)			As of December 31, 2018
Assets
Portfolio investments, at fair value
Non-controlled, non-affiliated investments, at fair value (cost of $212,247,572 and $212,280,172, respectively)	$	203,117,204		$	205,411,779
Non-controlled, affiliated investments, at fair value (cost of $26,683,798 and $26,385,612, respectively)		15,249,296			12,980,016
Controlled, affiliated investments, at fair value (cost $0 and $15,212,562, respectively)		—			16,406,021
Cash		4,830,119			11,049,499
Dividends and interest receivable		1,041,343			454,883
Receivable for investments sold		532,930			644,733
Deferred financing costs		909,289			1,366,393
Deferred tax asset		4,266,715			5,385,694
Prepaid expenses and other assets		253,559			79,410
Total Assets	$	230,200,455		$	253,778,428

Liabilities
Credit facility payable	$	28,658,350		$	28,536,441
Notes payable (net of deferred note offering costs of $550,159 and $855,433, respectively)		54,449,841			54,144,567
Payable for investments purchased		—			18,550,000
Other accrued expenses and liabilities		90,121			535,096
Directors’ fees payable		225,750			36,125
Professional fees payable		1,071,304			554,173
Interest and credit facility expense payable		1,558,563			1,069,139
Management fee payable		—			765,659
Income-based incentive fees payable		198,805			890,796
Distributions payable		2,317,602			2,433,102
Unearned structuring fee revenue		—			81,643
Income tax liability		255,531			379,155
Total Liabilities		88,825,867			107,975,896

Commitments and Contingencies (Note 12)

Net Assets
Common stock, par value $0.001 per share (100,000,000 shares authorized, 12,875,566 and 13,105,295 shares issued and outstanding, respectively)		12,876			13,105
Additional paid-in capital		197,118,476			198,594,662
Distributable earnings (accumulated loss)		(55,756,764	)		(52,805,235	)
Total Net Assets		141,374,588			145,802,532
Total Liabilities and Net Assets	$	230,200,455		$	253,778,428

Net Asset Value Per Share	$	10.98		$	11.13

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Operations

	For the three months ended September 30, 2019 (Unaudited)			For the three months ended September 30, 2018 (Unaudited)			For the nine months ended September 30, 2019 (Unaudited)			For the nine months ended September 30, 2018 (Unaudited)
Investment Income:
From non-controlled, non-affiliated investments:
Interest income from portfolio investments	$	5,386,714		$	5,676,759		$	16,946,112		$	17,284,856
Paid-in-kind interest income from portfolio investments		27,534			107,164			140,835			352,295
Other income from portfolio investments		47,920			94,668			332,795			2,213,784
Dividend income from portfolio investments		—			30,756			—			92,268
From non-controlled, affiliated investments:
Interest income from portfolio investments		32,418			58,881			110,659			265,414
Paid in-kind income from portfolio investments		108,583			96,816			298,186			309,946
Other income from portfolio investments		—			—			—			—
From controlled, affiliated investments:
Interest income from portfolio investments		—			488,036			208,538			1,470,032
Paid in-kind income from portfolio investments		—			—			—			—
Other income from portfolio investments		—			—			133,095			—
Total investment income		5,603,169			6,553,080			18,170,220			21,988,595

Expenses:
Management fees		835,825			943,360			2,543,009			3,214,345
Income-based incentive fees/(reversal of accruals)		—			(43,805	)		(691,991	)		(43,805	)
Professional fees		1,411,837			362,625			2,811,452			1,095,777
Valuation services		(70,780	)		78,346			86,720			132,279
Interest and credit facility expense		1,455,465			1,705,992			4,195,793			5,146,364
Amortization of deferred financing costs		157,059			117,587			569,604			325,138
Directors’ fees		213,270			87,076			587,946			300,104
Insurance expense		93,524			57,076			240,851			169,583
Amortization of deferred note offering costs		105,771			97,478			348,474			343,439
Consulting fees		—			54,152			244,916			535,892
Excise tax		(62,468	)		29,538			327,945			394,846
Other expenses		638,307			255,226			952,606			415,737
Total expenses		4,777,810			3,744,651			12,217,325			12,029,699
Waiver of management fees		(835,825	)		(157,227	)		(1,120,356	)		(266,508	)
Net expenses		3,941,985			3,587,424			11,096,969			11,763,191
Net investment income and foreign currency transactions		1,661,184			2,965,656			7,073,251			10,225,404

Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments
Net realized gain (loss) on:
Non-controlled, non-affiliated investments		—			(38,921	)		(111,717	)		(10,162,013	)
Non-controlled, affiliated investments		—			(12	)		—			(10,167,529	)
Controlled, affiliated investments		—			—			1,193,459			—
Foreign currency transactions		109,732			—			175,226			—
Net realized gain (loss) from portfolio investments and foreign currency transactions		109,732			(38,933	)		1,256,968			(20,329,542	)
Net change in unrealized appreciation (depreciation) on:
Non-controlled, non-affiliated investments		(742,017	)		2,355,583			(2,261,975	)		6,235,728
Non-controlled, affiliated investments		573,447			(1,610,661	)		1,971,094			7,601,872
Controlled, affiliated investments		—			—			(1,193,459	)		220,904
Foreign currency translation		148,596			—			136,968			—
Net change in unrealized appreciation (depreciation) from portfolio investments and foreign currency translation		(19,974	)		744,922			(1,347,372	)		14,058,504
Benefit (Provision) for income taxes on unrealized gain (loss) on investments		3,253			(589,643	)		(1,121,422	)		427,585
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments		93,011			116,346			(1,211,826	)		(5,843,453	)

Net Increase (Decrease) in Net Assets Resulting from Operations	$	1,754,195		$	3,082,002		$	5,861,425		$	4,381,951

Basic and diluted:
Net investment income per share	$	0.13		$	0.22		$	0.55		$	0.74
Earnings (loss) per share	$	0.14		$	0.23		$	0.45		$	0.32
Weighted Average Shares of Common Stock Outstanding		12,875,566			13,530,129			12,885,724			13,815,619

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

(Unaudited)

	Common Stock
	Shares			Par Amount			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at June 30, 2018	13,582,751		$	13,583		$	202,161,682		$	(52,580,521	)	$	149,594,744
Increase (decrease) in net assets resulting from operations
Net investment income	—			—			—			2,965,656			2,965,656
Net realized gain (loss) on investments and foreign currency transactions	—			—			—			(38,933	)		(38,933	)
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation	—			—			—			744,922			744,922
Benefit (Provision) for income taxes on unrealized gain (loss) on investments	—			—			—			(589,643	)		(589,643	)
Shareholder distributions:
Repurchase of common stock	(65,517	)		(66	)		(413,275	)		—			(413,341	)
Distributions to shareholders	—			—			—			(2,449,592	)		(2,449,592	)
Total increase (decrease) for the three months ended September 30, 2018	(65,517	)		(66	)		(413,275	)		632,410			219,069
Balance at September 30, 2018	13,517,234		$	13,517		$	201,748,407		$	(51,948,111	)	$	149,813,813
Dividends declared per common share	—		$	—		$	—		$	0.18		$	0.18

Balance at December 31, 2017	14,222,945		$	14,223		$	206,570,701		$	(48,870,749	)	$	157,714,175
Increase (decrease) in net assets resulting from operations
Net investment income	—			—			—			10,225,404			10,225,404
Net realized gain (loss) on investments and foreign currency transactions	—			—			—			(20,329,542	)		(20,329,542	)
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation	—			—			—			14,058,504			14,058,504
Benefit (Provision) for income taxes on unrealized gain (loss) on investments	—			—			—			427,585			427,585
Shareholder distributions:
Repurchase of common stock	(705,711	)		(706	)		(4,822,294	)		—			(4,823,000	)
Distributions to shareholders	—			—			—			(7,459,313	)		(7,459,313	)
Total increase (decrease) for the nine months ended September 30, 2018	(705,711	)		(706	)		(4,822,294	)		(3,077,362	)		(7,900,362	)
Balance at September 30, 2018	13,517,234		$	13,517		$	201,748,407		$	(51,948,111	)	$	149,813,813
Dividends declared per common share	—		$	—		$	—		$	0.54		$	0.54

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

(Unaudited)

	Common Stock
	Shares			Par Amount			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at June 30, 2019	12,875,566		$	12,876		$	197,118,476		$	(55,193,357	)	$	141,937,995
Increase (decrease) in net assets resulting from operations
Net investment income	—			—			—			1,661,184			1,661,184
Net realized gain (loss) on investments and foreign currency transactions	—			—			—			109,732			109,732
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation	—			—			—			(19,974	)		(19,974	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments	—			—			—			3,253			3,253
Shareholder distributions:
Repurchase of common stock	—			—			—			—			—
Distributions to shareholders	—			—			—			(2,317,602	)		(2,317,602	)
Total increase (decrease) for the three months ended September 30, 2019	—			—			—			(563,407	)		(563,407	)
Balance at September 30, 2019	12,875,566		$	12,876		$	197,118,476		$	(55,756,764	)	$	141,374,588
Dividends declared per common share	—		$	—		$	—		$	0.18		$	0.18

Balance at December 31, 2018	13,105,295		$	13,105		$	198,594,662		$	(52,805,235	)	$	145,802,532
Increase (decrease) in net assets resulting from operations
Net investment income	—			—			—			7,073,251			7,073,251
Net realized gain (loss) on investments and foreign currency transactions	—			—			—			1,256,968			1,256,968
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation	—			—			—			(1,347,372	)		(1,347,372	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments	—			—			—			(1,121,422	)		(1,121,422	)
Shareholder distributions:
Repurchase of common stock	(229,729	)		(229	)		(1,476,186	)		—			(1,476,415	)
Distributions to shareholders	—			—			—			(8,812,954	)		(8,812,954	)
Total increase (decrease) for the nine months ended September 30, 2019	(229,729	)		(229	)		(1,476,186	)		(2,951,529	)		(4,427,944	)
Balance at September 30, 2019	12,875,566		$	12,876		$	197,118,476		$	(55,756,764	)	$	141,374,588
Dividends declared per common share	—		$	—		$	—		$	0.69		$	0.69

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Cash Flows

	For the nine months ended September 30, 2019 (Unaudited)			For the nine months ended September 30, 2018 (Unaudited)
Cash Flows from Operating Activities
Net increase/(decrease) in net assets resulting from operations	$	5,861,425		$	4,381,951

Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Net realized (gain) loss from portfolio investments		(1,081,742	)		20,329,542
Net change in unrealized (appreciation) depreciation of portfolio investments		1,484,340			(14,058,504	)
Deferred tax asset		1,118,979			(430,507	)
Paid in-kind interest income from portfolio investments		(439,021	)		(662,241	)
Accretion of discount on debt securities		(1,120,276	)		(481,690	)
Purchases of portfolio investments		(61,229,802	)		(50,049,494	)
Net proceeds from sales/return of capital of portfolio investments		78,817,817			83,839,981
Amortization of deferred financing costs		569,604			325,138
Amortization of deferred note offering costs		348,474			343,439
(Increase) decrease in operating assets:
Dividends and interest receivable		(586,460	)		541,594
Receivable for investments sold		111,803			25,000
Income tax asset		—			133,627
Prepaid expenses and other assets		(174,149	)		(64,981	)
Increase (decrease) in operating liabilities:
Payable for investments purchased		(18,550,000	)		—
Other accrued expenses and liabilities		(444,975	)		(76,145	)
Directors' fees payable		189,625			9,583
Professional fees payable		517,131			(229,950	)
Interest and credit facility expense payable		489,424			93,737
Management fee payable		(765,659	)		447,802
Income-based incentive fees payable		(691,991	)		(43,805	)
Unearned structuring fee revenue		(81,643	)		(450,633	)
Income tax liability		(123,624	)		—
Net cash provided by (used in) operating activities		4,219,280			43,923,444

Cash Flows from Financing Activities
Financing costs paid		(112,500	)		(1,332,500	)
Offering costs paid		(43,200	)		(42,000	)
Proceeds from credit facility payable		54,805,298			26,253,872
Repayments of credit facility payable		(54,820,357	)		(61,500,000	)
Distributions paid to shareholders		(8,928,454	)		(8,571,027	)
Repurchase of common stock		(1,476,415	)		(4,823,000	)
Net cash provided by (used in) financing activities		(10,575,628	)		(50,014,655	)
Effect of exchange rate changes on cash denominated in foreign currency		136,968			—
Increase (decrease) in cash and cash equivalents		(6,219,380	)		(6,091,211	)
Cash at beginning of period		11,049,499			13,882,956
Cash and Cash Equivalents at End of Period	$	4,830,119		$	7,791,745

Supplemental and non-cash financing activities:
Cash paid during the period for interest	$	3,706,369		$	5,052,627
Accrued offering costs	$	2,485		$	2,485
Accrued distributions payable	$	2,317,602		$	2,449,591

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of September 30, 2019

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 143.67%

Senior Secured - First Lien — 94.73%

Aegis Sciences Corporation ^(2),(3)	Consumer Services	LIBOR + 5.50%		1.00	%		7.68	%	5/9/2025		7,422,519	$	7,267,806	$	7,107,062		5.03	%
Black Diamond Oilfield Rentals, LLC ^(2),(4)	Oil & Gas Services	LIBOR + 6.50%		1.00	%		8.82	%	12/17/2020		10,670,863		10,670,863		10,670,863		7.55	%
Cambium Learning Group, Inc. ^(2),(4)	Technology & Telecom	LIBOR + 4.50%					6.61	%	12/18/2025		1,980,025		1,891,006		1,953,000		1.38	%
CGGR Operations Holdings Corporation ^(2),(4),(5)	Business Services	LIBOR + 7.00%		1.00	%		9.32	%	9/30/2022		3,081,471		3,062,949		3,081,471		2.18	%
Clanwilliam Group Ltd. ^(2),(4),(6)	Technology & Telecom	Euribor + 7.00%					7.00	%	11/8/2025	€	5,922,000		6,576,416		6,456,163		4.57	%
Digital Room Holdings, Inc. ^(2),(4)	Business Services	LIBOR + 5.00%					7.11	%	5/21/2026		6,982,500		6,882,449		6,883,000		4.87	%
Envocore Holding, LLC ^(2),(4),(7)	Industrial Services	LIBOR + 10.25%		1.00	%		12.57	%	6/30/2022		17,694,444		17,659,366		16,102,000		11.39	%
Epic Healthcare Staffing Intermediate Holdco, LLC ^{(2),(4),(6),(8)}	Business Services	LIBOR + 8.25%		1.00	%		10.57	%	10/19/2022		10,771,646		10,741,574		10,771,646		7.62	%
GGC Aperio Holdings, L.P. ^(2),(4)	Financial Services	LIBOR + 5.00%					7.33	%	10/26/2024		8,470,000		8,082,826		8,470,000		5.99	%
Healthcare Associates of Texas, LLC ^(2),(4),(6)	Healthcare Services	LIBOR + 8.25%		1.00	%		10.57	%	11/8/2022		20,319,475		20,319,474		19,797,088		14.00	%
Impact Group, LLC ^(2),(4)	Consumer Services	LIBOR + 6.50%		1.00	%		8.83	%	6/27/2023		13,868,647		13,824,033		13,371,481		9.46	%
Institutional Shareholder Services, Inc. ^(2),(4)	Business Services	LIBOR + 4.50%					6.83	%	3/5/2026		2,985,000		2,957,446		2,957,000		2.09	%
Manna Pro Products, LLC ^(2),(4),(6)	Consumer Services	LIBOR + 6.00%		1.00	%		8.11	%	12/8/2023		7,386,039		7,315,460		7,310,000		5.16	%
Palmetto Moon LLC ⁽⁴⁾	Retail	11.5% Cash, 2.5% PIK					14.00	%	10/31/2021		4,356,153		4,343,106		4,225,000		2.99	%
Perforce Software Inc. ^(2),(3)	High Tech Industries	LIBOR + 4.50%					6.61	%	7/1/2026		5,000,000		4,975,844		4,995,000		3.53	%
Pinstripe Holdings, LLC ^(2),(4)	Business Services	LIBOR + 6.00%		1.00	%		8.12	%	1/17/2025		9,950,000		9,772,785		9,778,000		6.92	%
Total Senior Secured - First Lien													136,343,403		133,928,774		94.73	%
Senior Secured - Second Lien — 46.27%

BayMark Health Services, Inc. ^(2),(4),(6)	Healthcare Services	LIBOR + 8.25%		1.00	%		10.21	%	3/1/2025		8,000,000	$	7,897,541	$	8,000,000		5.66	%

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2019

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Cambium Learning Group, Inc. ^(2),(4)	Technology & Telecom	LIBOR + 8.50%					10.61	%	12/18/2026		5,000,000	$	4,716,452	$	4,726,000		3.34	%
CGGR Operations Holdings Corporation ^(2),(4),(5)	Business Services	LIBOR + 11.50%		1.00	%		13.82	%	9/30/2023		11,431,579		11,355,258		11,545,895		8.17	%
Institutional Shareholder Services, Inc. ^(2),(4)	Business Services	LIBOR + 8.50%					10.83	%	3/5/2027		2,000,000		1,944,135		1,944,000		1.37	%
Medsurant Holdings, LLC ⁽⁴⁾	High Tech Industries	13.00% Cash					13.00	%	6/30/2020		8,729,395		8,715,273		8,729,395		6.17	%
Perforce Software Inc. ^(2),(4)	High Tech Industries	LIBOR + 8.00%					10.10	%	7/1/2027		5,000,000		4,854,716		4,952,000		3.50	%
Pharmalogic Holdings Corp. ^(2),(4)	Healthcare Services	LIBOR + 8.00%					10.11	%	12/11/2023		16,100,000		16,038,335		16,100,000		11.39	%
Sandvine Corporation ^(2),(4)	Telecommunications	LIBOR + 8.00%					10.11	%	11/2/2026		4,500,000		4,416,909		4,420,000		3.13	%
WeddingWire, Inc. ^(2),(4)	Consumer Services	LIBOR + 8.25%					10.36	%	12/21/2026		5,000,000		4,953,109		5,000,000		3.54	%
Total Senior Secured - Second Lien													64,891,728		65,417,290		46.27	%
CLO/Structured Credit — 1.27%

Goldentree Loan Management US CLO 2 Ltd. ^(2),(3)	USD CLO	LIBOR + 4.70%					7.06	%	11/28/2030		2,000,000	$	1,950,823	$	1,793,140		1.27	%
Total CLO/Structured Credit													1,950,823		1,793,140		1.27	%
Equity/Other — 1.40%

Envocore Holding, LLC, Preferred Shares^(4),(7),(9)	Industrial Services										1,139,725	$	1,160,360	$	—		—
IGT, Preferred Shares^(4),(9)	Industrial Services	11% PIK					11.00	%	12/10/2024		1,110,922		1,110,922		—		—
Common Shares^(4),(9)											44,000		44,000		—		—
Preferred AA Shares^(4),(9)		15% PIK					15.00	%	12/10/2024		326,789		326,790		271,000		0.19	%
													1,481,712		271,000		0.19	%
Metal Powder Products, LLC, Common Shares^(4),(9)	Industrial Manufacturing										500,000		500,000		602,000		0.43	%
My Alarm Center, LLC, Common Shares^(4),(9)	Security										129,582		256,793		—		—
Junior Preferred Shares^(4),(9)											2,420		2,366,549		—		—

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2019

(Unaudited)

Company(+) ***	Industry	Spread Above Index	Base Rate Floor	Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value			% of Net Assets
Senior Preferred Shares^(4),(9)		8% PIK			8.00	%	7/14/2022		2,998	$	2,862,059	$	1,024,000			0.72	%
											5,485,401		1,024,000			0.72	%
Palmetto Moon LLC, Common Shares^(4),(9)	Retail								61		434,145		81,000			0.06	%
Total Equity/Other											9,061,618		1,978,000			1.40	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies											212,247,572		203,117,204			143.67	%
Investments in Non-Controlled, Affiliated Portfolio Companies — 10.79%^*

Senior Subordinated — 0.87%

Battery Solutions, Inc. ⁽⁴⁾	Environmental/Recycling Services	12% Cash, 2% PIK			14.00	%	11/6/2021		1,231,291	$	1,231,291	$	1,231,292			0.87	%
Southern Technical Institute, Inc. ^(4),(9)	Education	6% PIK			6.00	%	12/31/2021		3,528,988		3,528,988		—			—
Total Senior Subordinated											4,760,279		1,231,292			0.87	%
Equity/Other — 9.92%

Battery Solutions, Inc., Class A Units^(4),(9),(10)	Environmental/Recycling Services								5,000,000	$	1,058,000	$	—			—
Class E Units⁽⁴⁾		8% PIK			8.00	%	11/6/2021		4,766,685		4,766,685		4,067,003			2.88	%
Class F Units^(4),(9)									3,333,333		—		—			—
											5,824,685		4,067,003			2.88	%
Conisus, LLC, Common Shares^(4),(9)	Media: Advertising, Printing & Publishing								4,914,556		—		—			—
Preferred Equity⁽⁴⁾		12% PIK			12.00	%			12,677,834		12,677,834		9,119,001			6.45	%
											12,677,834		9,119,001			6.45	%
Southern Technical Institute, Inc., Class A Units^(4),(9)	Education								3,164,063		2,167,000		—			—
Class A1 Units^(4),(9),(11)									6,000,000		—		—			—
											2,167,000		—			—
Xpress Global Systems, LLC, Class B Units ^(4),(9)	Transportation Logistics								12,544		1,254,000		832,000			0.59	%
Total Equity/Other											21,923,519		14,018,004			9.92	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies											26,683,798		15,249,296			10.79	%
Total Investments											238,931,370		218,366,500			154.46	%
Liabilities In Excess Of Other Assets													(76,991,912	)		(54.46	%)
Net Assets												$	141,374,588			100.00	%

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of September 30, 2019

(Unaudited)

⁽⁺⁾

All investments are qualifying assets under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”), with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of September 30, 2019, non-qualifying assets represented 10.5% of the Company’s total assets, at fair value.

Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities. Transactions as of and during the nine months ended September 30, 2019 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows:

			Gross				Change in
	Fair Value at		Additions/				Unrealized					Fair Value at		Interest/
	December 31,		(Gross		Transfers		Appreciation			Realized		September 30		Dividend/
Name of Issuers	2018		Reductions)		In/Out		(Depreciation)			Gain (Loss)		2019		Other Income
Battery Solutions, Inc.	$	5,699,791	$	298,186	$	-	$	(699,682	)	$	-	$	5,298,295	$	408,845
Conisus, LLC		6,554,225		-		-		2,564,776			-		9,119,001		-
Southern Technical Institute, Inc.		-		-		-		-			-		-		-
Xpress Global Systems, LLC		726,000		-		-		106,000			-		832,000		-
	$	12,980,016	$	298,186	$	-	$	1,971,094		$	-	$	15,249,296	$	408,845

^**

As of September 30, 2019, the Company was not deemed, under the 1940 Act, to "Control" any of its portfolio companies due to owning more than 25% of any such portfolio company's outstanding voting securities or because the Company had the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions during the nine months ended September 30, 2019 in which the issuer was deemed to be Controlled by the Company are as follows:

			Gross					Change in
	Fair Value at		Additions/					Unrealized					Fair Value at		Interest/
	December 31,		(Gross			Transfers		Appreciation			Realized		September 30		Dividend/
Name of Issuers	2018		Reductions)			In/Out		(Depreciation)			Gain (Loss)		2019		Other Income
FST Technical Services, LLC^(a)	$	16,406,021	$	(16,406,021	)	$	-	$	(1,193,459	)	$	1,193,459	$	-	$	341,633
	$	16,406,021	$	(16,406,021	)	$	-	$	(1,193,459	)	$	1,193,459	$	-	$	341,633

(a) FST Technical Services, LLC was sold on February 8, 2019.

^***	Pledged as collateral under the Credit Facility with ING Capital LLC.
⁽¹⁾	The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.
⁽²⁾	The principal balance outstanding for all floating rate loans is indexed to LIBOR, Euribor or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.
⁽³⁾	Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3).
⁽⁴⁾	Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3).
⁽⁵⁾	CGGR Holdings’ Tranche B Loan was reclassified to a second lien investment as a result of a sale of a portion of the Tranche A Loan to an unaffiliated third party.
⁽⁶⁾	The investment has an unfunded commitment as of September 30, 2019 which is excluded from the presentation (see Note 12).
⁽⁷⁾	The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC.
⁽⁸⁾	The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC.
⁽⁹⁾	Non-income producing security.
⁽¹⁰⁾	The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC).
⁽¹¹⁾	Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00.

Abbreviation Legend
LIBOR -	London Inter-bank Offered Rate
PIK -	Payment-In-Kind

See notes to unaudited consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of December 31, 2018

Company^(+)***	Industry	Spread Above Index	Base Rate Floor			Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 140.89%
Senior Secured – First Lien — 106.14%
Black Diamond Oilfield Rentals, LLC^(2),(3),(15)	Oil & Gas Services	LIBOR + 6.50%		1.00	%		8.90	%	12/17/2020		11,385,109	$	11,385,109	$	11,382,254		7.81	%
Cambium Learning Group, Inc.^(3),(10)	Technology & Telecom	LIBOR + 4.50%					7.31	%	12/18/2025		4,000,000		3,800,000		3,800,000		2.61	%
CGGR Operations Holdings Corporation^(2),(3),(8)	Business Services	LIBOR + 11.5%		1.00	%		13.90	%	9/30/2023		13,431,579		13,324,053		13,431,579		9.21	%
		LIBOR + 7.0%		1.00	%		9.40	%	9/30/2022		9,468,421		9,397,345		9,468,421		6.49	%
													22,721,398		22,900,000		15.70	%
Champion ONE^(2),(3)	Technology & Telecom	LIBOR + 10.5%		1.00	%		12.90	%	3/17/2022		5,884,230		5,842,683		5,884,230		4.04	%
Clanwilliam Group Ltd.^(2),(3),(8)	Technology & Telecom	Euribor + 7.00%					7.00	%	11/8/2025	€	5,724,000		6,344,310		6,347,088		4.35	%
Envocore Holding, LLC^(2),(3),(7)	Industrial Services	LIBOR + 9.25%		1.00	%		11.65	%	6/30/2022		18,500,000		18,453,344		18,500,000		12.69	%
Epic Healthcare Staffing Intermediate Holdco, LLC^{(2),(3),(8),(9)}	Business Services	LIBOR + 8.25%		1.00	%		10.65	%	10/19/2022		13,430,114		13,392,406		13,430,114		9.21	%
Healthcare Associates of Texas, LLC^(2),(3),(8)	Healthcare Services	LIBOR + 8.0%		1.00	%		10.40	%	11/8/2022		20,578,816		20,578,816		20,578,816		14.11	%
Impact Group, LLC^(2),(3)	Consumer Services	LIBOR + 6.50%		1.00	%		9.21	%	6/27/2023		19,965,214		19,965,214		19,965,214		13.69	%
Lugano Diamonds & Jewelry, Inc.^(2),(3)	Retail	LIBOR + 10.00%		0.75	%		12.40	%	10/24/2021		6,750,000		6,229,503		6,365,358		4.37	%
Manna Pro Products, LLC^(2),(3),(8)	Consumer Services	LIBOR + 6.0%		1.00	%		8.31	%	12/8/2023		1,322,485		1,316,153		1,322,485		0.91	%
Palmetto Moon LLC⁽²⁾	Retail	11.5% Cash, 1.0% PIK					12.50	%	10/31/2021		4,737,622		4,720,936		4,648,350		3.19	%
Pinstripe Holdings, LLC^(2),(3)	Business Services	LIBOR + 6.00%					8.81	%	1/17/2025		10,000,000		9,800,000		9,800,000		6.72	%
Superior Controls, Inc.^(2),(3),(8)	Wholesale/ Distribution	LIBOR + 7.25%		1.00	%		9.65	%	3/22/2021		9,825,000		9,789,394		9,825,000		6.74	%
Total Senior Secured – First Lien													154,339,266		154,748,909		106.14	%
Senior Secured – Second Lien — 29.18%
BayMark Health Services, Inc.^(2),(3)	Healthcare Services	LIBOR + 8.25%		1.00	%		10.60	%	3/1/2025		7,000,000		6,938,172		7,000,000		4.80	%
Medsurant Holdings, LLC⁽²⁾	High Tech Industries	13.00% Cash					13.00	%	6/30/2020		8,729,396		8,701,223		8,729,396		5.99	%
Pharmalogic Holdings Corp.^(2),(3),(8)	Healthcare Services	LIBOR + 8.0%					10.34	%	12/11/2023		11,340,000		11,267,485		11,340,000		7.77	%
Sandvine Corporation^(2),(3)	Telecommunications	LIBOR + 8.00%					10.35	%	11/2/2026		4,500,000		4,410,000		4,410,000		3.02	%
VVC Holding Corp.^(2),(3),(5)	Healthcare Services	LIBOR + 8.13%		1.00	%		10.56	%	7/9/2026		6,000,000		5,943,433		6,120,000		4.20	%
WeddingWire, Inc.^(2),(3)	Consumer Services	LIBOR + 8.25%					11.06	%	12/21/2026		5,000,000		4,950,000		4,950,000		3.40	%
Total Senior Secured – Second Lien													42,210,313		42,549,396		29.18	%
CLO/Structured Credit — 1.20%
Goldentree Loan Management US CLO 2 Ltd.^(3),(10)	USD CLO	LIBOR + 4.70%					7.06	%	11/28/2030		2,000,000	$	1,948,058	$	1,739,600		1.20	%
Total CLO/Structured Credit													1,948,058		1,739,600		1.20	%

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

Company^(+)***	Industry	Spread Above Index	Base Rate Floor	Interest Rate			Maturity Date		No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value		% of Net Assets
Equity/Other — 4.37%
Champion ONE, Common Shares^(2),(4)	Technology & Telecom									11,250	$	1,125,000	$	908,410		0.62	%
Envocore Holding, LLC, Preferred Shares^{(2),(4),(6),(7)}	Industrial Services									1,139,725		1,160,360		788,000		0.54	%
IGT, Preferred Shares^(2),(4)	Industrial Services	11% PIK			11.00	%		12/10/2024		1,110,922		1,110,922		—		—
Common Shares^(2),(4)										44,000		44,000		—		—
Preferred AA Shares^(2),(4)		15% PIK			15.00	%		12/10/2024		326,789		326,789		271,789		0.19	%
												1,481,711		271,789		0.19	%
Lugano Diamonds & Jewelry, Inc., Warrants^(2),(4)	Retail									666,615		666,615		1,000,000		0.69	%
Metal Powder Products, LLC, Common Shares^(2),(4)	Industrial Manufacturing									500,000		500,000		666,047		0.46	%
My Alarm Center, LLC, Common Shares^(2),(4)	Security									129,582		256,793		—		—
Junior Preferred Shares^(2),(4)										2,420		2,366,549		—		—
Senior Preferred Shares^(2),(4)		8% PIK			8.00	%		7/14/2022		2,998		2,862,059		1,023,999		0.70	%
												5,485,401		1,023,999		0.70	%
Palmetto Moon LLC, Common Shares^(2),(4)	Retail									61		434,145		106,000		0.07	%
Superior Controls, Inc., Preferred Shares^(2),(4)	Wholesale/ Distribution									400,000		400,000		789,192		0.54	%
Tunnel Hill, Class B Common Units^{(2),(4),(11),(14)}	Waste Services									98,418		2,529,303		820,437		0.56	%
Total Equity/Other												13,782,535		6,373,874		4.37	%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies												212,280,172		205,411,779		140.89	%
Investments in Non-Controlled, Affiliated Portfolio Companies — 8.90%*
Senior Subordinated — 0.83%
Battery Solutions, Inc.⁽²⁾	Environmental/ Recycling Services	12% Cash, 2% PIK			14.00	%		11/6/2021		1,212,773	$	1,212,773	$	1,212,774		0.83	%
Southern Technical Institute, Inc.^(2),(4)	Education	6% PIK			6.00	%		12/31/2021		3,528,988		3,528,988		—		—
Total Senior Subordinated												4,741,761		1,212,774		0.83	%
Equity/Other — 8.07%
Battery Solutions, Inc., Class A Units^(2),(4),(12)	Environmental/ Recycling Services									5,000,000	$	1,058,000	$	—		—
Class E Units⁽²⁾		8% PIK			8.00	%		11/6/2021		4,487,017		4,487,017		4,487,017		3.08	%
Class F Units^(2),(4)										3,333,333		—		—		—
												5,545,017		4,487,017		3.08	%
Conisus, LLC, Common Shares^(2),(4)	Media: Advertising, Printing & Publishing									4,914,556		—		—		—
Preferred Equity⁽²⁾		12% PIK			12.00	%				12,677,834		12,677,834		6,554,225		4.49	%
												12,677,834		6,554,225		4.49	%
Southern Technical Institute, Inc., Class A Units^(2),(4)	Education									3,164,063		2,167,000		—		—
Class A1 Units^(2),(4),(13)										6,000,000		—		—		—
												2,167,000		—		—
Xpress Global Systems, LLC, Class B Units^(2),(4)	Transportation Logistics									12,544		1,254,000		726,000		0.50	%
Total Equity/Other												21,643,851		11,767,242		8.07	%
Total Investments in Non-Controlled, Affiliated Portfolio Companies												26,385,612		12,980,016		8.90	%

