Solar Senior Capital Ltd. Annual Report 2011

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011OR ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 814-00849 SOLAR SENIOR CAPITAL LTD.(Exact name of registrant as specified in its charter) Maryland 27-4288022(State of Incorporation) (I.R.S. EmployerIdentification Number)500 Park AvenueNew York, N.Y. 10022(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (212) 993-1670Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value$0.01 per share The NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes ¨ No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No xThe aggregate market value of common stock held by non-affiliates of the Registrant on June 30, 2011 based on the closing price on that date of $17.95on the NASDAQ Global Select Market was approximately $161.6 million. For the purposes of calculating this amount only, all directors and executiveofficers of the Registrant have been treated as affiliates. There were 9,500,100 shares of the Registrant’s common stock outstanding as of February 20, 2012.Portions of the registrant’s Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscal yearcovered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Form 10-K. Table of ContentsSOLAR SENIOR CAPITAL LTD.FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2011TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 1A. Risk Factors 22 Item 1B. Unresolved Staff Comments 39 Item 2. Properties 40 Item 3. Legal Proceedings 40 Item 4. Mine Safety Disclosures 40 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 41 Item 6. Selected Financial Data 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 54 Item 8. Financial Statements and Supplementary Data 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 74 Item 9A. Controls and Procedures 74 Item 9B. Other Information 74 PART III Item 10. Directors, Executive Officers and Corporate Governance 75 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accountant Fees and Services 75 PART IV Item 15. Exhibits and Financial Statement Schedules 76 Signatures 78 Table of ContentsPART I Item 1.BusinessSolar Senior Capital Ltd. (“Solar Senior”, the “Company” or “we”), a Maryland corporation formed in December 2010, is a closed-end, externallymanaged, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes we intend to elect to be treated as a regulated investment company (“RIC”)under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).On February 24, 2011, we priced our initial public offering (the “IPO”), selling 9.0 million shares, including the underwriters’ over-allotment, at a priceof $20.00 per share. Concurrent with this offering, management purchased an additional 500,000 shares through a private placement transaction exempt fromregistration under the Securities Act of 1933, as amended, or the Securities Act (the “Concurrent Private Placement”), also at $20.00 per share.On August 26, 2011, we established a $200 million senior secured revolving credit facility (the “Credit Facility”) with Citigroup Global Markets Inc.acting as administrative agent. In connection with the Credit Facility, our wholly-owned subsidiary, SUNS SPV LLC (the “SPV”) was formed. The CreditFacility matures on August 26, 2016 and generally bears interest at a rate of LIBOR plus 2.25%. Under the Credit Facility, $150 million will be availableinitially with an additional $50 million available as a delayed draw. The Credit Facility can also be expanded up to $600 million. The Credit Facility issecured by all of the assets held by the SPV. Under the Credit Facility, Solar Senior and the SPV, as applicable, have made certain customary representationsand warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirementsfor similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature.We invest primarily in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities aremost attractive. Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investmentobjective by investing primarily in senior loans, including first lien, unitranche, and second lien debt instruments, made to private middle-market companieswhose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of public companies that are thinlytraded. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will beinvested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarilyLIBOR, plus a premium. Senior loans in which we expect to invest are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnershipsand other business entities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securitiesrated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “high risk” compared to debtinstruments that are rated above investment grade.We expect to invest in senior loans made primarily to private leveraged middle-market companies with approximately $20 million to $60 million ofEBITDA. Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. We expectthat our investments will generally range between $5 million and $30 million each, although we expect that this investment size will vary proportionately withthe size of our capital base. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments,which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited to, directinvestments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States. Wemay invest up to 30% of our total assets in 1Table of Contentssuch opportunistic investments, including senior loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the1940 Act. We are managed by Solar Capital Partners, LLC (“Solar Capital Partners”). Solar Capital Management, LLC (“Solar Capital Management”)provides the administrative services necessary for us to operate.As of December 31, 2011, our long term investments totaled $177.7 million and our net asset value was $172.4 million. Our portfolio was comprisedof debt investments in 21 portfolio companies and our income producing assets, which represented 100% of our total portfolio, had a weighted averageannualized yield on a fair value basis of approximately 8.5%.During the year ended December 31, 2011, we originated approximately $219.1 million of new investments in 23 portfolio companies. We also hadapproximately $2.2 million in debt repayments of existing portfolio companies and sales of securities of 7 portfolio companies for approximately$32.0 million, during 2011.Solar Capital PartnersSolar Capital Partners, our investment adviser, is controlled and led by Michael S. Gross, our chairman and chief executive officer, and Bruce Spohler,our chief operating officer. They are supported by a team of dedicated investment professionals, including senior team members Brian Gerson, Cedric Henley,David Mait and Suhail Shaikh. We refer to Messrs. Gross, Spohler, Gerson, Henley, Mait and Shaikh as Solar Capital Partners’ senior investmentprofessionals. Solar Capital Partners’ investment team has extensive experience in the private equity and leveraged lending industries, as well as significantcontacts with financial sponsors operating in those industries.In addition, Solar Capital Partners presently serves as the investment adviser for Solar Capital Ltd, or “Solar Capital,” a publicly traded businessdevelopment company with approximately $1.3 billion of investable capital that invests in the senior debt securities, mezzanine loans and equity securities ofleveraged middle market companies similar to those we intend to target for investment. The investment team led by Messrs. Gross and Spohler has invested inapproximately 90 different portfolio companies for Solar Capital and Solar Senior, which investments involved an aggregate of approximately 80 differentfinancial sponsors, through December 31, 2011. Since Solar Senior’s inception, these investment professionals have used their relationships in the middle-market financial sponsor and financial intermediary community to generate deal flow. As of February 21, 2012, Mr. Gross and Mr. Spohler beneficiallyowned, either directly or indirectly, approximately 6.22% and 5.26%, respectively, of our outstanding common stock.Solar Capital ManagementPursuant to an administration agreement (the “Administration Agreement”), Solar Capital Management furnishes us with office facilities, equipment andclerical, bookkeeping and record keeping services at such facilities. Under the Administration Agreement, Solar Capital Management also performs, oroversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records which we arerequired to maintain and preparing reports to our stockholders. In addition, Solar Capital Management assists us in determining and publishing our net assetvalue, oversees the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees thepayment of our expenses and the performance of administrative and professional services rendered to us by others. Solar Capital Management also providesmanagerial assistance on our behalf to those portfolio companies that request such assistance.Operating and Regulatory StructureA BDC is regulated by the 1940 Act. A BDC must be organized in the United States for the purpose of investing in or lending to primarily privatecompanies and making significant managerial assistance available to 2Table of Contentsthem. A BDC may use capital provided by public stockholders and from other sources to make long-term, private investments in businesses. A BDCprovides stockholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarilyprivately owned companies.We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of theoutstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as thelesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company arepresent or represented by proxy, or (b) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in thenature of our business.As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors mustbe persons who are not interested persons, as that term is defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by areputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against anyliability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct ofsuch person’s office.As a BDC, we are required to meet a coverage ratio of the value of total assets to total senior securities, which include all of our borrowings and anypreferred stock we may issue in the future, of at least 200%. We may also be prohibited under the 1940 Act from knowingly participating in certaintransactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the Securitiesand Exchange Commission (“SEC”).We are generally not able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, orwarrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our board of directorsdetermines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In addition, we maygenerally issue new shares of our common stock at a price below net asset value in rights offerings to existing stockholders, in payment of dividends and incertain other limited circumstances.As a BDC, we are generally limited in our ability to invest in any portfolio company in which our investment adviser or any of its affiliates currentlyhave an investment or to make any co-investments with our investment adviser or its affiliates without an exemptive order from the SEC, subject to certainexceptions.We will be periodically examined by the SEC for compliance with the 1940 Act.Qualifying AssetsUnder the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to asqualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s total assets. The principal categories ofqualifying assets relevant to our proposed business are the following: (1)Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limitedexceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of aneligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company isdefined in the 1940 Act as any issuer which:(a) is organized under the laws of, and has its principal place of business in, the United States;(b) is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be aninvestment company but for certain exclusions under the 1940 Act; and 3Table of Contents(c) satisfies any of the following:i. does not have any class of securities that is traded on a national securities exchange;ii. has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting andnon-voting common equity of less than $250 million;iii. is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of theeligible portfolio company; oriv. is a small and solvent company having total assets of not more than $4.0 million and capital and surplus of not less than $2.0million. (2)Securities of any eligible portfolio company which we control. (3)Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or intransactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of itssecurities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financingarrangements. (4)Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities andwe already own 60% of the outstanding equity of the eligible portfolio company. (5)Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise ofwarrants or rights relating to such securities. (6)Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.Managerial Assistance to Portfolio CompaniesAs a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among otherthings, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers ofportfolio companies and providing other organizational and financial guidance. We may also receive fees for these services. Solar Capital Managementprovides such managerial assistance on our behalf to portfolio companies that request this assistance.Temporary InvestmentsPending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. governmentsecurities or high-quality investment grade debt securities maturing in one year or less from the time of investment, which we refer to, collectively, astemporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, providedthat such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchaseby an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a pricewhich is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of ourassets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a singlecounterparty, we would not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter intorepurchase agreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties withwhich we enter into repurchase agreement transactions. 4Table of ContentsSenior SecuritiesWe are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our assetcoverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remainoutstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet theapplicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets fortemporary or emergency purposes without regard to asset coverage. We may borrow money, which would magnify the potential for gain or loss on amountsinvested and may increase the risk of investing in us.Code of EthicsWe and Solar Capital Partners have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and Rule 204A-1 under the InvestmentAdvisers Act of 1940 (the “Advisers Act”), respectively, that establishes procedures for personal investments and restricts certain transactions by ourpersonnel. Our codes of ethics generally do not permit investments by our employees in securities that may be purchased or held by us. You may read andcopy these codes of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public ReferenceRoom by calling the SEC at 1 (800) SEC-0330. In addition, each code of ethics is available on the EDGAR Database on the SEC’s Internet site athttp://www.sec.gov. You may also obtain copies of the codes of ethics, after paying a duplicating fee, by electronic request at the following Email address:publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.Compliance Policies and ProceduresWe and our investment adviser have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of thefederal securities laws. We are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of theirimplementation and to designate a chief compliance officer to be responsible for their administration. Guy Talarico currently serves as our chief complianceofficer.Proxy Voting Policies and ProceduresWe have delegated our proxy voting responsibility to our investment adviser. A summary of the Proxy Voting Policies and Procedures of our adviser areset forth below. The guidelines are reviewed periodically by the adviser and our non-interested directors, and, accordingly, are subject to change.As an investment adviser registered under the Investment Advisers Act of 1940, Solar Capital Partners has a fiduciary duty to act solely in the bestinterests of its clients. As part of this duty, it recognizes that it must vote securities held by its clients in a timely manner free of conflicts of interest. Thesepolicies and procedures for voting proxies for investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the AdvisersAct.Our investment adviser votes proxies relating to our portfolio securities in the best interest of our stockholders. Solar Capital Partners reviews on a case-by-case basis each proposal submitted for a proxy vote to determine its impact on our investments. Although it generally votes against proposals that may havea negative impact on our investments, it may vote for such a proposal if there exists compelling long-term reasons to do so.The proxy voting decisions of our investment adviser are made by the senior officers who are responsible for monitoring each of our investments. Toensure that our vote is not the product of a conflict of interest, it requires that: (i) anyone involved in the decision making process disclose to the managingmember any potential 5Table of Contentsconflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in thedecision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influencefrom interested parties.You may obtain information about how we voted proxies by making a written request for proxy voting information to: Solar Capital Partners, LLC, 500Park Avenue, New York, NY 10022.Privacy PrinciplesWe are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following informationis provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may shareinformation with select other parties.Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of ourstockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone,except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator).We restrict access to non-public personal information about our stockholders to employees of our investment adviser and its affiliates with a legitimatebusiness need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of ourstockholders.Taxation as a Regulated Investment CompanyAs a BDC, we intend to elect to be treated, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generallywill not have to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. Tocontinue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). Inaddition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxableincome,” which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the“Annual Distribution Requirement”).If we: • qualify as a RIC; and • satisfy the Annual Distribution Requirement;then we will not be subject to federal income tax on the portion of our investment company taxable income and net capital gain (i.e., realized net long-termcapital gains in excess of realized net short-term capital losses) we distribute to stockholders. We will be subject to U.S. federal income tax at the regularcorporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at leastequal to the sum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31in that calendar year and (3) any income realized, but not distributed, and on which we paid no federal income tax, in preceding years (the “Excise TaxAvoidance Requirement”). 