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

Company^(+)***	Industry	Spread Above Index	Base Rate Floor	Interest Rate			Maturity Date	No. Shares/ Principal Amount		Cost⁽¹⁾		Fair Value			% of Net Assets
Investments in Controlled, Affiliated Portfolio Companies — 11.25%**
Senior Secured – First Lien — 9.19%
FST Technical Services, LLC⁽²⁾	Technology & Telecom	14% Cash			14.00	%	6/30/2019		13,406,020	$	13,406,020	$	13,406,020			9.19	%
Total Senior Secured – First Lien											13,406,020		13,406,020			9.19	%
Equity/Other — 2.06%
FST Technical Services, LLC, Class B Units^(2),(4)	Technology & Telecom	9% PIK			9.00	%			1,750,000	$	1,806,542	$	3,000,001			2.06	%
Total Equity/Other											1,806,542		3,000,001			2.06	%
Total Investments in Controlled, Affiliated Portfolio Companies											15,212,562		16,406,021			11.25	%
Total Investments											253,878,346		234,797,816			161.04	%
Liabilities In Excess Of Other Assets													(88,802,284	)		(61.04	)%
Net Assets												$	145,802,532			100.00	%

(+)

All investments are qualifying assets under Section 55(a) of the 1940 Act, with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of December 31, 2018, non-qualifying assets represented 13.2% of the Company’s total assets, at fair value.

Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows:

Name of Issuers	Fair Value at December 31, 2017		Gross Additions/ (Gross Reductions)			Transfers In/Out		Change in Unrealized Appreciation (Depreciation)			Realized Gain (Loss)			Fair Value at December 31 2018		Interest/ Dividend/ Other Income
Battery Solutions, Inc.	$	7,820,167	$	(843,377	)	$	—	$	(1,276,999	)	$	—		$	5,699,791	$	550,223
Conisus, LLC		6,678,442		—			—		(124,217	)		—			6,554,225		—
Show Media, Inc.		1							7,900,820			(7,900,821	)		—
Southern Technical Institute, Inc.		1		—			—		10,167,528			(10,167,529	)		—		—
Xpress Global Systems, LLC		5,474,294		38,166			—		1,689,002			(6,475,462	)		726,000		162,603
	$	19,972,905	$	(805,211	)	$	—	$	18,356,134		$	(24,543,812	)	$	12,980,016	$	712,826

Denotes investments in connection with which the Company is deemed, under the 1940 Act, to be both an “Affiliated Person” and “Control” this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was both an Affiliated Person of, and deemed to be Controlled by, the Company are as follows:

Name of Issuers	Fair value at December 31, 2017		Gross Additions/ (Gross Reductions)			Transfers In/Out		Change in Unrealized Appreciation (Depreciation)		Realized Gain (Loss)		Fair Value at December 31 2018		Interest/ Dividend/ Other Income
FST Technical Services, LLC	$	15,256,237	$	(593,739	)	$	—	$	1,743,523	$	—	$	16,406,021	$	1,940,389
	$	15,256,237	$	(593,739	)	$	—	$	1,743,523	$	—	$	16,406,021	$	1,940,389

***

Pledged as collateral under the Credit Facility with ING Capital LLC.

(1)

The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

(2)

Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3).

See notes to consolidated financial statements

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

(3)

The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate or Euribor), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

(4)

Non-income producing security.

(5)

The investment is also known as Value-Based Care Solutions Group, or VBC Technologies, or VVC Holding Corp.

(6)

The investment represents three classes of preferred equity.

(7)

The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC.

(8)

The investment has an unfunded commitment as of December 31, 2018 which is excluded from the presentation (see Note 12).

(9)

The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC.

(10)

Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3).

(11)

The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

(12)

The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC).

(13)

Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00.

(14)

There is a possible escrow receivable up to a maximum of $2.4 million, which is excluded from the presentation.

(15)

Includes $2,855 of residual cost from previous tranche of debt, which will roll off in the first quarter of 2019.

Abbreviation Legend

PIK — Payment-In-Kind

See notes to consolidated financial statements

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

1.	Organization and Purpose

Alcentra Capital Corporation (the “Company” or “Alcentra”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Alcentra NY, together with certain of its affiliated companies (the "Alcentra Group"), is an indirect, majority owned subsidiary of The Bank of New York Mellon Corporation.

The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the investment activities of the Partnership.

On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital provided by Alcentra NY in exchange for 100 shares of Alcentra's common stock, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.

On May 14, 2014, Alcentra completed its initial public offering (the “IPO”), at a price of $15.00 per share. Through the IPO the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the IPO to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes (the “Taxable Subsidiary”). The Taxable Subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.

On May 22, 2017, Alcentra Capital Corporation completed an underwritten primary offering of 808,161 shares of its common stock at a public offering price of $13.68 per share for proceeds of approximately $10,853,602, after paying the sales load and offering expenses.

The Company’s investment objective is to generate both current income and, to a lesser extent, capital appreciation primarily by making direct investments in middle-market companies, which the Company defines as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 million, although the Company may make investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt. The Company expects to source investments primarily through the network of relationships that the principals of our investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Administration Agreement”) with State Street Bank and Trust Company (the “Administrator”) to provide the Company with financial reporting, post-trade compliance and treasury services.

On August 12, 2019, the Company entered into the Agreement and Plan of Merger (as amended on September 27, 2019, the “Merger Agreement”), with Crescent Capital BDC, Inc. (“Crescent Capital BDC”) and the other parties thereto, pursuant to which Crescent Capital BDC (following its reincorporation by merger into the State of Maryland) will acquire all of the outstanding shares of the Company’s common stock in a stock and cash transaction. Prior to the closing of the transactions contemplated by the Merger Agreement, Crescent Capital BDC will merge with and into a newly formed wholly owned subsidiary, Crescent Reincorporation Sub, Inc., a Maryland corporation, with Crescent Reincorporation Sub, Inc. surviving the merger as “Crescent Capital BDC, Inc.” (“Crescent Capital Maryland BDC”). Pursuant to the Merger Agreement, Atlantis Acquisition Sub, Inc. (“Acquisition Sub”), a wholly owned subsidiary of Crescent Capital Maryland BDC, will merge with and into the Company with the Company surviving as a wholly owned subsidiary of Crescent Capital Maryland BDC (the “First Merger”). Immediately thereafter and as a single integrated transaction, the Company will merge with and into Crescent Capital Maryland BDC with Crescent Capital Maryland BDC continuing as the surviving company (the “Second Merger,” and together with the First Merger, the “Mergers”). The Company’s Board of Directors (the “Board”), including each of its independent directors, and its Committee of Independent Directors (the “Independent Director Committee”) unanimously approved the Merger Agreement and the transactions contemplated thereby.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

Upon the completion of the Mergers, and subject to the terms and conditions of the Merger Agreement, the Company’s stockholders will be entitled to receive the following consideration for each share of the Company’s common stock owned immediately prior to the effective time of the Mergers: (1) stock consideration at the fixed exchange ratio of 0.4041 shares, par value $0.001 per share, of Crescent Capital Maryland BDC’s common stock (the “Exchange Ratio”) (and, if applicable, cash in lieu of fractional shares of Crescent Capital Maryland BDC’s common stock); (2) $1.5023 per share in cash from Crescent Capital Maryland BDC (less the amount of any special dividends declared by the Company after the date of the Merger Agreement to comply with applicable tax requirements (excluding regular quarterly dividends up to a maximum amount of $0.18 per share of the Company’s common stock)); and (3) $1.6761 per share in cash from Crescent Cap Advisors, LLC (“Crescent Cap Advisors”), the external investment adviser of Crescent Capital BDC (as may be adjusted pursuant to the Merger Agreement) (collectively, the “Merger Consideration”). The Exchange Ratio was fixed on the date of the Merger Agreement and is generally not subject to adjustment, including for changes in the trading price of the Company’s common stock before the closing of the Mergers. Based on the number of Company shares outstanding on the date of the Merger Agreement, the consummation of the Mergers would result in approximately 5.2 million shares of Crescent Capital Maryland BDC’s common stock being exchanged for approximately 12.9 million outstanding shares of the Company’s common stock, subject to adjustment in certain limited circumstances.

Crescent Capital Maryland BDC is expected to apply to have its common stock listed on The Nasdaq Stock Market under the symbol “CCAP,” with such listing expected to be effective as of the closing date of the Mergers. Upon completion of the Mergers, the current directors and officers of Crescent Capital BDC are expected to continue in their current positions in Crescent Capital Maryland BDC, and Crescent Cap Advisors will externally manage Crescent Capital Maryland BDC.

In connection with the reincorporation of Crescent Capital BDC from the State of Delaware to the State of Maryland (the “Reincorporation”), Crescent Capital Maryland BDC will adopt a charter that provides that the shares of Crescent Capital Maryland BDC’s common stock issued to holders of such shares in the Reincorporation will be subject to transfer restrictions set forth in the Crescent Capital Maryland BDC charter for a period ending 365 days following the date of the listing of Crescent Capital Maryland BDC’s common stock on a national securities exchange in connection with the Mergers (the “Listing”), the effect of which will be that 1/3 of such shares will not be transferable until 180 days following the Listing, another 1/3 will not be transferable until 270 days following the Listing, and the remaining 1/3 will not be transferable until 365 days following the Listing, without prior written consent of the board of directors of Crescent Capital Maryland BDC, with all such transfers remaining subject to applicable securities laws (including applicable volume restrictions with respect to affiliate sales).

Consummation of the Mergers is subject to certain conditions, including, among others, the approvals of the Company’s and Crescent Capital BDC’s stockholders, the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (as to which early termination was granted on September 10, 2019), and other customary closing conditions. While there can be no assurance as to the exact timing, or that the Mergers will be completed at all, the Company and Crescent Capital BDC are working to complete the Mergers in the first quarter of 2020.

In connection with the Mergers, Crescent Cap Advisors has agreed to implement the following changes to the Crescent Capital BDC investment advisory agreement following the closing of the Mergers: (1) reduce the base management fee from 1.50% to 1.25%, (2) waive a portion of the base management fee for the eighteen-month period following the First Merger so that only 0.75% will be charged for such time period, (3) waive the income-based portion of the incentive fee for the eighteen-month period following the First Merger and (4) increase the hurdle rate under the income-based portion of the incentive fee from 1.50% to 1.75% per quarter.

Simultaneously with the execution of the Merger Agreement, the Company entered into voting agreements (the “Voting Agreements”) with certain of Crescent Capital BDC’s stockholders (the “Supporting Crescent Capital BDC Stockholders”), pursuant to which such stockholders agreed to vote their respective shares of Crescent Capital BDC’s common stock in favor of the Crescent Capital BDC stockholder proposals described in the Company and Crescent Capital BDC’s joint proxy statement/prospectus relating to the Mergers. In addition, each Voting Agreement prohibits the applicable Supporting Crescent Capital BDC Stockholder from transferring any of its shares of Crescent Capital BDC’s common stock until the earlier of the effectiveness of the Mergers and the termination of the Merger Agreement, other than certain permitted transfers or with the prior written consent of the Company. As of November 1, 2019, the Supporting Crescent Capital BDC Stockholders are entitled to vote approximately 71% of the outstanding shares of Crescent Capital BDC’s common stock.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

2.	Summary of Significant Accounting Policies

Basis of Presentation – The accompanying financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 10 and 12 of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2019.

The accounting records of the Company are maintained in United States dollars.

Use of Estimates – The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.

Consolidation – In accordance with ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.

Portfolio Investment Classification - The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, "Control Investments" are defined as investments in portfolio companies in which the Company owns more than 25% of the voting securities or has the power to exercise control over management or policies of such portfolio company. Under the 1940 Act, “non-controlled Affiliate Investments" are defined as investments in portfolio companies in which the Company owns between 5% and 25% (inclusive) of the voting securities and does not have the power to exercise control over management or policies of such portfolio company. "Non-controlled, non-affiliate investments" are defined as investments that are neither Control Investments or Affiliate Investments.

Cash – At September 30, 2019, cash balances totaling $4.6 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that the risk of loss associated with any uninsured balance is remote.

Deferred Financing Costs – Deferred financing costs consist of fees and expenses paid in connection with the Credit Facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.

Deferred Note Offering Costs – Deferred note offering costs consist of fees and expenses paid in connection with the Notes (as defined in Note 9) and are capitalized at the time these fees and expenses are incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.

Valuation of Portfolio Investments – Portfolio investments are carried at fair value as determined by the Board.

The methodologies used in determining these valuations include:

(1) Preferred shares/membership units and common shares/membership units

In determining estimated fair value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Company’s own assumptions and taking into account all material events and circumstances which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:

(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment;

(ii) pending disposition by the Company of the major portfolio investment; and

(iii) sales prices of recent public or private transactions in identical or comparable investments.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).

(2) Debt

The fair value of performing debt investments is typically derived utilizing a market yield analysis. In a market yield analysis, a price is ascribed to each debt investment based upon an assessment of current and expected market yields for similar debt investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with a debt investment.

The Company considers many factors in evaluating the most suitable point within the range of fair values, including, but not limited to, the following:

	·	the portfolio company’s underlying operating performance and any related trends;

	·	the improvement or decline in the underlying credit quality measured on the basis of a loan-to-enterprise value ratio and total outstanding debt to EBITDA ratio; and

	·	changes or issues related to the portfolio company’s customer/supplier concentration, regulatory developments and other portfolio company specific considerations.

(3) Warrants

Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.

Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value.

With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter in connection with determining the fair value of the Company's investments for which no market quotation is readily available, as described below:

	·	Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

	·	preliminary valuation conclusions will then be documented and discussed with the investment committee of the Adviser;
	·	Independent valuation firms engaged by the valuation committee of the Board prepare preliminary valuations on a select portion of the Company's investment portfolio on a quarterly basis and submit the reports to the Board;

	·	the valuation committee of the Board then reviews these preliminary valuations and makes a recommendation to the Board with respect thereto; and
	·	the Board then discusses valuations and approves the fair value of each such investment in good faith, based on the input of the Adviser, the independent valuation firms and the valuation committee.

The valuation committee of the Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board does not have de minimis investments of less than 1% of the Company’s gross assets (up to an aggregate of 10% of the Company’s gross assets) independently reviewed. The Board is ultimately responsible for the valuation of portfolio investments at fair value as approved in good faith pursuant to Alcentra’s valuation policy and a consistently applied valuation process.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments, as determined by the Board, may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations previously assigned.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

Offering Costs – Offering expenses are expensed on the Company’s Consolidated Statements of Operations. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement.

Paid-In-Capital – The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.

Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.

Investments – Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.

Original Issue Discount – When the Company receives warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.

Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There was one non-accrual investment as of each of September 30, 2019 and December 31, 2018.

Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment. These fees are non-recurring in nature.

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

Income Taxes – The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to its stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.

The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are "pass through" entities for tax purposes and continue to comply with the "source income" requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company's consolidated financial statements. The Taxable Subsidiary uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses the realizability of the deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When management can project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, management will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require the recording of any deferred tax asset valuation allowance in future periods. For the three and nine months ended September 30, 2019, the Company recognized a (provision)/benefit for income tax on unrealized gain/(loss) on investments of $0 million and $(1.1) million, respectively, for the Taxable Subsidiary. For the three and nine months ended September 30, 2018, the Company recognized a (provision)/benefit for income taxes on unrealized gain/(loss) on investments of $(0.6) million and $0.4 million, respectively, for the Taxable Subsidiary. As of September 30, 2019 and December 31, 2018, the Company had a deferred tax asset in the amount of $4.3 million and $5.4 million, respectively, primarily relating to tax loss carryforwards. The decrease in the deferred tax asset resulted from a valuation allowance recorded during the nine months ended September 30, 2019.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

The deferred tax asset of $4.3 million (after a 21% tax rate) is comprised of the following: (1) $1.0 million of net operating losses; (2) $0.7 million of capital losses; and (3) $3.4 million of partnership losses, offset by (4) $0.8 of a valuation allowance. GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's financial statements to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for tax years that may be open for the quarter ended September 30, 2019. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.

Indemnification – In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

Recently Issued Accounting Standards – In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amended FASB ASC 310-20. The amendments in ASU 2017-08 shortened the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments became effective for fiscal years beginning after December 15, 2018, as well as for interim periods within those fiscal years. The Company adopted ASU 2017-08 in connection with its quarterly report on Form 10-Q for the three months ended March 31, 2019. Such adoption did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 in its consolidated financial statements and disclosures with no material impact.

In August 2018, the U.S. Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. The Company has adopted these changes in its consolidated financial statements and disclosures with no material impact.

In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has evaluated the impact of ASC 606 and determined that it does not have a material impact on its consolidated financial statements and disclosures.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

3.	Fair Value of Portfolio Investments

The Company accounts for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair Value is based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of September 30, 2019 are as follows:

	Level 1		Level 2		Level 3		Total
Senior Secured - First Lien	$	—	$	12,102,062	$	121,826,712	$	133,928,774
Senior Secured - Second Lien		—		—		65,417,290		65,417,290
Subordinated Debt		—		—		1,231,292		1,231,292
CLO/Structured Credit		—		1,793,140		—		1,793,140
Equity/Other		—		—		15,996,004		15,996,004
Total Investments	$	—	$	13,895,202	$	204,471,298	$	218,366,500

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2018 are as follows:

	Level 1		Level 2		Level 3		Total
Senior Secured – First Lien	$	-	$	3,800,000	$	164,354,929	$	168,154,929
Senior Secured – Second Lien		-		-		42,549,396		42,549,396
Subordinated Debt		-		-		1,212,774		1,212,774
CLO/Structured Credit		-		1,739,600		-		1,739,600
Equity/Other		-		-		21,141,117		21,141,117
Total investments	$	-	$	5,539,600	$	229,258,216	$	234,797,816

The changes in investments classified as Level 3 are as follows for the nine months ended September 30, 2019 and September 30, 2018.

As of September 30, 2019:

	Senior			Senior
	Secured -			Secured -			Senior		Equity/
	First Lien			Second Lien			Subordinated		Other			Total
Balance as of January 1, 2019	$	164,354,929		$	42,549,396		$	1,212,774	$	21,141,117		$	229,258,216
Amortized discounts/premiums		825,752			277,362			-		-			1,103,114
Paid in-kind interest		140,834			-			6,074		279,668			426,576
Net realized gain (loss)		68,711			-			-		1,013,030			1,081,741
Net change in unrealized appreciation (depreciation)		(2,682,683	)		186,479			-		1,102,679			(1,393,525	)
Purchases		31,344,318			17,200,000			12,444		400,000			48,956,762
Sales/Return of capital		(62,701,096	)		(8,120,000	)		-		(7,940,490	)		(78,761,586	)
Lien status change		(13,324,053	)		13,324,053			-		-			-
Transfers in		3,800,000			-			-		-			3,800,000
Transfers out		-			-			-		-			-
Balance as of September 30, 2019	$	121,826,712		$	65,417,290		$	1,231,292	$	15,996,004		$	204,471,298

Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2019	$	(2,526,133	)	$	174,248		$	-	$	1,093,258		$	(1,258,627	)

As of September 30, 2018:

	Senior			Senior
	Secured -			Secured -			Senior			Equity/
	First Lien			Second Lien			Subordinated			Other			Total
Balance as of January 1, 2018	$	177,340,027		$	14,203,691		$	66,884,849		$	29,125,978		$	287,554,545
Amortized discounts/premiums		259,001			62,780			168,329			-			490,110
Paid in-kind interest		154,487			-			249,805			257,949			662,241
Net realized gain (loss)		(24,417	)		(4,922,053	)		(10,098,674	)		(5,245,476	)		(20,290,620	)
Net change in unrealized appreciation (depreciation)		(217,553	)		6,189,339			5,466,204			2,705,893			14,143,883
Purchases		10,881,573			24,129,501			2,277,393			60,360			37,348,827
Sales/Return of capital		(39,160,680	)		(3,528,990	)		(41,252,699	)		-			(83,942,369	)
Transfers in		-			-			-			-			-
Transfers out		-			-			-			-			-
Balance as of September 30, 2018	$	149,232,438		$	36,134,268		$	23,695,207		$	26,904,704		$	235,966,617