6Table of ContentsIn order to qualify as a RIC for federal income tax purposes, we must, among other things: • at all times during each taxable year, have in effect an election to be treated as a BDC under the 1940 Act; • derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities loans, gainsfrom the sale of stock or other securities or currencies, or other income derived with respect to our business of investing in such stock, securitiesor currencies and (b) net income derived from an interest in a “qualified publicly traded partnership;” and • diversify our holdings so that at the end of each quarter of the taxable year: • at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and othersecurities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of theoutstanding voting securities of the issuer; and • no more than 25% of the value of our assets is invested in (i) the securities, other than U.S. government securities or securities of otherRICs, of one issuer, (ii) the securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and thatare engaged in the same or similar or related trades or businesses or (iii) the securities of one or more “qualified publicly tradedpartnerships.”We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that aretreated under applicable tax rules as having original issue discount (such as debt instruments with payment-in-kind (“PIK”) interest or, in certain cases,increasing interest rates or debt instruments issued with warrants), we must include in income each year a portion of the original issue discount that accruesover the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issuediscount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to ourstockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.Because we may use debt financing, we will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants underloan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual DistributionRequirement. If we are unable to obtain cash from other sources or are otherwise limited in our ability to make distributions, we could fail to qualify for RICtax treatment and thus become subject to corporate-level income tax.Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (i) disallow,suspend or otherwise limit the allowance of certain losses or deductions; (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gainor ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited); (iv) cause us to recognizeincome or gain without a corresponding receipt of cash; (v) adversely affect the time as to when a purchase or sale of securities is deemed to occur;(vi) adversely alter the characterization of certain complex financial transactions; and (vii) produce income that will not be qualifying income for purposes ofthe 90% gross income test described above. We will monitor our transactions and may make certain tax elections in order to mitigate the potential adverse effectof these provisions.Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generallywill be treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term will depend on how long we held a particular warrant. Uponthe exercise of a warrant acquired by us, our tax basis in the stock purchased under the warrant will equal the sum of the amount paid for the warrant plus thestrike price paid on the exercise of the warrant. Except as set forth in “Failure to Qualify as a Regulated Investment Company,” the remainder of thisdiscussion assumes we will qualify as a RIC for each taxable year. 7Table of ContentsFailure to Qualify as a Regulated Investment CompanyIf we were unable to qualify for treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not beable to deduct distributions to stockholders, nor would they be required to be made. Such distributions would be taxable to our stockholders as dividendsand, if made in a taxable year beginning on or before December 31, 2012 and provided certain holding period and other requirements were met, could qualifyfor treatment as “qualified dividend income” in the hands of non-corporate stockholders (and thus eligible for the 15% maximum rate) to the extent of ourcurrent and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends receiveddeduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of thestockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would berequired to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as aRIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification andthat requalify as a RIC no later than the second year following the non-qualifying year, we could be subject to tax on any unrealized net built-in gains in theassets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent 10 years, unless we made a specialelection to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC.Investment Advisory FeesPursuant to an investment advisory and management agreement (the “Investment Advisory and Management Agreement”), we have agreed to pay SolarCapital Partners a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. The basemanagement fee is calculated at an annual rate of 1.00% of our gross assets. Solar Capital Partners, however, waived the portion of the base management feepayable on net proceeds of the IPO and Concurrent Private Placement that had not yet been invested in portfolio investments, exclusive of any temporaryinvestments in cash, cash equivalents, U.S. government securities and other high-quality investment grade debt investments that mature in 12 months or lessfrom the date of investment. For services rendered under the Investment Advisory and Management Agreement, the base management fee is payable quarterly inarrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters,and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarterhave been appropriately pro-rated.The incentive fee has two parts, as follows: one is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income forthe immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any otherincome (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consultingfees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including thebase management fee, expenses payable under the Administration Agreement to Solar Capital Management, and any interest expense and dividends paid onany issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments witha deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yetreceived in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed net of all realized capital losses or unrealizedcapital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of theimmediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). Our net investment income used to calculate thispart of the incentive fee is also included in the amount of our gross assets used tocalculate the 1.00% base management fee. We pay Solar Capital Partners anincentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows: • no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%; 8Table of Contents • 50% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceedsthe hurdle but is less than 2.9167% in any calendar quarter (11.67% annualized). We refer to this portion of our pre-incentive fee net investmentincome (which exceeds the hurdle but is less than 2.9167%) as the “catch-up.” The “catch-up” is meant to provide our investment adviser withapproximately 20% of our pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 2.9167% inany calendar quarter; and • 20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.9167% in any calendar quarter (11.67% annualized) willbe payable to Solar Capital Partners (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment incomethereafter is allocated to Solar Capital Partners).The following is a graphical representation of the calculation of the income-related portion of the incentive fee:Pre-incentive fee net investment income(expressed as a percentage of the value of net assets) Percentage of pre-incentive fee net investment incomeallocated to Solar Capital PartnersThese calculations are appropriately pro-rated for any period of less than three months and adjusted for any share issuances or repurchases during therelevant quarter. You should be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debtinvestments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantialincrease of the amount of incentive fees payable to our investment adviser with respect to pre-incentive fee net investment income.The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the InvestmentAdvisory and Management Agreement, as of the termination date), and equals 20% of our realized capital gains, if any, on a cumulative basis from inceptionthrough the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregateamount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio, provided that, the incentive fee determined asof December 31, 2011 will be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of allrealized capital losses and unrealized capital depreciation from the inception of Solar Senior Capital. 9Table of ContentsExamples of Quarterly Incentive Fee CalculationExample 1: Income Related Portion of Incentive Fee (*):Alternative 1AssumptionsInvestment income (including interest, dividends, fees, etc.) = 1.25%Hurdle rate (1) = 1.75%Management fee (2) = 0.25%Other expenses (legal, accounting, custodian, transfer agent, etc.) (3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 0.80%Pre-incentive net investment income does not exceed hurdle rate, therefore there is no incentive fee.Alternative 2AssumptionsInvestment income (including interest, dividends, fees, etc.) = 2.70%Hurdle rate (1) = 1.75%Management fee (2) = 0.25%Other expenses (legal, accounting, custodian, transfer agent, etc.) (3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 2.25%Incentive fee = 50% × pre-incentive fee net investment income, subject to the “catch-up” (4)= 50% × (2.25% – 1.75%)= 0.25% 10Table of ContentsAlternative 3AssumptionsInvestment income (including interest, dividends, fees, etc.) = 4.00%Hurdle rate (1) = 1.75%Management fee (2) = 0.25%Other expenses (legal, accounting, custodian, transfer agent, etc.) (3) = 0.20%Pre-incentive fee net investment income(investment income – (management fee + other expenses)) = 3.55%Incentive fee = 20% × pre-incentive fee net investment income, subject to “catch-up” (4)Incentive fee = 50% × “catch-up” + (20% × (pre-incentive fee net investment income – 2.9167%))Catch-up = 2.9167% – 1.75%= 1.1667%Incentive fee = (50% × 1.1667%) + (20% × (3.55% – 2.9167%))= 0.58334% + (20% × 0.6333%)= 0.58334% + 0.12667%= 0.71001% (*)The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.(1)Represents 7.00% annualized hurdle rate.(2)Represents 1.00% annualized management fee.(3)Excludes organizational and offering expenses.(4)The “catch-up” provision is intended to provide our investment adviser with an incentive fee of approximately 20% on all of our pre-incentive fee netinvestment income as if a hurdle rate did not apply when our net investment income exceeds 2.9167% in any calendar quarter.Example 2: Capital Gains Portion of Incentive Fee:Alternative 1:Assumptions • Year 1: $20 million investment made in Company A (“Investment A”), and $30 million investment made in Company B (“Investment B”) • Year 2: Investment A sold for $50 million and fair market value (“FMV”) of Investment B determined to be $32 million • Year 3: FMV of Investment B determined to be $25 million • Year 4: Investment B sold for $31 million 11Table of ContentsThe capital gains portion of the incentive fee, if any, would be: • Year 1: None • Year 2: $6 million capital gains incentive fee$30 million realized capital gains on sale of Investment A multiplied by 20% • Year 3: None$5 million cumulative fee (20% multiplied by $25 million ($30 million cumulative capital gains less $5 million cumulative capital depreciation)) less$6 million (previous capital gains fee paid in Year 2) • Year 4: $200,000 capital gains incentive fee$6.2 million cumulative fee ($31 million cumulative realized capital gains multiplied by 20%) less $6 million (previous capital gains fee paid in Year 2)Alternative 2Assumptions • Year 1: $20 million investment made in Company A (“Investment A”), $30 million investment made in Company B (“Investment B”) and $25million investment made in Company C (“Investment C”) • Year 2: Investment A sold for $50 million, FMV of Investment B determined to be $25 million and FMV of Investment C determined to be $25million • Year 3: FMV of Investment B determined to be $27 million and Investment C sold for $30 million • Year 4: FMV of Investment B determined to be $24 million • Year 5: Investment B sold for $20 millionThe capital gains portion of the incentive fee, if any, would be: • Year 1: None • Year 2: $5 million capital gains incentive fee20% multiplied by $25 million ($30 million realized capital gains on sale of Investment A less $5 million unrealized capital depreciation on InvestmentB) • Year 3: $1.4 million capital gains incentive fee(1)$6.4 million cumulative fee (20% multiplied by $32 million ($35 million cumulative realized capital gains less $3 million unrealized capitaldepreciation)) less $5 million (previous capital gains fee paid in Year 2) • Year 4: None • Year 5: None$5 million cumulative fee (20% multiplied by $25 million ($35 million cumulative realized capital gains less $10 million realized capital losses)) less$6.4 million (previous cumulative capital gains fee paid in Year 2 and Year 3) (1)As illustrated in Year 3 of Alternative 1 above, if Solar Senior Capital were to be wound up on a date other than December 31 of any year, SolarSenior Capital may have paid aggregate capital gain incentive fees that are more than the amount of such fees that would be payable if Solar SeniorCapital had been wound up on December 31 of such year. 12Table of ContentsPayment of Our ExpensesAll investment professionals of the investment adviser and their respective staffs, when and to the extent engaged in providing investment advisory andmanagement services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by SolarCapital Partners. We bear all other costs and expenses of our operations and transactions, including (without limitation): • the cost of our organization and public offerings; • the cost of calculating our net asset value, including the cost of any third-party valuation services; • the cost of effecting sales and repurchases of our shares and other securities; • interest payable on debt, if any, to finance our investments; • fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing duediligence reviews of prospective investments and advisory fees; • transfer agent and custodial fees; • fees and expenses associated with marketing efforts; • federal and state registration fees, any stock exchange listing fees; • federal, state and local taxes; • independent directors’ fees and expenses; • brokerage commissions; • fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums; • direct costs and expenses of administration, including printing, mailing, long distance telephone and staff; • fees and expenses associated with independent audits and outside legal costs; • costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws; and • all other expenses incurred by either Solar Capital Management or us in connection with administering our business, including payments underthe Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Solar Capital Managementin performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliancefunctions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financialofficer and any administrative support staff.InvestmentsSolar Senior Capital seeks to create a diverse portfolio of senior loans by investing approximately $5 million to $30 million of capital, on average, in thesecurities of leveraged companies, including middle-market companies. We may also invest in debt of public companies that are thinly traded. Under normalmarket conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will be invested in seniorloans.Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily LIBOR, plus apremium. Senior loans in which we intend to invest are typically made to 13Table of ContentsU.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions.Senior loans typically are rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield”securities, and may be considered “high risk” compared to debt instruments that are rated above investment grade. Senior secured loans, however, aregenerally less risky than subordinated debt, bearing lower leverage and higher recovery statistics.In addition to senior secured loans, we may invest a portion of our portfolio in opportunistic investments, which are not our primary focus, but areintended to enhance our returns to stockholders. These investments may include similar direct investments in public companies that are not thinly traded andsecurities of leveraged companies located in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunisticinvestments, including senior loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a business development companyunder the 1940 Act.We may borrow funds to make investments. As a result, we will be exposed to the risks of leverage, which may be considered a speculative investmenttechnique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in oursecurities. In addition, the costs associated with our borrowings, including any increase in management fees payable to our investment adviser, Solar CapitalPartners, will be borne by our common stockholders.Additionally, we may in the future seek to securitize our loans to generate cash for funding new investments. To securitize loans, we may create a whollyowned subsidiary and contribute a pool of loans to the subsidiary. This could include the sale of interests in the subsidiary on a non-recourse basis topurchasers who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools, and we would retain a portion of theequity in the securitized pool of loans.Moreover, we may acquire investments in the secondary market and, in analyzing such investments, we will employ the same analytical process as weuse for our primary investments.We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge againstfluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in thevalues of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of suchpositions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in thevalue of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions shouldincrease. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into ahedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedginginstruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to riskof loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S.currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. 