Net change in unrealized appreciation (depreciation) from investments still held as of September 30, 2018	$	(109,819	)	$	(2,261,703	)	$	(1,658,994	)	$	(2,539,583	)	$	(6,570,099	)

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019:

Assets at Fair Value	Fair Value at September 30, 2019		Valuation Technique	Unobservable Input	Range of Inputs		Weighted Average
Senior Secured - First Lien	$	121,826,711	Yield to Maturity	Comparable Market Rate		6.6% - 16.9%		10.0	%

Senior Secured - Second Lien		65,417,291	Yield to Maturity	Comparable Market Rate		10.1% - 14.0%		10.3	%

Senior Subordinated		1,231,292	Yield to Maturity	Comparable Market Rate		14.0% - 14.2%		14.1	%

Preferred Ownership		14,481,004	Market Approach	Enterprise Value/ LTM EBITDA Multiple/ Transaction price		6.0x – 10.5x		8.2	x
Common Ownership/ Common Warrants		1,515,000	Market Approach	Enterprise Value/ LTM EBITDA Multiple/ Transaction price		4.5x – 10.5x		6.4	x

Total	$	204,471,298

As of December 31, 2018:

Assets at Fair Value	Fair Value at December 31, 2018		Valuation Technique	Unobservable Input	Range of Inputs			Weighted Average
Senior Secured - First Lien	$	164,354,929	Yield to Maturity	Comparable Market Rate		7.0% - 14.0%			10.7	%

Senior Secured - Second Lien		42,549,396	Yield to Maturity	Comparable Market Rate		10.3% - 13.0%			11.0	%

Senior Subordinated		1,212,774	Yield to Maturity	Comparable Market Rate		14.0	%		14.0	%

Preferred Ownership		16,914,223	Market Approach	Enterprise Value/ LTM EBITDA Multiple/ Transaction price		5.5x - 12.0x			7.4	x

Common Ownership/ Common Warrants		4,226,894	Market Approach	Enterprise Value/ LTM EBITDA Multiple/ Transaction price		4.5x - 12.0x			8.1	x

Total	$	229,258,216

4.	Share Transactions

On November 2, 2017, the Board approved a $2.5 million open market stock repurchase program. Pursuant to the program, the Company was authorized to repurchase up to $2.5 million in aggregate of our common stock in the open market. The timing, manner, price and amount of any share repurchases were determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. Repurchases under the program were authorized through November 2, 2018.

On November 16, 2017, the Board approved expansion of the open market stock repurchase program to $5.0 million and extension of the length of the program to January 31, 2019.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

As of August 8, 2018, the Company repurchased an aggregate of $5.0 million shares of our common stock under the discretionary open-market share repurchase program and, as a result, the program terminated on such date in accordance with its terms. Subsequently, pursuant to the Board authorization on November 5, 2018, the Company adopted a trading plan on December 10, 2018 for the purpose of repurchasing shares of its common stock in the open market (the "Plan"). Under the Plan, the Company may repurchase up to the lesser of (1) 5.0% of the amount of shares of the Company's common stock outstanding as of the date of the Plan, December 10, 2018 and (2) $10.0 million in aggregate amount of the Company's common stock.

On August 12, 2019, the Board suspended the Company’s stock repurchase program in connection with the execution of the Merger Agreement.

The following tables set forth the number of shares of common stock repurchased by the Company under its share repurchase programs for the nine months ended September 30, 2019 and September 30, 2018:

Nine months ended September 30, 2019:

Month Ended		Shares Repurchased		Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
	January 2019		207,220		$6.50 - $6.99	$	1,318,920
	February 2019		22,509		$6.95 - $7.00		157,495
	Total		229,729			$	1,476,415

Nine months ended September 30, 2018:

Month Ended		Shares Repurchased		Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares
	January 2018		16,786		$8.01 - $8.22	$	136,949
	March 2018		195,785		$6.05 - $7.24		1,373,656
	April 2018		231,343		$6.12 - $7.20		1,599,304
	May 2018		136,819		$6.18 - $6.85		901,837
	June 2018		59,461		$6.30 - $6.80		397,913
	July 2018		49,974		$6.13 - $6.48		316,614
	August 2018		15,543		$6.12 - $6.22		96,727
	Total		705,711			$	4,823,000

5.	Distributions

The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually. If the Company does not distribute (or are not deemed to have distributed) at least (i) 98% of the Company's annual ordinary income in the calendar year earned (the "required distribution"), (ii) 98.2% of capital gain net income (adjusted for certain ordinary losses) for the one-year period ending October 31 of that calendar year, and (iii) any income or capital gains recognized, but not distributed, in preceding calendar years and on which the Company incurred no federal income tax, the Company will generally be required to pay an excise tax equal to 4% of the amount by which the required distribution exceeds the distributions from such taxable income for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income. As of September 30, 2019 and December 31, 2018, the Company accrued $329,539 and $435,797, respectively, for any unpaid potential excise tax liability and have included these amounts within income tax asset or liability on the accompanying Consolidated Statements of Assets and Liabilities.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the nine months ended September 30, 2019:

Date Declared	Record Date	Payment Date	Amount Per Share
March 11, 2019	March 29, 2019	April 4, 2019	$	0.18
May 3, 2019	June 28, 2019	July 3, 2019	$	0.33
August 5, 2019	September 26, 2019	October 3, 2019	$	0.18

The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the nine months ended September 30, 2018:

Date Declared	Record Date	Payment Date	Amount Per Share
March 8, 2018	March 30, 2018	April 4, 2018	$	0.18
May 4, 2018	June 29, 2018	July 5, 2018	$	0.18
August 6, 2018	September 28, 2018	October 4, 2018	$	0.18

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the plan administrator, before any associated brokerage or other costs.

6.	Related Party Transactions

Under the Company’s amended and restated investment advisory agreement with Alcentra NY (the “Investment Advisory Agreement”), the Company has agreed to pay Alcentra NY an annual base management fee, which is calculated at an annual rate as follows: 1.50% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are less than or equal to $625,000,000; 1.40% if its gross assets are greater than or equal to $625,000,001 but less than or equal to $750,000,000; and 1.25% if its gross assets are greater than or equal to $750,000,001. The various management fee percentages (i.e. 1.50%, 1.40% and 1.25%) would apply to the Company's entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee is payable quarterly in arrears and is calculated based on the average value of the Company's gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.

On May 4, 2018, the Adviser agreed to a temporary voluntary 25 basis point reduction, from May 1, 2018 to April 30, 2019, across all of these base management fee breakpoints. On May 3, 2019, the Adviser agreed to a continuation of the temporary 25 basis point reduction across all of the base management fee breakpoints under the Investment Advisory Agreement, effective from May 1, 2019 to April 30, 2020.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company's ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a ‘‘catch-up’’ feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter.

The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for our then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK interest or OID) is paid to the Adviser, together with interest thereon from the date of deferral to the date of payment, only if and to the extent that the Company actually receives such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle. The Adviser has agreed to permanently waive any interest accrued on the portion of the incentive fee attributable to deferred interest (such as PIK interest or OID).

The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until the Company has received such income in cash.

For the three and nine months ended September 30, 2019, the Company recorded expenses for base management fees of $835,825 and $2,543,009, respectively, of which $835,825 and $1,120,356, respectively, was waived by the Adviser. Of the $835,825 and $1,120,356 in base management fees waived by the Adviser during the three and nine months ended September 30, 2019, respectively, $0.1 million and $0.4 million, respectively was waived pursuant to the temporary 25 basis point reduction in the base management fee agreed to by the Adviser until April 30, 2020, and $0.7 million and $0.7 million, respectively, was voluntarily waived by the Adviser in its sole discretion. No base management fee was payable at September 30, 2019. For the three and nine months ended September 30, 2018, the Company recorded expenses for base management fees of $943,360 and $3,214,345, respectively, of which $157,227 and $266,508, respectively, was waived by the Adviser and $1,712,974 was payable at September 30, 2018.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

For the three and nine months ended September 30, 2019, the Company reversed $0 and $691,991, respectively, in previously accrued income-based incentive fees. For each of the three and nine months ended September 30, 2018, the Company reversed $43,805 in previously accrued income-based incentive fees. As of September 30, 2019 and September 30, 2018, $198,805 and $1,251,180 in income-based incentive fees, respectively, was payable by the Company. For each of the three and nine months ended September 30, 2019 and September 30, 2018, the Company incurred capital gains incentive fees of $0.

The Company’s officers are employees of the Adviser and the Company may pay the allocable portion of the compensation of the Company’s Chief Financial Officer and Chief Compliance Officer and their staffs pursuant to the Investment Advisory Agreement.

7.	Directors' Fees

The Company’s independent directors each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in-person each Board meeting and $1,000 for each Board meeting they participate in telephonically. In addition, each independent director receives $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each audit committee, compensation committee, nominating and corporate governance committee, and valuation committee meeting attended in person or telephonically. The chair of the audit committee receives an annual fee of $10,000, and the respective chairs of the compensation committee, the nominating and corporate governance committee and the valuation committee each receives an annual fee of $5,000. The lead independent director also receives an annual fee of $15,000. The Board may establish ad hoc committees or working groups from time to time to assist the Board in fulfilling its oversight responsibilities, and the independent directors may receive fees and be reimbursed for reasonable out-of-pocket expenses incurred in connection therewith.

In connection with the Board's review of strategic alternatives, the Board established the Independent Director Committee during 2018, which is comprised of each of the Board's independent directors and met throughout 2018 on a periodic basis. Effective April 2018, each member of the Independent Director Committee received a monthly fee of $1,000, and the chair of the Independent Director Committee received an additional monthly retainer of $5,000 for his services as chair and the increased responsibilities associated therewith. Effective November 2018, each member of the Independent Director Committee received $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each meeting of the committee attended in person or telephonically, rather than $1,000 per month. In addition, effective November 2018, the chair of the Independent Director Committee received a monthly retainer of $4,000, a reduction from the previous $5,000 per month retainer. Effective May 1, 2019, each member of the Independent Director Committee receives a $10,000 monthly retainer in lieu of the $1,000 per meeting fee that was effective starting in November 2018. In addition, the chair of the Independent Director Committee receives an additional $5,000 monthly retainer in lieu of the previous $4,000 monthly retainer.

The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.

For the three and nine months ended September 30, 2019, the Company recorded directors' fee expense of $213,270 and $587,946, respectively, which includes fees in connection with the ongoing strategic review, of which $225,750 was payable at September 30, 2019. For the three and nine months ended September 30, 2018, the Company recorded directors' fee expense of $87,076 and $300,104, respectively, of which $78,500 was payable at September 30, 2018.

8.	Purchases and Sales (Investment Transactions)

Investment purchases, sales and principal payments/paydowns are summarized below for the nine months ended September 30, 2019 and September 30, 2018.

	For the nine months ended September 30,
	2019		2018
Investment purchases, at cost (including PIK interest and dividends)	$	61,668,823	$	50,711,735
Investment sales, proceeds (including principal payments/paydown proceeds)		78,817,817		83,839,981

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

9.	Alcentra Capital InterNotes®

On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company's issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.

These notes (the "Notes") are direct unsecured obligations and each series of notes has been issued by a separate trust (administered by U.S. Bank). The notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

During each of the nine months ended September 30, 2019 and September 30, 2018, the Company did not issue any Alcentra Capital InterNotes®. For the three and nine months ended September 30, 2019, the Company had average Notes outstanding of $55.0 million and $55.0 million (principal amount), respectively, with a weighted average interest rate of 6.33% and 6.40%, respectively. For the three and nine months ended September 30, 2018, the Company borrowed an average of $55.0 million and $55.0 million, respectively, with a weighted average interest rate of 6.33% and 6.40%, respectively.

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding as of September 30, 2019.

Tenor at	Principal		Interest		Weighted
Origination	Amount		Rate		Average
(in years)	(000’s omitted)		Range		Interest Rate			Maturity Date Range
5	$	53,582		6.25% - 6.50%		6.38	%	February 15, 2020 - June 15, 2021
7		1,418		6.50% - 6.75%		6.63	%	January 15, 2022 - April 15, 2022
	$	55,000

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

In connection with the issuance of the Alcentra Capital InterNotes®, the Company incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of September 30, 2019. During the nine months ended September 30, 2019 and September 30, 2018, the Company recorded $0.348 million and $0.343 million of amortization of deferred note offering costs on the Alcentra Capital InterNotes®.

10.	Credit Facility/Line of Credit

On May 8, 2014, the Company entered into a senior secured revolving credit agreement (as amended and restated from time to time, the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender, and the lenders from time to time party thereto, to provide liquidity in support of its investment and operational activities. The Credit Facility had an initial commitment of $80 million with an accordion feature that allowed for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the commitments and the accordion feature. The total commitments and accordion feature were $135 million and up to $250 million, respectively, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility had a maturity date of August 11, 2020 and bore interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.

On September 21, 2018, the Company amended certain provisions of the Credit Facility. Under the Amended Credit Agreement, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the Credit Facility bear interest, at the Company’s election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.

The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of the total assets of the Company and its subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by the Company and its subsidiaries after the closing date of the Amended Credit Agreement. In addition, the Amended Credit Agreement requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.

The Credit Facility agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum liquidity test, and maintenance of RIC and BDC status. The Credit Facility agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, and certain change in control events. As of September 30, 2019, the Company was in compliance in all material respects with the terms of the Credit Facility.

As of September 30, 2019 and December 31, 2018, the Company had United States dollar borrowings of $28.7 million and $28.5 million outstanding under the Credit Facility, respectively. For the three and nine months ended September 30, 2019, the Company had average borrowings under the Credit Facility of $29.7 million and $26.3 million, respectively, with a weighted average interest rate of 4.81% and 4.67%, respectively. For the three and nine months ended September 30, 2018, the Company had average borrowings under the Credit Facility of $53.0 million and $55.9 million, respectively, with a weighted average interest rate of 5.44% and 5.21%, respectively.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

In accordance with the 1940 Act, during the nine months ended September 30, 2018 and the three months ended March 31, 2019, the Company was allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. On May 4, 2018, the Board, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019, the Company's asset coverage requirement applicable to senior securities, under the 1940 Act, was reduced to 150%; however, the Company remains subject to a 200% minimum asset coverage ratio covenant under the Credit Facility and thus will not be able to take advantage of the reduced asset coverage requirement under the 1940 Act unless and until it negotiates revised terms and conditions with the lenders under the Credit Facility. As of September 30, 2019, the aggregate amount outstanding of the senior securities issued by the Company was $28 7 million under the Credit Facility (also outstanding are the Alcentra Capital InterNotes® of $55.0 million) and the Company's asset coverage was 269%.

11.	Market and Other Risk Factors

At September 30, 2019, a significant portion of the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is comprised of investments in the 17 industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.

The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.

Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.

The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.

12.	Commitments and Contingencies

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2019 and December 31, 2018, the Company had $14.2 million and $15.0 million in unfunded commitments under loan and financing agreements, respectively. The Company’s unfunded commitment under loan and financing agreements as of September 30, 2019 and December 31, 2018 are presented below.

		As of
		September 30, 2019		December 31, 2018
BayMark Health Services, Inc.	$	4,000,000	$	-
Clanwilliam Group Ltd.		3,355,635		3,753,476
Epic Healthcare Staffing Intermediate Holdco, LLC		2,836,363		363,637
Manna Pro Products, LLC		2,589,092		92,764
Healthcare Associates of Texas, LLC		1,454,003		1,572,225
Pharmalogic Holdings Corp.		-		4,760,000
Superior Controls, Inc.		-		2,500,000
CGGR Operations Holding Corporation		-		2,000,000
Total	$	14,235,093	$	15,042,102

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

13.	Classification of Portfolio Investments

As of September 30, 2019, the Company’s portfolio investments were categorized as follows:

Investment Type	Cost		Fair Value		% of Net Assets*
Senior Secured - First Lien	$	136,343,403	$	133,928,774		94.73	%
Senior Secured - Second Lien		64,891,728		65,417,290		46.27	%
Equity/Other		30,985,137		15,996,004		11.32	%
CLO/Structured Credit		1,950,823		1,793,140		1.27	%
Senior Subordinated		4,760,279		1,231,292		0.87	%
Total	$	238,931,370	$	218,366,500		154.46	%

Geographic Region
South	$	46,977,048	$	45,417,951		32.13	%
West		33,206,217		33,144,481		23.44	%
Midwest		33,974,781		32,333,295		22.87	%
Southeast		42,414,453		32,135,709		22.73	%
Northeast		30,739,009		26,455,395		18.71	%
Mid-Atlantic		28,674,416		26,003,000		18.39	%
Canada		14,418,207		14,627,366		10.35	%
Ireland		6,576,416		6,456,163		4.57	%
US (CLO)		1,950,823		1,793,140		1.27	%
Total	$	238,931,370	$	218,366,500		154.46	%

Industry
Business Services	$	46,716,596	$	46,961,012		33.22	%
Healthcare Services		44,255,350		43,897,088		31.05	%
Consumer Services		33,360,408		32,788,543		23.19	%
High Tech Industries		18,545,833		18,676,395		13.21	%
Industrial Services		20,301,438		16,373,000		11.58	%
Technology & Telecom		13,183,874		13,135,163		9.29	%
Oil & Gas Services		10,670,863		10,670,863		7.55	%
Media: Advertising, Printing & Publishing		12,677,834		9,119,001		6.45	%
Financial Services		8,082,826		8,470,000		5.99	%
Environmental/Recycling Services		7,055,976		5,298,295		3.75	%
Telecommunications		4,416,909		4,420,000		3.13	%
Retail		4,777,251		4,306,000		3.05	%
USD CLO		1,950,823		1,793,140		1.27	%
Security		5,485,401		1,024,000		0.72	%
Transportation Logistics		1,254,000		832,000		0.59	%
Industrial Manufacturing		500,000		602,000		0.42	%
Education		5,695,988		—		0.00	%
Total	$	238,931,370	$	218,366,500		154.46	%

*Fair value as a percentage of Net Assets

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

As of December 31, 2018, the Company’s portfolio investments were categorized as follows:

Investment Type	Cost		Fair Value		% of Net Assets*
Senior Secured - First Lien	$	167,745,286	$	168,154,929		115.33	%
Senior Secured - Second Lien		42,210,313		42,549,396		29.18	%
Equity/Other		37,232,929		21,141,117		14.50	%
CLO/Structured Credit		1,948,058		1,739,600		1.20	%
Senior Subordinated		4,741,760		1,212,774		0.83	%
Total	$	253,878,346	$	234,797,816		161.04	%

Geographic Region
West	$	52,427,327	$	54,266,593		37.22	%
Southeast		56,535,014		44,026,689		30.20	%
South		45,437,808		43,758,859		30.01	%
Northeast		43,622,806		38,144,071		26.16	%
Midwest		24,841,625		23,614,916		16.20	%
Canada		22,721,398		22,900,000		15.71	%
Ireland		6,344,310		6,347,088		4.35	%
US		1,948,058		1,739,600		1.19	%
Total	$	253,878,346	$	234,797,816		161.04	%

Industry
Business Services	$	45,913,805	$	46,130,114		31.64	%
Healthcare Services		44,727,905		45,038,816		30.89	%
Technology & Telecom		32,324,555		33,345,749		22.87	%
Consumer Services		26,231,367		26,237,699		17.99	%
Industrial Services		21,095,416		19,559,789		13.42	%
Retail		12,051,199		12,119,708		8.31	%
Oil & Gas Services		11,385,108		11,382,254		7.81	%
Wholesale/Distribution		10,189,394		10,614,192		7.28	%
High Tech Industries		8,701,223		8,729,396		5.99	%
Media: Advertising, Printing & Publishing		12,677,834		6,554,225		4.50	%
Environmental/Recycling Services		6,757,790		5,699,791		3.91	%
Telecommunications		4,410,000		4,410,000		3.02	%
USD CLO		1,948,058		1,739,600		1.19	%
Security		5,485,401		1,023,999		0.70	%
Waste Services		2,529,303		820,437		0.56	%
Transportation Logistics		1,254,000		726,000		0.50	%
Industrial Manufacturing		500,000		666,047		0.46	%
Education		5,695,988		-		0.00	%
Total	$	253,878,346	$	234,797,816		161.04	%

*Fair value as a percentage of Net Assets

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

September 30, 2019

(Unaudited)

14.	Financial Highlights

The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the nine months ended September 30, 2019 and September 30, 2018.

	For the nine months ended			For the nine months ended
	September 30, 2019			September 30, 2018
	(Unaudited)			(Unaudited)
Per share data⁽¹⁾
Net asset value, beginning of period	$	11.13		$	11.09

Net investment income (loss)		0.55			0.74
Net realized and unrealized gains (losses)⁽²⁾		0.08			(0.24	)
Benefit (Provision) for income taxes on unrealized gain (loss) on investments		(0.09	)		0.03
Net increase (decrease) in net assets resulting from operations		0.54			0.53

Distributions to shareholders:⁽³⁾
From net investment income		(0.69	)		(0.54	)
Total dividend distributions declared⁽⁴⁾		(0.69	)		(0.54	)


Net asset value, end of period	$	10.98		$	11.08
Market value per share, end of period	$	8.89		$	5.98

Total return based on net asset value⁽⁵⁾⁽⁶⁾		4.9	%		4.8	%
Total return based on market value⁽⁵⁾⁽⁶⁾		48.1	%		(22.3	)%

Shares outstanding at end of period		12,875,566			13,517,234

Ratio/Supplemental Data:
Net assets, at end of period	$	141,374,588		$	149,813,813
Ratio of total expenses before waiver to average net assets⁽⁷⁾		11.35	%		10.36	%
Ratio of interest expenses to average net assets⁽⁷⁾		4.45	%		4.76	%
Ratio of incentive fees to average net assets⁽⁷⁾		(0.65	)%		(0.04	)%
Ratio of waiver of management and incentive fees to average net assets⁽⁷⁾		1.05	%		0.23	%
Ratio of net expenses to average net assets⁽⁷⁾		10.30	%		10.12	%
Ratio of net investment income (loss) before waiver to average net assets⁽⁷⁾		5.61	%		8.79	%
Ratio of net investment income (loss) after waiver to average net assets⁽⁷⁾		4.56	%		8.56	%

Total Credit Facility payable outstanding	$	28,658,350		$	54,457,145
Total Notes payable outstanding	$	55,000,000		$	55,000,000

Asset coverage ratio⁽⁸⁾		2.7			2.4
Portfolio turnover rate⁽⁶⁾		28	%		19	%

(1)		The per share data was derived by using the average shares outstanding during the period.
(2)		The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the year may not agree with the change in the aggregate gains and losses in portfolio securities for the year because of the timing of purchases or sales of the Company's shares in relation to fluctuating market values for the portfolio.
(3)		The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.
(4)		Includes a special dividend of $0.15 per share paid to stockholders of record as of June 28, 2019.
(5)		Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan.
(6)		Not annualized.
(7)		Annualized, except for non-recurring expenses.
(8)		Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)

September 30, 2019

(Unaudited)

15.	Unconsolidated Significant Subsidiaries

In accordance with the SEC’s Regulation S-X and GAAP, the Company has one subsidiary, Southern Technical College (“STI”), that is deemed to be a “significant subsidiary” as of and for the nine months ended September 30, 2019 and two subsidiaries, FST Technical Services, LLC ("FST") and STI, that are deemed to be "significant subsidiaries" as of and for the year ended December 31, 2018 for which summarized financial information is presented below as of and for the nine months ended September 30, 2019 and as of and for the year ended December 31, 2018 in aggregate.

Southern Technical College

	As of			For the nine months ended
Balance Sheet	September 30, 2019		Income Statement	September 30, 2019
Current Assets	$	5,837,646	Net Sales	$	22,389,888
Noncurrent Assets		43,666,556	Gross Profit		3,952,278
Current Liabilities		7,327,307	Net Income/EBITDA		1,798,415
Noncurrent Liabilities		18,781,482

Southern Technical College and FST Technical Services, LLC

	As of			For the year ended
Balance Sheet	December 31, 2018		Income Statement	December 31, 2018
Current Assets	$	15,536,556	Net Sales	$	50,355,783
Noncurrent Assets		64,090,276	Gross Profit		12,732,260
Current Liabilities		10,838,139	Net Income/EBITDA		7,318,579
Noncurrent Liabilities		32,322,997

In addition to the risks associated with our investments in general, there are unique risks associated with our investments in these entities. The business and growth of FST at December 31, 2018 depended in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries and there was no assurance that this trend in outsourcing would have continued, as companies may elect to perform such services internally. A significant change in the direction of that trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by FST, could have significantly decreased its revenues and such decreased revenues could have had a material adverse effect on it or its results of operations or financial condition. The Company sold its investment in FST on February 8, 2019.

The business and growth of STI have been impacted by regulatory changes that have affected for-profit institutions. Although the regulatory climate has since improved, there is no assurance that this will continue to improve enrollment or retention rates.

16.	Subsequent Events

Subsequent to September 30, 2019, the following activity occurred:

On October 3, 2019, the Company paid a quarterly dividend of $0.18 per share to stockholders of record as of September 26, 2019.

On October 11, 2019, the Board approved a 2019 fourth quarter dividend of $0.18 per share payable on December 15, 2019 to stockholders of record as of November 30, 2019.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements relating to:

·	our future operating results, including the performance of our existing investments;

·	the introduction, withdrawal, success and timing of business initiatives and strategies;

·	changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

·	the relative and absolute investment performance and operations of our investment adviser;

·	the impact of increased competition;

·	the impact of investments we intend to make and future acquisitions and divestitures;

·	our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;

·	the resolution and impact of any legal proceedings, including any proceedings relating to the Mergers (as defined below);

·	our business prospects and the prospects of our portfolio companies;

·	our regulatory structure and tax status;

·	the adequacy of our cash resources and working capital;

·	the timing of cash flows, if any, from the operations of our portfolio companies;

·	the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;

·	the ability of our portfolio companies to achieve their objective;

·	the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser;

·	the impact of any activist stockholder activities;

·	our contractual arrangements and relationships with third parties;

·	our ability to access capital and any future financings by us;

·	the ability of our investment adviser to attract and retain highly talented professionals;

·	the impact of changes to tax legislation and, generally, our tax position;

·	the Mergers, the likelihood the Mergers are completed and the anticipated timing of their completion;

·	our expectations regarding the timetable for completing the transactions with Crescent Capital BDC, Inc. (“Crescent Capital BDC”), future financial and operating results, benefits of the transactions and future opportunities for the combined company; and

·	the ability of our business and Crescent Capital BDC’s business to successfully integrate if the Mergers are completed.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.

Overview

Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation in 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code. Alcentra NY, LLC is a majority-owned, indirect subsidiary of The Bank of New York Mellon Corporation.

Our investment objective is to generate both current income and, to a lesser extent, capital appreciation primarily by making direct investments in middle-market companies, which we define as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 million, although we may make investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second lien, unitranche debt and, to a lesser extent given the current credit environment, mezzanine debt. We expect to source investments primarily through the network of relationships that the principals of our investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

We are required to comply with certain regulatory requirements such as not acquiring any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” generally includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal place of business in the United States.

Pending Transactions with Crescent Capital BDC, Inc.

On August 12, 2019, we entered into the Agreement and Plan of Merger, dated as of August 12, 2019 (as amended on September 27, 2019, the “Merger Agreement”), with Crescent Capital BDC, one of its wholly owned subsidiaries (“Acquisition Sub”) and, solely for limited purposes, Crescent Capital BDC’s external investment adviser, Crescent Cap Advisors, LLC (“Crescent Cap Advisors”). The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Crescent Capital BDC (following its reincorporation by merger into the State of Maryland, as discussed below) will acquire all of the outstanding shares of our common stock in a stock and cash transaction. Prior to the closing of the transactions contemplated by the Merger Agreement, Crescent Capital BDC will merge with and into a newly formed wholly owned subsidiary, Crescent Reincorporation Sub, Inc., a Maryland corporation, with Crescent Reincorporation Sub, Inc. surviving the merger as “Crescent Capital BDC, Inc.” (“Crescent Capital Maryland BDC”). Pursuant to the Merger Agreement, Acquisition Sub will merge with and into the Company with the Company surviving as a wholly owned subsidiary of Crescent Capital Maryland BDC (the “First Merger”). Immediately thereafter and as a single integrated transaction, we will merge with and into Crescent Capital Maryland BDC with Crescent Capital Maryland BDC continuing as the surviving company (the “Second Merger,” and together with the First Merger, the “Mergers”). See “Note 1 – Organization and Purpose” in the notes to our financial statements for more information.

Portfolio Composition, Investment Activity and Yield

For the three months ended September 30, 2019, we had no new debt investments or add-on fundings due to the operation of interim operating covenants under the Merger Agreement effective during the pendency of the Mergers.

During the three months ended September 30, 2019 we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of approximately $2.8 million. During the three months ended September 30, 2018, we invested $6.1 million in debt and equity investments, including one new portfolio company and one add on investment. These investments consisted of senior secured debt ($6.0 million or 99% of the total amount invested) and preferred equity ($0.06 million or 1% of the total amount invested). During the three months ended September 30, 2018 we received proceeds from repayments and amortizations on investments of $4.6 million.

As of September 30, 2019, we had $218.4 million (at fair value) invested in 28 companies and 1 CLO. Our portfolio included approximately 61.3% of first lien debt, 30.0% of second lien debt, 0.6% of subordinated debt, 0.8% in CLO debt and 7.3% of equity investments. At September 30, 2019, our average portfolio company investment at amortized cost and fair value was approximately $7.4 million and $7.2 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $20.3 million and $19.8 million, respectively.

As of December 31, 2018, we had $234.8 million (at fair value) invested in 30 companies. Our portfolio included approximately 71.6% of first lien debt, 18.1% of second lien debt, 0.5% of mezzanine debt, 0.7% of CLO investments and 9.0% of equity investments at fair value. At December 31, 2018, our average portfolio company investment at amortized cost and fair value was approximately $8.7 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $22.7 million and $22.9 million, respectively.

At September 30, 2019, 93.0% of our debt investments bore interest based on floating rates (with a majority subject to interest rate floors), such as LIBOR, and 7.0% bore interest at fixed rates. At December 31, 2018, 86.9% of our debt investments bore interest based on floating rates (with a majority subject to interest rate floors), such as LIBOR, and 13.1% bore interest at fixed rates. The weighted average coupon on all of our debt investments as of September 30, 2019 and December 31, 2018 was approximately 9.8% and 11.0%, respectively. The weighted average yield on our debt investments as of September 30, 2019 and December 31, 2018 was approximately 10.6% and 11.0%, respectively.

The following table shows the portfolio composition by investment type at fair value and cost with the corresponding percentage of total investments.

	Cost								Fair Value
	September 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	(dollars in thousands)
Senior Secured - First Lien	$	136,343	57.1	%	$	167,745	66.1	%	$	133,929	61.3	%	$	168,155	71.6	%
Senior Secured - Second Lien		64,892	27.1	%		42,210	16.5	%		65,417	30.0	%		42,549	18.1	%
Senior Subordinated		4,760	2.0	%		4,742	1.9	%		1,231	0.6	%		1,213	0.6	%
CLO/Structured Credit		1,951	0.8	%		1,948	0.8	%		1,793	0.8	%		1,740	0.7	%
Equity/Other		30,985	13.0	%		37,233	14.7	%		15,996	7.3	%		21,141	9.0	%
Total	$	238,931	100.0	%	$	253,878	100.0	%	$	218,366	100.0	%	$	234,798	100	%

The following table shows portfolio composition by geographic region at fair value and cost with the corresponding percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.

	Cost								Fair Value
	September 30, 2019				December 31, 2018				September 30, 2019				December 31, 2018
	(dollars in thousands)
South	$	46,977	19.7	%	$	45,438	17.9	%	$	45,418	20.8	%	$	43,759	18.6	%
West		33,206	13.9	%		52,427	20.6	%		33,145	15.2	%		54,266

Alcentra Capital Corp 10-Q