14Table of ContentsOur principal focus is to provide senior secured loans, including first lien, unitranche and second lien loans, to private middle-market companies in avariety of industries. We generally seek to target companies that generate positive cash flows. We generally seek to invest in companies from the broad varietyof industries in which our investment adviser has direct expertise. The following is a representative list of the industries in which we may invest. • Aerospace & Defense • Healthcare, Education & Childcare• Automobile • Home, Office Furnishings & Durable Consumer Prds• Banking • Hotels, Motels, Inns and Gaming• Beverage, Food & Tobacco • Insurance• Buildings & Real Estate • Leisure, Amusement, Entertainment• Broadcasting & Entertainment • Machinery• Cargo Transport • Mining, Steel, Iron & Nonprecious Metals• Chemicals, Plastics & Rubber • Personal & Nondurable Consumer Products• Containers, Packaging & Glass • Personal, Food & Misc. Services• Diversified/Conglomerate Manufacturing • Personal Transportation• Diversified/Conglomerate Services • Printing & Publishing• Electronics • Retail Stores• Farming & Agriculture • Telecommunications• Finance • Textiles & Leather• Grocery • UtilitiesWe may invest in other industries if we are presented with attractive opportunities.Set forth below is a list of our ten largest portfolio company investments as of December 31, 2011, as well as the top ten industries in which we wereinvested as of December 31, 2011, in each case calculated as a percentage of our total assets as of such date. Portfolio Company % of TotalAssets KIK Custom Products, Inc. 10.3% Hearthside Food Solutions, LLC 9.9% Decision Resources, LLC 8.2% AmeriQual Group, LLC 6.7% Asurion, LLC 5.7% Engineering Solutions & Products, LLC 5.1% ATI Holdings, Inc. 4.2% FleetPride Corporation 4.2% Insight Pharmaceuticals LLC 4.2% Sotera Defense Solutions, Inc. 4.2% Industry Classification % of TotalAssets Beverage, Food & Tobacco 19.3% Healthcare, Education & Childcare 18.3% Personal & Nondurable Consumer Products 10.9% Diversified / Conglomerate Service 10.3% Aerospace & Defense 9.3% Insurance 5.7% Cargo Transport 4.2% Personal, Food & Misc. Services 4.2% Grocery 3.3% Retail Stores 2.6% 15Table of ContentsInvestment Selection ProcessSolar Capital Partners utilizes a value-oriented investment philosophy with a focus on the preservation of capital and a commitment to managingdownside exposure.Portfolio Company CharacteristicsWe have identified several criteria that we believe are important in identifying and investing in prospective portfolio companies. These criteria providegeneral guidelines for our investment decisions; however, not all of these criteria will be met by each prospective portfolio company in which we choose toinvest.Stable Earnings and Strong Free Cash Flow. We seek to invest in companies who have demonstrated stable earnings through economic cycles. Wetarget companies that can de-lever through consistent generation of cash flows rather than relying solely on growth to service and repay our loans.Value Orientation. Our investment philosophy places a premium on fundamental analysis from an investor’s perspective and has a distinct valueorientation. We intend to focus on companies in which we can invest at relatively low multiples of operating cash flow and that are profitable at the time ofinvestment on an operating cash flow basis.Value of Assets. The prospective value of the assets, if any, that collateralizes the loans in which we invest, will be an important factor in our creditanalysis. Our analysis emphasizes both tangible assets, such as accounts receivable, inventory, equipment and real estate, and intangible assets, such asintellectual property, customer lists, networks and databases. In some of our senior loan transactions, the company’s fundings may be derived from aborrowing base determined by the value of the company’s assets.Strong Competitive Position in Industry. We seek to invest in target companies that have developed leading market positions within their respectivemarkets and are well positioned to capitalize on growth opportunities. We will seek companies that demonstrate significant competitive advantages versus theircompetitors, which we believe should help to protect their market position and profitability. Typically, we would not invest in start-up companies orcompanies having speculative business plans.Diversified Customer and Supplier Base. We seek to acquire businesses that have a diversified customer and supplier base. We believe thatcompanies with a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation, changing businesspreferences and other factors that may negatively impact their customers, suppliers and competitors.Exit Strategy. We seek to predominantly invest in companies which provide multiple alternatives for an eventual exit. We look for opportunities thatprovide an exit typically within three years of the initial capital commitment.We seek companies that we believe will provide a steady stream of cash flow to repay our loans and reinvest in their respective businesses. We believethat such internally generated cash flow, leading to the payment of interest on, and the repayment of the principal of, our investments in portfolio companiesrepresents a key means by which we will be able to exit from our investments over time.In addition, we also seek to invest in companies whose business models and expected future cash flows offer attractive exit possibilities. Thesecompanies include candidates for strategic acquisition by other industry participants and companies that may repay our investments through an initial publicoffering of common stock or another capital market transaction. We underwrite our investments on a hold-to-maturity basis, but expensive capital is oftenrepaid prior to stated maturity. 16Table of ContentsExperienced and Committed Management. We generally require that portfolio companies have an experienced management team. We plan to alsorequire portfolio companies have in place proper incentives to induce management to succeed and to act in concert with our interests as investors, includinghaving significant equity interests.Strong Sponsorship. We aim to invest alongside other sophisticated investors. We seek to partner with successful financial sponsors who havehistorically generated high returns. We believe that investing in these sponsors’ portfolio companies enables us to benefit from their direct involvement and duediligence.The illustration below provides Solar Senior Capital’s target portfolio companies and the targeted position of its investment in a company’s capital structure. Solar Senior Capital’s senior investment team works in concert with sponsors to proactively manage investment opportunities by acting as a partnerthroughout the investment process. We actively focus on the middle-market financial sponsor community, with a particular focus on the upper-end of themiddle-market (sponsors with equity funds of $800 million to $3 billion). We favor such sponsors because they typically: • buy larger companies with strong business franchises; • invest significant amounts of equity in their portfolio companies; • value flexibility and creativity in structuring their transactions; • possess longer track records over multiple investment funds; • have a deeper management bench; • have better ability to withstand downturns; and • possess the ability to support portfolio companies with additional capitalWe divide our coverage of these sponsors among our investment professionals, who are responsible for day-to-day interaction with financial sponsors.We take a proactive approach, provide quick feedback, deliver on commitments, and are constructive throughout the life cycle of an investment. 17Table of ContentsDue DiligenceOur “private equity” approach to credit investing incorporates extensive in-depth due diligence often alongside the private equity sponsor. In conductingdue diligence, we will use publicly available information as well as information from relationships with former and current management teams, consultants,competitors and investment bankers. We believe that our due diligence methodology allows us to screen a high volume of potential investment opportunities ona consistent and thorough basis.Our due diligence typically includes: • review of historical and prospective financial information; • review and valuation of assets; • research relating to the company’s management, industry, markets, products and services and competitors; • on-site visits; • discussions with management, employees, customers or vendors of the potential portfolio company; • review of senior loan documents; and • background investigations.We also expect to evaluate the private equity sponsor making the investment. Further, due to Solar Capital Partners’ considerable repeat business withsponsors, we have direct experience with the management teams of many sponsors. A private equity sponsor is typically the controlling shareholder uponcompletion of an investment and as such is considered critical to the success of the investment. The equity sponsor is evaluated along several key criteria,including: • Investment track record; • Industry experience; • Capacity and willingness to provide additional financial support to the company through additional capital contributions, if necessary; and • Reference checks.Throughout the diligence process, a deal team is in constant dialogue with the management team of the company in which we are considering to invest toensure that any concerns are addressed as early as possible through the process and that unsuitable investments are filtered out before considerable time hasbeen invested.Upon the completion of due diligence and a decision to proceed with an investment in a company, the investment professionals leading the investmentpresent the investment opportunity to Solar Capital Partners’ investment committee, which then determine whether to pursue the potential investment.Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing of theinvestment, as well as other outside advisers, as appropriate.The Investment CommitteeAll new investments are required to be approved by a consensus of the investment committee of Solar Capital Partners, which is led by Messrs. Grossand Spohler. The members of Solar Capital Partners’ investment committee receive no compensation from us. Such members may be employees or partners ofSolar Capital Partners and may receive compensation or profit distributions from Solar Capital Partners. 18Table of ContentsInvestment StructureOnce we determine that a prospective portfolio company is suitable for investment, we will to work with the management of that company and its othercapital providers, including senior, junior and equity capital providers, to structure an investment. We negotiate among these parties to agree on how ourinvestment is expected to perform relative to the other capital in the portfolio company’s capital structure.We seek to invest in portfolio companies primarily in the form of senior loans. These senior loans typically have current cash pay interest with someamortization of principal. Interest is typically paid on a floating rate basis, often with a floor on the LIBOR rate. We generally seek to obtain security interestsin the assets of our portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first or secondpriority liens on the assets of a portfolio company.Typically, we expect that our senior loans will have final maturities of four to seven years. However, we expect that our portfolio companies often mayrepay these loans early, generally within three years from the date of initial investment.We seek to tailor the terms of the investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating astructure that protects our rights and manages our risk while creating incentives for the portfolio company to achieve its business plan and improve itsprofitability. We seek to limit the downside potential of our investments by negotiating covenants in connection with our investments that afford our portfoliocompanies as much flexibility in managing their businesses as possible, consistent with preservation of our capital. Such restrictions may include affirmativeand negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation or participation rights.We seek to hold most of our investments to maturity or repayment, but have the ability to sell our investments earlier.Ongoing Relationships with Portfolio CompaniesMonitoring. Solar Capital Partners monitors our portfolio companies on an ongoing basis. Solar Capital Partners monitors the financial trends of eachportfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.Solar Capital Partners has several methods of evaluating and monitoring the performance and fair value of our investments, which include thefollowing: • Assessment of success in adhering to each portfolio company’s business plan and compliance with covenants; • Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financialposition, requirements and accomplishments; • Comparisons to other Solar Capital and Solar Senior Capital portfolio companies in the industry, if any; and • Review of monthly and quarterly financial statements, asset valuations, and financial projections for portfolio companies.In addition to various risk management and monitoring tools, Solar Capital Partners also uses an investment rating system to characterize and monitorour expected level of returns on each investment in our portfolio. 19Table of ContentsWe use an investment rating scale of 1 to 4. The following is a description of the conditions associated with each investment rating: InvestmentRating Summary Description1 Involves the least amount of risk in our portfolio, the portfolio company is performing above expectations, and the trends and riskfactors are generally favorable (including a potential exit)2 Risk that is similar to the risk at the time of origination, the portfolio company is performing as expected, and the risk factors areneutral to favorable; all new investments are initially assessed a grade of 23 The portfolio company is performing below expectations, may be out of compliance with debt covenants, and requires procedures forcloser monitoring4 The investment is performing well below expectations and is not anticipated to be repaid in fullSolar Capital Partners monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. As of December 31,2011, the weighted average investment rating on the fair market value of our portfolio was 2.0. In connection with our valuation process, Solar CapitalPartners reviews these investment ratings on a quarterly basis.Valuation ProceduresWe will conduct the valuation of our assets, pursuant to which our net asset value shall be determined, at all times consistent with U.S. generallyaccepted accounting principles (“GAAP”) and the 1940 Act. We will generally value our assets on a quarterly basis, or more frequently if required under the1940 Act. Our valuation procedures are set forth in more detail below:Securities for which market quotations are readily available on an exchange shall be valued at the closing price on the day of valuation. We may alsoobtain quotes with respect to certain of our investments from pricing services or brokers or dealers in order to value assets. When doing so, we determinewhether the quote obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the quote obtained.Securities for which reliable market quotations are not readily available or for which the pricing source does not provide a valuation or methodology orprovides a valuation or methodology that, in the judgment of our investment adviser or board of directors, does not represent fair value, shall each be valuedas follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment;(ii) preliminary valuation conclusions are documented and discussed with our senior management; (iii) independent third-party valuation firms engaged by, oron behalf of, the board of directors will conduct independent appraisals and review management’s preliminary valuations and make their own assessment for(a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of our total assets, plus availableborrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in default; (iv) the board of directorswill discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviser and, whereappropriate, the respective third-party valuation firms.The recommendation of fair value will generally be based on the following factors, as relevant: • the nature and realizable value of any collateral; • the portfolio company’s ability to make payments; • the portfolio company’s earnings and discounted cash flow; • the markets in which the issuer does business; and • comparisons to publicly traded securities. 20Table of ContentsSecurities for which market quotations are not readily available or for which a pricing source is not sufficient may include, but are not limited to, thefollowing: • private placements and restricted securities that do not have an active trading market; • securities whose trading has been suspended or for which market quotes are no longer available; • debt securities that have recently gone into default and for which there is no current market; • securities whose prices are stale; • securities affected by significant events; and • securities that the investment adviser believes were priced incorrectly.Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty withrespect to the possible effect of such valuations, and any change in such valuations, on our financial statements.CompetitionOur primary competitors provide financing to middle-market companies and include other business development companies, commercial andinvestment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity funds. Additionally,alternative investment vehicles, such as hedge funds, frequently invest in middle-market companies. As a result, competition for investment opportunities atmiddle-market companies can be intense. However, we believe that there has been a reduction in the amount of debt capital available since the downturn in thecredit markets, which began in mid-2007, and that this has resulted in a less competitive environment for making new investments. While many middle-market companies were previously able to raise senior debt financing through traditional large financial institutions, we believe this approach to financing willbecome more difficult as implementation of U.S. and international financial reforms, such as Basel 3, will limit the capacity of large financial institutions tohold non-investment grade leveraged loans on their balance sheets. We believe that many of these financial institutions have de-emphasized their service andproduct offerings to middle-market companies in particular.Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example,some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may havehigher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships thanus. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a business development company.We use the industry information available to Messrs. Gross and Spohler and the other investment professionals of Solar Capital Partners to assess investmentrisks and determine appropriate pricing for our investments in portfolio companies. In addition, we believe that the relationships of Messrs. Gross and Spohlerand the other investment professionals of our investment adviser enable us to learn about, and compete effectively for, financing opportunities with attractiveleveraged companies in the industries in which we seek to invest.StaffingWe do not currently have any employees. Mr. Gross, our chairman and chief executive officer, and Mr. Spohler, our chief operating officer, currentlyserve as the managing member and a partner, respectively, of our investment adviser, Solar Capital Partners. Nicholas Radesca, our chief financial officerand corporate secretary, is an employee of Solar Capital Management, and performs his functions as chief financial officer under the terms of ourAdministration Agreement. Guy Talarico, our chief compliance officer, is the chief executive officer of Alaric Compliance Services, LLC, and performs hisfunctions as our chief compliance officer under the terms of an agreement between Solar Capital Management and Alaric Compliance Services, LLC. SolarCapital Management has retained Mr. Talarico and Alaric Compliance Services, LLC pursuant to its obligations under our Administration Agreement. 21Table of ContentsOur day-to-day investment operations will be managed by Solar Capital Partners. Solar Capital Partners’ investment personnel currently consists of itssenior investment professionals, Messrs. Gross, Spohler, Gerson, Henley, Mait and Shaikh, and a team of additional experienced investment professionals.Based upon its needs, Solar Capital Partners may hire additional investment professionals. In addition, we will reimburse Solar Capital Management for theallocable portion of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees andexpenses associated with performing compliance functions, and the compensation of our chief financial officer and any administrative support staff.Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. Many of theserequirements affect us. For example: • Pursuant to Rule 13a-14 of the 1934 Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financialstatements contained in our periodic reports; • Pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls andprocedures; • Pursuant to Rule 13a-15 of the 1934 Act, our management must prepare an annual report regarding its assessment of the effectiveness of internalcontrols over financial reporting and beginning with our 2012 fiscal year, obtain an audit of the effectiveness of internal controls over financialreporting performed by our independent registered public accounting firm; and • Pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the 1934 Act, our periodic reports must disclose whether there were significantchanges in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, includingany corrective actions with regard to significant deficiencies and material weaknesses.The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and theregulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and willtake actions necessary to ensure that we are in compliance therewith.Available InformationYou may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, onofficial business days during the hours of 10:00 am to 3:00 pm. You may obtain information on the operation of the Public Reference Room by calling the SECat 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers thatfile electronically with the SEC. The address of that site is (http://www.sec.gov).Our internet address is www.solarseniorcap.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, orfurnish it to, the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K, and you should notconsider information contained on our website to be part of this annual report on Form 10-K. Item 1A.Risk FactorsBefore you invest in our common stock, you should be aware of various risks, including those described below. The risks set out below are notthe only risks we face. If any of the following events occur, our business, financial condition and results of operations could be materially adverselyaffected. In such case, our net asset value could decline, and you may lose all or part of your investment. 22Table of ContentsRisks Related to Our InvestmentsWe operate in a highly competitive market for investment opportunities.A number of entities compete with us to make the types of investments that we target in leveraged companies. We compete with other BDCs, public andprivate funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, privateequity funds. Many of our potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than wedo. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of ourcompetitors may have higher risk tolerances or different risk assessments than we do, which could allow them to consider a wider variety of investments andestablish more relationships than us. Furthermore, many of our potential competitors are not subject to the regulatory restrictions that the 1940 Act imposes onus. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results ofoperations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we canoffer no assurance that we will be able to identify and make investments that are consistent with our investment objective.We do not seek to compete primarily based on the interest rates we offer, and we believe that some of our competitors may make loans with interest ratesthat may be comparable to or lower than the rates we may offer. We may lose investment opportunities if we do not match our competitors’ pricing, terms andstructure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of creditloss.Our investments are very risky and highly speculative.We invest primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, made to middle-market companies whosedebt is rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may beconsidered “high risk” compared to debt instruments that are rated above investment grade.When we make a senior secured term loan investment in a portfolio company, we generally take a security interest in the available assets of the portfoliocompany, including the equity interests of its subsidiaries, which we expect to help mitigate the risk that we will not be repaid. However, there is a risk that thecollateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate invalue based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital,and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial conditionand prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently,the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the loan’s terms, or at all, or that we will beable to collect on the loan should we be forced to enforce our remedies.In addition, investing in middle-market companies involves a number of significant risks, including: • these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, whichmay be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may haveobtained in connection with our investment; • they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to renderthem more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; 23Table of Contents • they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation ortermination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; • they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changingbusinesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations,finance expansion or maintain their competitive position. In addition, our executive officers, directors and our investment adviser may, in theordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies; and • they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay theiroutstanding indebtedness upon maturity.The lack of liquidity in our investments may adversely affect our business.We generally make investments in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or willotherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the needarises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we havepreviously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extentthat we have material non-public information regarding such portfolio company.Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant lossif any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.Although we do not intend to focus our investments in any specific industries, our portfolio may be concentrated in a limited number of portfoliocompanies and industries. Beyond the asset diversification requirements associated with our qualification as a RIC under Subchapter M of the Code, we willnot have fixed guidelines for diversification, and while we will not target any specific industries, our investments may be concentrated in relatively fewindustries. As a result, the aggregate returns we will realize may be significantly adversely affected if a small number of investments perform poorly or if weneed to write down the value of any one investment. Additionally, a downturn in any particular industry in which we are invested could also significantlyimpact the aggregate returns we realize.Capital markets have recently been in a period of disruption and instability. These market conditions have materially and adversely affected debtand equity capital markets in the United States and abroad, which may in the future have a negative impact on our business and operations.The global capital markets have recently been in a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions.Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions thatmaterially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a wholeand financial services firms in particular. These conditions could continue for a prolonged period of time or worsen in the future. While these conditionspersist, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital. Equity capitalmay be difficult to raise because, subject to some limited exceptions which apply to us, as a BDC we are generally not able to issue additional shares of ourcommon stock at a price less than net asset value. In addition, our ability to incur indebtedness (including by issued preferred stock) is limited by applicableregulations such that our asset coverage, as defined in the 1940 Act, must equal at 24Table of Contentsleast 200% immediately after each time we incur indebtedness. The debt capital that will be available, if at all, may be at a higher cost and on less favorableterms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.The illiquidity of our investments may make it difficult for us to sell such investments if required. As a result, we may realize significantly less thanthe value at which we will have recorded our investments. In addition, significant changes in the capital markets may have a negative effect on the valuationsof our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investmentsfor liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.The recent downgrade of the U.S. credit rating and the economic crisis in Europe could negatively impact our business, financial conditionand results of operations.Recent U.S. debt ceiling and budget deficit concerns, together with signs of deteriorating sovereign debt conditions in Europe, have increased thepossibility of additional credit-rating downgrades and economic slowdowns. Although U.S. lawmakers passed legislation to raise the federal debt ceiling,Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States from “AAA” to “AA+” in August 2011. The impact ofthis or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis inEurope with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations is inherently unpredictable andcould adversely effect the U.S. and global financial markets and economic conditions. There can be no assurance that governmental or other measures to aideconomic recovery will be effective. These developments, and the government’s credit concerns in general, could cause interest rates and borrowing costs torise, which may negatively impact our ability to access the capital markets on favorable terms. In addition, the decreased credit rating could create broaderfinancial turmoil and uncertainty, which may weigh heavily on our stock price. Continued adverse economic conditions could have a material adverse effecton our business, financial condition and results of operations. Economic recessions or downturns could impair our portfolio companies and harm ouroperating results.Economic recessions or downturns could impair our portfolio companies and harm our operating results. Many of our potential portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during theseperiods. Therefore, our non-performing assets may increase and the value of our portfolio may decrease during these periods as we will be required to recordthe values of our investments. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equityinvestments at fair value. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets.Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extendcredit to us. These events could prevent us from increasing investments and harm our operating results.A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially,acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardizethe portfolio company’s ability to meet its obligations under the debt that we will hold. We may incur additional expenses to the extent necessary to seekrecovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt,depending on the facts and circumstances, including the extent to which we will actually provide significant managerial assistance to that portfolio company, abankruptcy court might recharacterize our debt holding and subordinate all or a portion of our claim to that of other creditors. 25Table of ContentsPrice declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our netasset value through increased net unrealized depreciation.As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith byor under the direction of our board of directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation.The unprecedented declines in prices and liquidity in the corporate debt markets from 2008 through mid-2010 have resulted in significant net unrealizeddepreciation in the portfolios of many existing BDCs, reducing their net asset value. Depending on market conditions, we may face similar losses, whichcould reduce our net asset value and have a material adverse impact on our business, financial condition and results of operations.The affect of global climate change may impact the operations of our portfolio companies.There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may beadversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature andhumidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude ofany changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services ismaterial to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreasedrevenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, includingservice interruptions.Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, inorder to: (i) increase or maintain in whole or in part our ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in theoriginal or subsequent financing; or (iii) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments orotherwise lack sufficient funds to make those investments. We will have the discretion to make any follow-on investments, subject to the availability of capitalresources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initialinvestment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make adesired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, either becausewe will prefer other opportunities or because we will be subject to BDC requirements that would prevent such follow-on investments or the desire to maintainour RIC tax status.Because we generally will not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control overour portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.Although we may do so in the future, initially we do not intend to hold controlling equity positions in our portfolio companies. As a result, we will besubject to the risk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfoliocompany may take risks or otherwise act in ways that will be adverse to our interests. Due to the lack of liquidity of the investments that we will typicallyhold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and maytherefore suffer a decrease in the value of our investments. 26Table of ContentsAn investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available informationabout these companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability toeconomic downturns.We invest primarily in privately held companies. Generally, little public information exists about these companies, and we will be required to rely on theability of Solar Capital Partners’ investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. Ifwe will be unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose moneyon our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence than larger competitors. Thesefactors could adversely affect our investment returns as compared to companies investing primarily in the securities of public companies.Our portfolio companies may incur debt that ranks equally with, or senior to, some of our investments in such companies.We invest primarily in senior secured loans, including unitranche, second lien, as well as unsecured debt instruments issued by our portfoliocompanies. If we invest in unitranche, second lien, or unsecured debt instruments, our portfolio companies typically may be permitted to incur other debt thatranks equally with, or senior to, such debt instruments. By their terms, such debt instruments may provide that the holders are entitled to receive payment ofinterest or principal on or before the dates on which we will be entitled to receive payments in respect of the debt securities in which we will invest. Also, in theevent of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to ourinvestment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. Insuch cases, after repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In thecase of debt ranking equally with debt securities in which we will invest, we would have to share on an equal basis any distributions with other creditorsholding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.Our investment strategy contemplates potential investments in debt securities of foreign companies. Investing in foreign companies may expose us toadditional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and socialinstability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, highertransaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractualobligations, lack of uniform accounting and auditing standards and greater price volatility.Although most of our investments will be U.S. dollar-denominated, any investments denominated in a foreign currency will be subject to the risk thatthe value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances,the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capitalappreciation, and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact,hedge currency risk, or that if we do, such strategies will be effective.We may expose ourselves to risks if we engage in hedging transactions.If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forwardcontracts, currency options and interest rate swaps, caps, collars and 27Table of Contentsfloors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates.Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or preventlosses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, therebyoffsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlyingportfolio positions should increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that weare not able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlationbetween such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedgeand expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securitiesdenominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.Our investment adviser may not be able to achieve the same or similar returns as those achieved by our senior investment professionals whilethey were employed at prior positions.Although in the past Mr. Gross held senior positions at a number of investment firms, including Solar Capital, Apollo Investment Corporation andApollo Management, L.P., Mr. Gross’ track record and achievements are not necessarily indicative of future results that will be achieved by our investmentadviser. In his role at such other firms, Mr. Gross was part of an investment team, and he was not solely responsible for generating investment ideas. Inaddition, such investment teams arrived at investment decisions by consensus.Risks Relating to an Investment in Our SecuritiesOur shares may trade at a substantial discount from net asset value and may continue to do so over the long term.Shares of closed-end investment companies have frequently traded at a market price that is less than the net asset value that is attributable to thoseshares. The possibility that our shares of common stock will trade at a substantial discount from net asset value over the long term is separate and distinctfrom the risk that our net asset value will decrease. We cannot predict whether shares of our common stock will trade above, at or below our net asset value. Ifour common stock trades below its net asset value, we will generally not be able to issue additional shares or sell our common stock at its market price withoutfirst obtaining the approval for such issuance from our stockholders and our independent directors. If additional funds are not available to us, we could beforced to curtail or cease our new lending and investment activities, and our net asset value could decrease and our level of distributions could be impacted.Our common stock price may be volatile and may decrease substantially.The trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market may be higher orlower than the price you pay, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance.These factors include, but are not limited to, the following: • price and volume fluctuations in the overall stock market from time to time; • investor demand for our shares; • significant volatility in the market price and trading volume of securities of BDCs or other companies in our sector, which are not necessarilyrelated to the operating performance of these companies; • changes in regulatory policies or tax guidelines with respect to RICs or BDCs; • failure to qualify as a RIC, or the loss of RIC status; 28Table of Contents • any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; • changes, or perceived changes, in the value of our portfolio investments; • departures of Solar Capital Partners’ key personnel; • operating performance of companies comparable to us; or • general economic conditions and trends and other external factors.In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought againstthat company. Due to the potential volatility of our stock price once a market for our stock is established, we may become the target of securities litigation inthe future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.There is a risk that our stockholders may not receive distributions or that our distributions may not grow over time.We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that wewill achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, dueto the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.We may choose to pay dividends in our own common stock, in which case our stockholders may be required to pay federal income taxes inexcess of the cash dividends they receive.We may distribute taxable dividends that are payable in cash or shares of our common stock at the election of each stockholder. IRS Revenue Procedure2010-12 temporarily allows a RIC whose stock is publicly traded on an established securities market in the United States to distribute its own stock as adividend for the purpose of fulfilling its distribution requirements. Pursuant to this revenue procedure, a RIC may treat a distribution of its own stock asfulfilling its distribution requirements if (i) the distribution is declared on or before December 31, 2012, with respect to a taxable period ending on or beforeDecember 31, 2011, and (ii) each shareholder may elect to receive his or her entire distribution in either cash or stock of the RIC subject to a limitation on theaggregate amount of cash to be distributed to all shareholders, which limitation must be at least 10% of the aggregate declared distribution. Under RevenueProcedure 2010-12, if too many shareholders elect to receive cash, each shareholder electing to receive cash will receive a pro rata amount of cash (with thebalance of the distribution paid in stock). In no event will any shareholder, electing to receive cash, receive less than 10% of his or her entire distribution incash. If the requirements of Revenue Procedure 2010-12 are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal tothe amount of cash that could have been received instead of stock.Where Revenue Procedure 2010-12 is not currently applicable, the Internal Revenue Service has also issued private letter rulings on cash/stock dividendspaid by RICs and real estate investment trusts using a 20% cash standard (and, more recently, the 10% cash standard of Revenue Procedure 2010-12) ifcertain requirements are satisfied. Stockholders receiving such dividends will be required to include the full amount of the dividend (including the portionpayable in stock) as ordinary income (or, in certain circumstances, long-term capital gain) to the extent of our current and accumulated earnings and profitsfor federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividendsreceived. If a U.S. stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amountincluded in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of 29Table of Contentssuch dividend that is payable in common stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock inorder to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock. It is unclear whether and to what extent wewill be able to pay taxable dividends of the type described in this paragraph (whether pursuant to Revenue Procedure 2010-12, a private letter ruling orotherwise).Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.The 500,000 shares that were issued to Solar Senior Capital Investors LLC in the Concurrent Private Placement pursuant to the exemption fromregistration provided by Section 4(2) under the Securities Act were subject to a 180 day lock-up period. Upon expiration of this lock-up period, such sharesbecame generally freely tradable in the public market, subject to the provisions of Rule 144 promulgated under the Securities Act. Sales of substantial amountsof our common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If thisoccurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.We have also committed to file a registration statement to register the resale of the shares of common stock that were issued in the Concurrent PrivatePlacement to Solar Senior Capital Investors LLC within 60 days of receiving a request from Solar Senior Capital Investors LLC to do so. We have committedto use our commercially reasonable efforts to obtain effectiveness of such registration statement as soon as reasonably practicable after the filing of suchregistration statement. Assuming effectiveness of such registration statement, Solar Senior Capital Investors LLC will generally be able to resell its shares ofcommon stock without restriction.Risks Relating to Our Business and StructureWe have a limited operating history.We were formed and commenced operations in December 2010. As a result of a lack of operating history, we are subject to many of the business risksand uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of yourinvestment could decline substantially.We are dependent upon Solar Capital Partners’ key personnel for our future success.We depend on the diligence, skill and network of business contacts of Messrs. Gross and Spohler, who serve as the managing member and a partner ofSolar Capital Partners, respectively, and who lead Solar Capital Partners’ investment team. Messrs. Gross and Spohler, together with the other dedicatedinvestment professionals available to Solar Capital Partners, evaluate, negotiate, structure, close and monitor our investments. Our future success will dependon the continued service of Messrs. Gross and Spohler and the other investment professionals available to Solar Capital Partners. We cannot assure you thatunforeseen business, medical, personal or other circumstances would not lead any such individual to terminate his relationship with us. The loss ofMr. Gross or Mr. Spohler, or any of the other senior investment professionals who serve on Solar Capital Partners’ investment team, could have a materialadverse effect on our ability to achieve our investment objective as well as on our financial condition and results of operations. In addition, we can offer noassurance that Solar Capital Partners will remain our investment adviser.The senior investment professionals of Solar Capital Partners are and may in the future become affiliated with entities engaged in business activitiessimilar to those intended to be conducted by us, and may have conflicts of interest in allocating their time. We expect that Messrs. Gross and Spohler willdedicate a significant portion of their time to the activities of Solar Senior Capital; however, they may be engaged in other business activities which coulddivert their time and attention in the future. 30Table of ContentsOur business model depends to a significant extent upon strong referral relationships with financial sponsors, and the inability of the seniorinvestment professionals of our investment adviser to maintain or develop these relationships, or the failure of these relationships to generateinvestment opportunities, could adversely affect our business.We expect that the principals of our investment adviser will maintain and develop their relationships with financial sponsors, and we will rely to asignificant extent upon these relationships to provide us with potential investment opportunities. If the senior investment professionals of our investmentadviser fail to maintain their existing relationships or develop new relationships with other sponsors or sources of investment opportunities, we will not be ableto grow our investment portfolio. In addition, individuals with whom the senior investment professionals of our investment adviser have relationships are notobligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities forus.A disruption in the capital markets and the credit markets could negatively affect our business.As a BDC, we have to maintain our ability to raise additional capital for investment purposes. Without sufficient access to the capital markets or creditmarkets, we may be forced to curtail our business operations or we may not be able to pursue new business opportunities. Disruptive conditions in thefinancial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact ourresults of operations and financial condition.If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the 1940 Act. Any suchfailure would affect our ability to issue senior securities, including borrowings, and pay dividends, which could materially impair our business operations.Our liquidity could be impaired further by an inability to access the capital markets. For example, we cannot be certain that we will be able to consummatenew borrowing facilities to provide capital for normal operations, including new originations. Reflecting concern about the stability of the financial markets,many lenders and institutional investors have reduced or ceased providing funding to borrowers. This market turmoil and tightening of credit have led toincreased market volatility and widespread reduction of business activity generally.If we are unable to consummate new facilities on commercially reasonable terms, our liquidity will be reduced significantly. If we consummate newfacilities but are then unable to repay amounts outstanding under such facilities, and are declared in default or are unable to renew or refinance these facilities,we would not be able to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances thatwe may be unable to control, such as inaccessibility to the credit markets, a severe decline in the value of the U.S. dollar, a further economic downturn or anoperational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and marketconditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectorsof the financial markets could adversely impact our business.Our financial condition and results of operations will depend on our ability to manage future growth effectively.Our ability to achieve our investment objective and to grow depends on Solar Capital Partners’ ability to identify, invest in and monitor companies thatmeet our investment criteria.Accomplishing this result on a cost-effective basis is largely a function of Solar Capital Partners’ structuring of the investment process, its ability toprovide competent, attentive and efficient services to us and its ability to access financing for us on acceptable terms. The investment team of Solar CapitalPartners has substantial responsibilities under the Investment Advisory and Management Agreement, and they may also be called upon to 31Table of Contentsprovide managerial assistance to our portfolio companies as the principals of our administrator. In addition, the members of Solar Capital Partners’ investmentteam have similar responsibilities with respect to the management of Solar Capital’s investment portfolio. Such demands on their time may distract them orslow our rate of investment. In order to grow, Solar Capital Partners will need to retain, train, supervise and manage new investment professionals. However,we can offer no assurance that any such investment professionals will contribute effectively to the work of the investment adviser. Any failure to manage ourfuture growth effectively could have a material adverse effect on our business, financial condition and results of operations.We may need to raise additional capital to grow because we must distribute most of our income.We may need additional capital to fund growth in our investments. We expect to issue equity securities and expect to borrow from financial institutionsin the future. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our investment company taxableincome to our stockholders to maintain our regulated investment company status. As a result, any such cash earnings may not be available to fund investmentoriginations. We expect to borrow from financial institutions and issue additional debt and equity securities. If we fail to obtain funds from such sources orfrom other sources to fund our investments, it could limit our ability to grow, which may have an adverse effect on the value of our securities. In addition, as aBDC, our ability to borrow or issue additional preferred stock may be restricted if our total assets are less than 200% of our total borrowings and preferredstock.Any failure on our part to maintain our status as a BDC would reduce our operating flexibility and we may be limited in our investmentchoices as a BDC.The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their total assets inspecified types of “qualifying assets”, primarily in private companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. governmentsecurities and other high quality debt investments that mature in one year or less. In addition, subject to certain limited exceptions, an investment in an issuerthat has outstanding securities listed on a national exchange may be treated as a qualifying asset only if such issuer has a market capitalization that is lessthan $250 million at the time of such investment. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could causethe SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders,we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as aBDC, we may be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with such regulationswould significantly decrease our operating flexibility, and could significantly increase our costs of doing business.Regulations governing our operation as a BDC affect our ability to, and the way in which we will, raise additional capital. As a BDC, thenecessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “seniorsecurities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue seniorsecurities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness notrepresented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If thathappens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a timewhen such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our commonstockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increasedrisk of loss. 32Table of ContentsAs of February 21, 2012, we had $8.6 million outstanding under the Credit Facility. If we issue preferred stock, the preferred stock would rank“senior” to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights,preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying,deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your bestinterest.We will not be generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, orwarrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if our board ofdirectors determines that such sale is in the best interests of Solar Senior Capital and its stockholders, and our stockholders approve such sale. In any suchcase, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our board of directors, closelyapproximates the market value of such securities (less any distributing commission or discount). We do not presently intend to issue our common stock at aprice below the then-current net asset value per share of our common stock during the twelve months following completion of our initial public offering. If weraise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentageownership of our stockholders at that time will decrease, and you might experience dilution.At our 2012 Annual Stockholders Meeting, subject to certain determinations required to be made by our board of directors, we will seek the approval ofour stockholders to provide us with the ability to sell or otherwise issue shares of our common stock at a price below the then current net asset value per shareduring a period beginning in May 2012 and expiring on the earlier of the one-year anniversary of the date of the 2012 Annual Stockholders Meeting and thedate of our 2013 Annual Stockholders Meeting, which is expected to be held in May 2013. We cannot assure you that our stockholders will approve thisproposal.We may borrow money, which would magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in oursecurities. As of February 21, 2012, we had $8.6 million outstanding under the Credit Facility. We may borrow from and issue senior debt securities tobanks, insurance companies and other lenders in the future. Lenders of these senior securities will have fixed dollar claims on our assets that are superior tothe claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of ourassets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease inour income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could also negatively affect our ability tomake dividend payments on our common stock. Leverage is generally considered a speculative investment technique. Our ability to service any debt that weincur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as themanagement fee payable to our investment adviser, Solar Capital Partners, will be payable based on our gross assets, including those assets acquired throughthe use of leverage, Solar Capital Partners will have a financial incentive to incur leverage which may not be consistent with our stockholders’ interests. Inaddition, our common stockholders will bear the burden of any increase in our expenses as a result of leverage, including any increase in the management feepayable to Solar Capital Partners.As a BDC, we are generally required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of ourborrowings and any preferred stock that we may issue in the future, of at least 200%. If this ratio declines below 200%, we may not be able to incur additionaldebt and could be required by law to sell a portion of our investments to repay some debt when it is disadvantageous to do so, which could have a materialadverse effect on our operations, and we may not be able to make distributions. The 33Table of Contentsamount of leverage that we employ will depend on our investment adviser’s and our board of directors’ assessment of market and other factors at the time ofany proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.In addition, the Credit Facility, and any other debt facility into which we may enter would likely impose financial and operating covenants that restrictour business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required tomaintain our status as a RIC under Subchapter M of the Code.The debt securities that we may issue will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. We,and indirectly our stockholders, bear the cost of issuing and servicing such debt securities. Any convertible or exchangeable securities that we issue in thefuture may have rights, preferences and privileges more favorable than those of our common stock.Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returnson the portfolio, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the tablebelow. Assumed total return on our portfolio(net of expenses) (10)% (5)% 0% 5% 10%Corresponding return to stockholder(1) (11.0)% (5.6)% (0.1)% 5.3% 10.7% (1)Assumes $187.4 million in total assets and $8.6 million in total debt outstanding, which reflects our total assets and total debt outstanding as ofDecember 31, 2011, and a cost of funds of 2.6%. Excludes non-leverage related liabilities.To the extent we use debt or preferred stock to finance our investments, changes in interest rates will affect our cost of capital and netinvestment income.To the extent we borrow money, or issue preferred stock, to make investments, our net investment income will depend, in part, upon the differencebetween the rate at which we borrow funds or pay dividends on preferred stock and the rate at which we invest those funds. As a result, we can offer noassurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in the event we use debt tofinance our investments. In periods of rising interest rates, our cost of funds would increase, except to the extent we issue fixed rate debt or preferred stock,which could reduce our net investment income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt.We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include variousinterest rate hedging activities to the extent permitted by the 1940 Act.You should also be aware that a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments.Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase ofthe amount of incentive fees payable to our investment adviser with respect to our pre-incentive fee net investment income.As of December 31, 2011, we had $8.6 million outstanding under the Credit Facility. 34Table of ContentsWe may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or lossand the risks of investing in us in the same way as our borrowings.Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on anypreferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must takepreference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses andare not entitled to participate in any income or appreciation in excess of their stated preference.There will be uncertainty as to the value of our portfolio investments.A large percentage of our portfolio investments will be in the form of securities that are not publicly traded. The fair value of securities and otherinvestments that are not publicly traded may not be readily determinable. We will value these securities and the Credit Facility on a quarterly basis inaccordance with our valuation policy, which will be at all times consistent with GAAP. Our board of directors may utilize the services of third-party valuationfirms to aid it in determining the fair value of these securities and the Credit Facility. The board of directors will discuss valuations and determine the fairvalue in good faith based on the input of our investment adviser and the respective third-party valuation firms. The factors that may be considered in fairvalue pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, themarkets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Becausesuch valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of timeand may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for thesesecurities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher thanthe values that we ultimately realize upon the disposal of such securities.We may experience fluctuations in our quarterly results.We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the debt securitieswe acquire, the default rate on such securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains orlosses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period shouldnot be relied upon as being indicative of performance in future periods.There are significant potential conflicts of interest, including Solar Capital Partners’ management of Solar Capital, which could impact ourinvestment returns.Our executive officers and directors, as well as the current and future partners of our investment adviser, Solar Capital Partners, may serve as officers,directors or principals of entities that operate in the same or a related line of business as we do. Currently, the executive officers and directors, as well as thecurrent partners of our investment adviser, Solar Capital Partners, serve as officers and directors of Solar Capital, a publicly-traded BDC. Accordingly, theymay have obligations to investors in those entities, including to investors of Solar Capital, the fulfillment of which obligations might not be in the best interestsof us or our stockholders. In addition, we note that any affiliated investment vehicle currently existing, or formed in the future, and managed by ourinvestment adviser or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and,accordingly, may invest in asset classes similar to those targeted by us. As a result, Solar Capital Partners may face conflicts in allocating investmentopportunities between us and such other entities. Although Solar Capital Partners will endeavor to allocate investment opportunities in a fair and equitablemanner, it is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by ourinvestment adviser or an investment manager affiliated with our investment adviser. In any such case, when Solar Capital Partners identifies an investment, itwill be forced to choose which investment fund should make the investment. 35Table of ContentsWe may co-invest on a concurrent basis with Solar Capital, and any other affiliates that our investment adviser forms in the future, subject tocompliance with applicable regulations and regulatory guidance and our allocation procedures. In certain circumstances, negotiated co-investments may bemade only if we receive an order from the SEC permitting us to do so. There can be no assurance that any such order will be obtained.In the course of our investing activities, we pay management and incentive fees to Solar Capital Partners and reimburse Solar Capital Partners for certainexpenses it incurs. As a result, investors in our common stock will invest on a “gross” basis and receive distributions on a “net” basis after expenses,resulting in a lower rate of return than an investor might achieve through direct investments. Accordingly, there may be times when the management team ofSolar Capital Partners has interests that differ from those of our stockholders, giving rise to a conflict.We have entered into a royalty-free license agreement with our investment adviser, pursuant to which our investment adviser has granted us a non-exclusive license to use the name “Solar Senior Capital.” Under the License Agreement, we have the right to use the “Solar Senior Capital” name for so long asSolar Capital Partners or one of its affiliates remains our investment adviser. In addition, we pay Solar Capital Management, an affiliate of Solar CapitalPartners, our allocable portion of overhead and other expenses incurred by Solar Capital Management in performing its obligations under the AdministrationAgreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of our chieffinancial officer and any administrative support staff. These arrangements create conflicts of interest that our board of directors must monitor.We may be obligated to pay our investment adviser incentive compensation even if we incur a loss.Our investment adviser will be entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our pre-incentive fee net investment income for that quarter (before deducting incentive compensation) above a performance threshold for that quarter. Accordingly,since the performance threshold is based on a percentage of our net asset value, decreases in our net asset value make it easier to achieve the performancethreshold. Our pre-incentive fee net investment income for incentive compensation purposes excludes realized and unrealized capital losses or depreciation thatwe may incur in the fiscal quarter, even if such capital losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we maybe required to pay Solar Capital Partners incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net lossfor that quarter.Our incentive fee may induce Solar Capital Partners to pursue speculative investments.The incentive fee payable by us to Solar Capital Partners may create an incentive for Solar Capital Partners to pursue investments on our behalf that areriskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to our investment adviser willbe calculated based on a percentage of our return on invested capital. This may encourage our investment adviser to use leverage to increase the return on ourinvestments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. Inaddition, the investment adviser will receive the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of theincentive fee based on income, there is no hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment advisermay have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practicecould result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularlyduring economic downturns.The incentive fee payable by us to our investment adviser also may induce Solar Capital Partners to invest on our behalf in instruments that have adeferred interest feature, even if such deferred payments would not provide cash necessary to enable us to pay current distributions to our shareholders. Underthese investments, we 36Table of Contentswould accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investmentincome used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of this incentive fee would be based onincome that we have not yet received in cash. In addition, the “catch-up” portion of the incentive fee may encourage Solar Capital Partners to accelerate or deferinterest payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations in timing and dividend amounts.We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to theextent we so invest, will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remainobligated to pay management and incentive fees to Solar Capital Partners with respect to the assets invested in the securities and instruments of otherinvestment companies. With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee ofSolar Capital Partners as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.We will become subject to corporate-level income tax if we are unable to qualify and maintain our qualification as a regulated investmentcompany under Subchapter M of the Code.Although we intend to elect to be treated as a RIC under Subchapter M of the Code for 2011 and succeeding tax years, no assurance can be given that wewill be able to qualify for and maintain RIC status. To obtain and maintain RIC tax treatment under the Code, we must meet the following annual distribution,income source and asset diversification requirements. • The annual distribution requirement for a RIC will be satisfied if we distribute to our stockholders on an annual basis at least 90% of our netordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we may use debtfinancing, we will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and creditagreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the distribution requirement. If weare unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax. • The income source requirement will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the saleof stock or securities or similar sources. • The asset diversification requirement will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxableyear. Failure to meet those requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RICstatus. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could bemade at disadvantageous prices and could result in substantial lossesIf we fail to qualify for RIC tax treatment for any reason and remain or become subject to corporate income tax, the resulting corporate taxes couldsubstantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.We may have difficulty satisfying the annual distribution requirement in order to qualify and maintain RIC status if we recognize incomebefore or without receiving cash representing such income.For federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount, whichmay arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or contracted “payment in kind,” or PIK,interest, which represents contractual interest added to the loan balance and due at the end of the loan term. We also may be required to include in incomecertain other amounts that we will not receive in cash. 37Table of ContentsBecause in certain cases we may recognize income before or without receiving cash representing such income, we may have difficulty satisfying theannual distribution requirement applicable to RICs. Accordingly, we may have to sell some of our investments at times we would not consider advantageous,raise additional debt or equity capital or reduce new investments to meet these distribution requirements. If we are not able to obtain cash from other sources,we may fail to qualify for RIC tax treatment and thus be subject to corporate-level income tax.Our board of directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, whichcould convey special rights and privileges to its owners.Under the Maryland General Corporation Law and our charter, our board of directors is authorized to classify and reclassify any authorized butunissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the board of directorsis required by Maryland law and our charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends orother distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the board of directors could authorize the issuance ofshares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control thatmight involve a premium price for holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne byour existing common stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock.For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. In addition, the1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. Wecurrently have no plans to issue preferred stock. The issuance of preferred shares convertible into shares of common stock might also reduce the net incomeand net asset value per share of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to theextent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, couldhave an adverse effect on your investment in our common stock.Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impacton the price of our common stock.The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change incontrol of Solar Senior Capital or the removal of our directors. We are subject to the Maryland Business Combination Act, subject to any applicablerequirements of the 1940 Act. Our board of directors has adopted a resolution exempting from the Business Combination Act any business combinationbetween us and any other person, subject to prior approval of such business combination by our board, including approval by a majority of our disinteresteddirectors. If the resolution exempting business combinations is repealed or our board does not approve a business combination, the Business Combination Actmay discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from theMaryland Control Share Acquisition Act acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control ShareAcquisition Act, the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increase the difficulty ofconsummating such a transaction. However, we will amend our bylaws to be subject to the Control Share Act only if our board of directors determines that itwould be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Act does not conflict with the1940 Act. The SEC staff has issued informal guidance setting forth its position that certain provisions of the Control Share Act would, if implemented, violateSection 18(i) of the 1940 Act.We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying ourboard of directors in three classes serving staggered three-year terms, and authorizing our board of directors to classify or reclassify shares of our stock in oneor more classes or series, 38Table of Contentsto cause the issuance of additional shares of our stock, to amend our charter without stockholder approval and to increase or decrease the number of shares ofstock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or achange in control that might otherwise be in the best interests of our stockholders.Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice (except as required by the1940 Act) and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, orwithdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business,operating results and value of our stock. Nevertheless, the effects may adversely affect our business and impact our ability to make distributions.The impact of recent financial reform legislation on us is uncertain.In light of recent conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration andregulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the“Dodd-Frank Reform Act”) became effective on July 21, 2010, although many provisions of the Dodd-Frank Reform Act have delayed effectiveness or will notbecome effective until the relevant federal agencies issue new rules to implement the Dodd-Frank Reform Act. Nevertheless, the Dodd-Frank Reform Act mayhave a material adverse impact on the financial services industry as a whole and on our business, results of operations and financial condition. Accordingly,we cannot predict the effect the Dodd-Frank Act or its implementing regulations will have on our business, results of operations or financial condition.Changes in laws or regulations governing our operations may adversely affect our business.We and our portfolio companies will be subject to regulation by laws at the local, state and federal levels. These laws and regulations, as well as theirinterpretation, may be changed from time to time. Accordingly, any change in these laws or regulations could have a material adverse affect on our business.Our investment adviser can resign upon 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in adisruption in our operations that could adversely affect our financial condition, business and results of operations.Our investment adviser has the right, under the Investment Advisory and Management Agreement, to resign at any time upon 60 days’ written notice,whether we have found a replacement or not. If our investment adviser resigns, we may not be able to find a new investment adviser or hire internalmanagement with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do soquickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to paydistributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management andinvestment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertisepossessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration ofsuch management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect ourfinancial condition, business and results of operations. Item 1B.Unresolved Staff CommentsNone. 39Table of ContentsItem 2.PropertiesOur executive offices are located at 500 Park Avenue, New York, New York 10022, and are provided by Solar Capital Management in accordance withthe terms of the Administration Agreement. We believe that our office facilities are suitable and adequate for our business as it is contemplated to be conducted. Item 3.Legal ProceedingsAs of December 31, 2011, we were not subject to any pending legal proceedings. Item 4.Mine Safety DisclosuresNot applicable. 40Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesPrice Range of Common StockOur common stock is traded on the NASDAQ Global Select Market under the symbol “SUNS”. The following table sets forth, for each fiscal quartersince our initial public offering on February 24, 2011, the net asset value (“NAV”) per share of our common stock, the high and low sales prices for ourcommon stock, such sales prices as a percentage of NAV per share and quarterly distributions per share. Fiscal 2010 NAV(1) Sales Price Premium orDiscount ofHigh SalesPrice toNAV(2) Premium orDiscount ofLow SalesPrice toNAV(2) DeclaredDividends(3) High Low Fiscal 2011 Fourth Quarter $18.15 $16.58 $13.50 91.3% 74.4% $0.27 Third Quarter 17.97 18.49 14.14 102.9% 78.7% 0.23 Second Quarter 18.78 19.17 16.95 102.1% 90.3% 0.05 First Quarter 18.73 19.80 18.52 105.7% 98.9% — (1)NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and lowsales prices. The NAVs shown are based on outstanding shares at the end of each period.(2)Calculated as of the respective high or low sales price divided by the quarter end NAV.(3)Dividends are declared on a monthly basis. The amounts represent the total cash dividends declared in the specified quarter.Shares of BDCs may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares ofcommon stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term are separate and distinct from the riskthat our net asset value will decrease. Since our initial public offering on February 24, 2011, our shares of common stock have traded at both a discount and apremium to the net assets attributable to those shares.The last reported closing market price of our common stock on February 21, 2012 was $16.94 per share. As of February 21, 2012, we had 3stockholders of record.DIVIDENDSWe intend to continue to distribute monthly dividends to our stockholders. Our monthly dividends, if any, will be determined by our board of directors.We intend to elect to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our ordinaryincome and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Inaddition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, atleast annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cashdividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan soas to receive cash dividends. 41Table of ContentsWe may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount ofthese dividends and distributions from time to time. In addition, we may be limited in our ability to make dividends and distributions due to the asset coveragetest for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in current and future credit facilities.If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our RIC status. Wecannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level.All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are generally automatically reinvested inshares of our common stock. As a result, stockholders that do not participate in the dividend reinvestment plan may experience dilution over time.Stockholders who do not elect to receive dividends in shares of common stock may experience accretion to the net asset value of their shares if our shares aretrading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including theproportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the dividendpayable to a stockholder.The following table lists the monthly dividends per share of our common stock declared since our initial public offering on February 24, 2011. Date Declared Record Date Payment Amount Fiscal 2012 February 3, 2012 February 17, 2012 March 2, 2012 $0.10 January 9, 2012 January 19, 2012 February 2, 2012 0.10 Total 2012 $0.20 Fiscal 2011 December 6, 2011 December 15, 2011 December 29, 2011 $0.10 November 1, 2011 November 18, 2011 December 2, 2011 0.09 October 7, 2011 October 19, 2011 November 2, 2011 0.08 September 12, 2011 September 20, 2011 October 4, 2011 0.08 August 2, 2011 August 19, 2011 September 2, 2011 0.08 July 7, 2011 July 18, 2011 August 1, 2011 0.07 June 6, 2011 June 16, 2011 June 30, 2011 0.05 Total 2011 $0.55 Sale of Unregistered SecuritiesInformation regarding the Company’s sales of equity securities that were not registered under the Securities Act was previously included in theCompany’s quarterly report on Form 10-Q for the quarter ended March 31, 2011. 42Table of ContentsIssuer Purchases of Equity SecuritiesFor the year ended December 31, 2011, as a part of the Company’s dividend reinvestment plan for our common stockholders, we purchased 21,838shares of our common stock for approximately $345,000 in the open market in order to satisfy the reinvestment portion of our dividends. The following chartoutlines repurchases of our common stock during the year ended December 31, 2011. Month TotalNumber ofSharesPurchased AveragePrice Paidper Share Total Numberof SharesPurchased asPart of PubliclyAnnouncedPlans orPrograms MaximumNumber (orApproximateDollar Value) ofShares that MayYet Be PurchasedUnder the Plansor Programs January 2011 — — — — February 2011 — — — — March 2011 — — — — April 2011 — — — — May 2011 — — — — June 2011 837 $18.00 — — July, 2011 — — — — August, 2011 2,074 $18.00 — — September 2011 2,346 $16.30 — — October 2011 2,777 $14.18 — — November 2011 4,165 $15.29 — — December 2011 9,639 $15.67 — — Total 21,838 $15.79 — — 43Table of ContentsSTOCK PERFORMANCE GRAPHThis graph compares the return on our common stock with that of the Standard & Poor’s 500 Stock Index and the Russell 2000 Financial ServicesIndex, for the period from February 24, 2011 (the date that shares of our common stock began trading on the NASDAQ Global Select Market) throughDecember 31, 2011. The graph assumes that, on February 9, 2010, a person invested $100 in each of the following: our common stock (SUNS), the S&P500 Index, and the Russell 2000 Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. Itassumes that dividends paid are invested in like securities. The graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed”with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the 1934 Act. The stock price performance included in the above graphis not necessarily indicative of future stock price performance. 44Table of ContentsItem 6.Selected Financial DataThe selected financial and other data below should be read in conjunction with our “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and the financial statements and notes thereto. Financial information is presented for the fiscal year ended December 31, 2011 and forthe period from January 28, 2011 (commencement of operations) through December 31, 2011. Financial information for the period ended December 31, 2011has been derived from our financial statements that were audited by KPMG LLP (“KPMG”), an independent registered public accounting firm. Period fromJanuary 28, 2011toDecember 31, 2011 (dollars in thousands) Income statement data: Total investment income $7,890 Total expenses 5,290 Net investment income 2,600 Net realized loss (576) Net change in unrealized loss (2,274) Net decrease in net assets resulting from operations (250) Other data (unaudited): Weighted average annualized yield on income producinginvestments: On fair value(1)(4) 8.5% On cost(2)(4) 8.4% Number of portfolio companies atperiod end(4) 21 As ofDecember 31, 2011 (dollars in thousands) Balance sheet data: Total investment portfolio $177,749 Total cash and cash equivalents 2,934 Total assets 187,395 Credit facility payable 8,600 Net assets 172,435 Per share data:(5) Net asset value per share 18.15 Net investment income 0.30 Net realized and unrealized loss (0.33) Dividends and distributions declared 0.55 (1)Throughout this document, the weighted average yield on income producing investments is computed as the (a) annual stated interest on accruing loansand debt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debtsecurities, plus the effective interest yield on preferred shares divided by (b) total income producing investments at fair value. The weighted average yieldis computed as of the balance sheet date and excludes assets on non-accrual status or on a cost recovery basis as of such date.(2)For this calculation, the weighted average yield on income producing investments is computed as the (a) annual stated interest on accruing loans anddebt securities plus the annual amortization of loan origination fees, original issue discount, and market discount on accruing loans and debt securities,plus the effective interest yield on preferred shares divided by (b) total income producing investments at cost. The weighted average yield is computed asof the balance sheet date and excludes assets on non-accrual status or on a cost recovery basis as of such date. 45(3) Table of Contents(3)Commencement of operations.(4)Unaudited.(5)For the period from January 28, 2011 (commencement of operations) through December 31, 2011. Item 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe information contained in this section should be read in conjunction with the Selected Financial and Other Data and our Financial Statementsand notes thereto appearing elsewhere in this report.OverviewSolar Senior Capital Ltd., a Maryland corporation formed in December 2010, is a closed-end, externally managed, non-diversified managementinvestment company that has elected to be treated as a BDC under the 1940 Act. In addition, for tax purposes we intend to elect to be treated as a RIC underSubchapter M of the Code.On February 24, 2011, we priced our IPO, selling 9.0 million shares, including the underwriters’ over-allotment, at a price of $20.00 per share.Concurrent with this offering, management purchased an additional 500,000 shares through a Concurrent Private Placement, also at $20.00 per share.On August 26, 2011, we established the $200 million Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. In connectionwith the Credit Facility, our wholly-owned subsidiary, SUNS SPV LLC was formed. The Credit Facility matures on August 26, 2016 and generally bearsinterest at a rate of LIBOR plus 2.25%. Under the Credit Facility, $150 million will be available initially with an additional $50 million available as a delayeddraw. The Credit Facility can also be expanded up to $600 million. The Credit Facility is secured by all of the assets held by the SPV. Under the CreditFacility, Solar Senior and the SPV, as applicable, have made certain customary representations and warranties, and are required to comply with variouscovenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility includesusual and customary events of default for credit facilities of this nature.We invest primarily in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities aremost attractive. Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investmentobjective by investing primarily in senior loans, including first lien, unitranche, and second lien debt instruments, made to private middle-market companieswhose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of public companies that are thinlytraded. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will beinvested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarilyLIBOR, plus a premium. Senior loans in which we expect to invest are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnershipsand other business entities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securitiesrated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “high risk” compared to debtinstruments that are rated above investment grade.We expect to invest in senior loans made primarily to private leveraged middle-market companies with approximately $20 million to $60 million ofEBITDA. Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. We expectthat our investments will generally range between $5 million and $30 million each, although we expect that this investment size will vary proportionately withthe size of our capital base. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments,which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited to, directinvestments in public companies that are not thinly traded and securities of leveraged 46Table of Contentscompanies located in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunistic investments, includingsenior loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 Act.As of December 31, 2011, our long term investments totaled $177.7 million and our net asset value was $172.4 million. Our portfolio was comprisedof debt investments in 21 portfolio companies and our income producing assets, which represented 100% of our total portfolio, had a weighted averageannualized yield on a fair value basis of approximately 8.5%.During the year ended December 31, 2011, we originated approximately $219.1 million of new investments in 23 portfolio companies. We also hadapproximately $2.2 million in debt repayments of existing portfolio companies and sales of securities of 7 portfolio companies for approximately$32.0 million, during 2011.Recent DevelopmentsOn January 9, 2012, our board of directors declared a monthly dividend of $0.10 per share, which was paid on February 2, 2012 to holders of recordas of January 19, 2012. On February 3, 2012, our board of directors declared a monthly dividend of $0.10 per share payable on March 2, 2012 to holders ofrecord as of February 17, 2012. We expect the dividends to be paid from taxable earnings with specific tax characteristics reported to stockholders after the endof the calendar year.Critical Accounting PoliciesThe preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, andrevenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as criticalaccounting policies.Valuation of Portfolio InvestmentsWe conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940 Act. Ourvaluation procedures are set forth in more detail below:Securities for which market quotations are readily available on an exchange are valued at the closing price on the valuation date. We may also obtainquotes with respect to certain of our investments from pricing services or brokers or dealers in order to value assets. When doing so, we determine whether thequote obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the quote obtained.Securities for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology orprovide a valuation or methodology that, in the judgment of Solar Capital Partners, or our board of directors, does not represent fair value, shall each bevalued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment;(ii) preliminary valuation conclusions are documented and discussed with senior management; (iii) independent third-party valuation firms engaged by, or onbehalf of, the board of directors will conduct independent appraisals and review management’s preliminary valuations and make their own assessment for(a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of total assets, plus availableborrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in default; (iv) the board of directorswill discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviser and, whereappropriate, the respective third-party valuation firms. 47Table of ContentsThe recommendation of fair value will generally be based on the following factors, as relevant: • the nature and realizable value of any collateral; • the portfolio company’s ability to make payments; • the portfolio company’s earnings and discounted cash flow; • the markets in which the issuer does business; and • comparisons to publicly traded securities.Securities for which market quotations are not readily available or for which a pricing source is not sufficient may include, but are not limited to, thefollowing: • private placements and restricted securities that do not have an active trading market; • securities whose trading has been suspended or for which market quotes are no longer available; • debt securities that have recently gone into default and for which there is no current market; • securities whose prices are stale; • securities affected by significant events; and • securities that the investment adviser believes were priced incorrectly.Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty withrespect to the possible effect of such valuations, and any change in such valuations, on our financial statements.GAAP fair value measurement guidance classifies the inputs used to measure these fair values into the following hierarchy:Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that theCompany has the ability to access (examples include active exchange-traded equity securities and exchange-traded derivatives).Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable eitherdirectly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following: a)Quoted prices for similar assets or liabilities in active markets; b)Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which tradeinfrequently); c)Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counterderivatives, including foreign exchange forward contracts); and d)Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means forsubstantially the full term of the asset or liability.Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable andsignificant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would usein pricing the asset or liability (examples include certain of our private debt and equity investments) and long-dated or complex derivatives (including certainequity and currency derivatives). 48Table of ContentsThe following table shows the level of our investments and Credit Facility as of December 31, 2011;Fair Value MeasurementsAs of December 31, 2011 Level 1 Level 2 Level 3 Total Assets: Bank Debt/Senior Secured Loans $— $13,725 $160,976 $174,701 Unsecured Bonds — 3,048 — 3,048 Total Investments — 16,773 160,976 177,749 Credit Facility $— $— $8,600 $8,600 There were no investments transferred into or out of Level 1, 2, or 3 during the period January 28, 2011 to December 31, 2011.Credit FacilityThe Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10.Accounting for the Credit Facility at fair value will better align the measurement methodologies of assets and liabilities, which may mitigate certain earningsvolatility. As a result of this election, approximately $2.8 million of costs related to the establishment of the Credit Facility was expensed during the periodending December 31, 2011, rather than being deferred and amortized over the life of the Credit Facility. For the period from February 28, 2011 toDecember 31, 2011, the Credit Facility had no net change in unrealized (appreciation) depreciation. We used an independent third-party valuation firm tomeasure the fair value of the Credit Facility.Revenue RecognitionOur revenue recognition policies are as follows:Sales: Gains or losses on the sale of investments are calculated by using the specific identification method.Interest Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closingand/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans.Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as partof interest income. We may have loans in our portfolio that contain a PIK provision. PIK interest is accrued at the contractual rates and added to the loanprincipal on the reset dates.Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonabledoubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments receivedon non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment about ultimate collectability of principal.Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current.Payment-in-Kind InterestWe may have investments in our portfolio which contain a PIK interest provision. Over time, PIK interest increases the principal balance of theinvestment, but is recorded as interest income. For us to maintain our status as a RIC, substantially all of this income must be paid out to stockholders in theform of dividends, even though we have not currently collected cash with respect to the PIK interest. 49Table of ContentsNew Accounting Pronouncements and Accounting Standards UpdatesIn May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820):Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 wasissued concurrently with International Financial Reporting Standards No. 13 (“IFRS 13”), Fair Value Measurements, to provide largely identical guidanceabout fair value measurement and disclosure requirements as is currently required under ASU 2010-06, Fair Value Measurements and Disclosures (Topic820). The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is requiredor permitted under IFRS or GAAP. For GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. ASU2011-04 eliminates the concepts of in-use and in-exchange when measuring fair value of all financial instruments. For Level 3 fair value measurements, theASU requires that our disclosure include quantitative information about significant unobservable inputs, a qualitative discussion about the sensitivity of thefair value measurement to changes in the unobservable inputs and the interrelationship between inputs, and a description of our valuation process. Publiccompanies are required to apply ASU 2011-04 prospectively for interim and annual periods beginning after December 15, 2011. Upon adoption of ASU 2011-04, it is not expected that it will have a significant impact on the Company’s financial statements and the Company is currently evaluating the impact on itsdisclosures.Portfolio InvestmentsThe total value of our investments was approximately $177.7 million at December 31, 2011. During the period from January 28, 2011 to December 31,2011, we originated approximately $219.1million of new investments in 23 portfolio companies.In certain instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we mayreceive repayments of certain debt investments prior to their scheduled maturity date. The frequency or volume of these repayments may fluctuate significantlyfrom period to period. Our portfolio activity also reflects sales of securities. During the year ended December 31, 2011, we received approximately $32.0million in sales from 7 portfolio companies and approximately $2.2 million of principal repayments from 11 portfolio companies.At December 31, 2011, we had investments in debt securities of 21 portfolio companies, totaling approximately $177.7 million.The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2011: December 31, 2011 Cost Fair Value Bank Debt/Senior Secured Investments $176,839 $174,701 Unsecured Bonds 3,184 3,048 Total $180,023 $177,749 As of December 31, 2011, the weighted average yield on income producing investments in our portfolio was approximately 8.5%. As of December 31,2011, there were no investments on non-accrual status.Results of Operations for the Period January 28, 2011 to December 31, 2011Solar Senior Capital was formed in December 2010 and commenced operations on January 28, 2011. As a result, there is no comparableperiod to compare results of operations for the period January 28, 2011 to December 31, 2011. 50Table of ContentsRevenueInvestment income of approximately $7.89 million for the period ended December 31, 2011 was primarily attributable to interest earned frominvestments in the 21 portfolio companies and from interest earned on cash and cash equivalents.ExpensesThe largest expense component was for debt issuance costs of approximately $2.80 million which were incurred for upfront commitment and legal feesrelated to the establishment of the Credit Facility on August 26, 2011. Investment advisory and management fees of approximately $0.94 million werecalculated at an annual rate of 1.00% of gross assets. Remaining expenses of approximately $1.55 million were mostly for recurring general and administrativeexpenses.Net Realized and Unrealized Loss on InvestmentsNet realized and unrealized losses of approximately $2.85 million were attributable to general weakness in fixed income prices and widening of creditmarket spreads, which occurred mostly during the third quarter of 2011.Liquidity and Capital ResourcesOur liquidity and capital resources were generated and are generally available through the Credit Facility, the proceeds of the IPO and Concurrent PrivatePlacement, cash flows from operations, investment sales of liquid assets, repayments of loans, income earned on investments and cash equivalents, and weexpect through periodic follow-on equity and/or debt offerings. We may from time to time issue securities in either public or private offerings. The issuance ofdebt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance willoccur or be successful.The primary use of existing funds and any funds raised in the future is expected to be for investments in portfolio companies, cash distributions to ourshareholders or for other general corporate purposes.At December 31, 2011, we had cash and cash equivalents of approximately $2.9 million. Cash used in operating activities for the period endedDecember 31, 2011 was approximately $175.6 million. We expect that all current liquidity needs will be met with cash flows from operations, borrowings,and other activities.Credit FacilityOn August 26, 2011, we established a $200 million senior secured revolving credit facility with Citigroup Global Markets Inc. acting as administrativeagent. The Credit Facility matures on August 26, 2016 and generally bears interest at a rate of LIBOR plus 2.25%. Under the Credit Facility, $150 millionwill be available initially with an additional $50 million available as a delayed draw. The Credit Facility can also be expanded up to $600 million. The CreditFacility is secured by all of the assets held by the SPV. Under the Credit Facility, Solar Senior and the SPV, as applicable, have made certain customaryrepresentations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and othercustomary requirements for similar credit facilities. The Credit Facility includes usual and customary events of default for credit facilities of this nature. 51Table of ContentsContractual ObligationsA summary of our significant contractual payment obligations are as follows:Payments Due by Period (in millions) Total Less than1 Year 1-3 Years 3-5 Years More Than5 Years Senior secured revolving credit facility(1) $8.6 $— $— $8.6 $— (1)As of December 31, 2011, we had $191.4 million of unused borrowing capacity under the Credit Facility.We have certain commitments pursuant to our Investment Advisory and Management Agreement entered into with the Investment Adviser. We haveagreed to pay a fee for investment advisory and management services consisting of two components—a base management fee and an incentive fee. Paymentsunder the Investment Advisory and Management Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentivefee. See Item 1. Business – Investment Advisory and Management Agreement. We have also entered into a contract with Solar Capital Management to serve asour administrator. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of Solar Capital Management’soverhead in performing its obligation under the agreement, including rent, fees, and other expenses inclusive of our allocable portion of the compensation of ourchief financial officer and any administrative staff. See Item 1. Business – Solar Capital Management.Off-Balance Sheet ArrangementsIn the normal course of our business, we trade various financial instruments and may enter into various investment activities with off-balance sheetrisk, which include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financialinstruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the marketvalue or our satisfaction of the obligations may exceed the amount recognized in our Statement of Assets and Liabilities.BorrowingsWe had borrowings of $8.6 million outstanding as of December 31, 2011 under the Credit Facility.Distributions and DividendsThe following table reflects the cash distributions, including dividends and returns of capital, if any, per share that we have declared on our commonstock since our initial public offering: Date Declared Record Date Payment Amount Fiscal 2012 February 3, 2012 February 17, 2012 March 2, 2012 $0.10 January 9, 2012 January 19, 2012 February 2, 2012 0.10 Total 2012 $0.20 Fiscal 2011 December 6, 2011 December 15, 2011 December 29, 2011 $0.10 November 1, 2011 November 18, 2011 December 2, 2011 0.09 October 7, 2011 October 19, 2011 November 2, 2011 0.08 September 12, 2011 September 20, 2011 October 4, 2011 0.08 August 2, 2011 August 19, 2011 September 2, 2011 0.08 July 7, 2011 July 18, 2011 August 1, 2011 0.07 June 6, 2011 June 16, 2011 June 30, 2011 0.05 Total 2011 $0.55 52Table of ContentsTax characteristics of all dividends will be reported to shareholders on Form 1099 after the end of the calendar year. Our monthly dividends, if any, willbe determined by our board of directors.We intend to elect to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our ordinaryincome and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Inaddition, although we currently intend to distribute net realized capital gains (net long-term capital gains in excess of short-term capital losses), if any, at leastannually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cashdividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan soas to receive cash dividends.Related PartiesWe have entered into a number of business relationships with affiliated or related parties, including the following: • We have entered into an Investment Advisory and Management Agreement with Solar Capital Partners. Mr. Gross, our chairman and chiefexecutive officer, is the managing member and a senior investment professional of, and has financial and controlling interests in, Solar CapitalPartners. In addition, Mr. Spohler, our chief operating officer is a partner and a senior investment professional of, and has financial interests in,Solar Capital Partners. • Solar Capital Management provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuantto our Administration Agreement. We reimburse Solar Capital Management for the allocable portion of overhead and other expenses incurred by itin performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliancefunctions, and the compensation of our chief compliance officer, our chief financial officer and any administrative support staff. Solar CapitalPartners, our investment adviser, is the sole member of and controls Solar Capital Management. • We have entered into a license agreement with Solar Capital Partners, pursuant to which Solar Capital Partners has granted us a non-exclusive,royalty-free license to use the name “Solar Senior Capital.”In addition, Solar Capital Partners presently serves as investment adviser to Solar Capital Ltd., a publicly-traded BDC with investable capital in excessof $1.3 billion that invests primarily in the mezzanine debt and equity securities of middle-market leveraged companies similar to those we intend to target forinvestment. In addition, Michael S. Gross, our chairman and chief executive officer, Bruce Spohler, our chief operating officer, and Nicholas Radesca, ourchief financial officer, serve in similar capacities for Solar Capital Ltd. Solar Capital Partners and its affiliates may also manage other funds in the future thatmay have investment mandates that are similar, in whole and in part, with ours. Solar Capital Partners and its affiliates may determine that an investment isappropriate for us and for Solar Capital Ltd. or one or more of those other funds. In such event, depending on the availability of such investment and otherappropriate factors, Solar Capital Partners or its affiliates may determine that we should invest side-by-side with one or more other funds. Any suchinvestments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with Solar CapitalPartners’ allocation procedures. 53Table of ContentsItem 7A.Quantitative and Qualitative Disclosure about Market RiskWe are subject to financial market risks, including changes in interest rates. During the period ended December 31, 2011, certain of the loans in ourportfolio had floating interest rates. Interest rates on these types of loans are typically based on floating LIBOR and reset to current market rates every one to sixmonths. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options, swaps,caps and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, theymay also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the period endedDecember 31, 2011 we did not engage in interest rate hedging activities.The following table quantifies the potential changes in interest income should interest rates increase by 100 or 200 basis points or decrease by 25 basispoints. Investment income is calculated as revenue from loans and other lending investments held at December 31, 2011 and interest expense is calculatedbased on our borrowings of $8.6 million as of December 31, 2011. The base interest rate case assumes the rates on our portfolio investments remain as theywere on December 31, 2011. All of the hypothetical calculations are based on a model of our portfolio as of December 31, 2011 and assume no change to anyinput other than the underlying base interest rates.Actual results could differ significantly from those estimated in the table. Change in Interest Rates Estimated PercentageChange in InterestIncome Net ofInterest Expense(unaudited) -25 Basis Points 0.11% Base Interest Rate 0.00% +100 Basis Points 0.56% +200 Basis Points 11.13% 54Table of ContentsItem 8.Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 56 Consolidated Statement of Assets and Liabilities as of December 31, 2011 57 Consolidated Statement of Operations for the period from January 28, 2011 (commencement of operations) through December 31, 2011 58 Consolidated Statement of Changes in Net Assets for the period from January 28, 2011 (commencement of operations) through December 31, 2011 59 Consolidated Statement of Cash Flows for the period from January 28, 2011 (commencement of operations) through December 31, 2011 60 Consolidated Schedule of Investments as of December 31, 2011 61 Notes to Consolidated Financial Statements 63 55Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersSolar Senior Capital Ltd.:We have audited the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Solar SeniorCapital Ltd. (the Company) as of December 31, 2011, and the related consolidated statements of operations, changes in net assets and cash flows for theperiod from January 28, 2011 (commencement of operations) to December 31, 2011. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosure in the financial statements. Our procedures included confirmation of securitiesowned as of December 31, 2011, by correspondence with the custodian or by other appropriate auditing procedures. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Solar SeniorCapital Ltd. as of December 31, 2011, and the results of its operations, the changes in its net assets and cash flows for the period from January 28, 2011(commencement of operations) to December 31, 2011, in conformity with U.S. generally accepted accounting principles./s/ KPMG LLPNew York, New YorkFebruary 22, 2012 56Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES(in thousands, except shares) December 31, 2011 Assets Investments at fair value: Non-controlled, non-affiliated investments, at fair value (cost: $180,023) $177,749 Total investments 177,749 Cash and cash equivalents 2,934 Receivable for investments sold 4,931 Interest receivable 1,687 Prepaid expenses and other receivables 94 Total Assets 187,395 Liabilities Credit facility payable 8,600 Payable for investments purchased 4,912 Due to Solar Capital Partners LLC: Investment advisory and management fee payable 944 Due to Solar Capital Management LLC 141 Other accrued expenses and payables 363 Total Liabilities 14,960 Net Assets Common stock, par value $0.01 per share 9,500,100 shares issued and outstanding, 200,000,000 authorized 95 Paid-in capital in excess of par 177,815 Distributions in excess of net investment income (2,625) Accumulated net realized loss on investments (576) Net unrealized depreciation on investments (2,274) Total Net Assets $172,435 Number of shares outstanding 9,500,100 Net Asset Value Per Share $18.15 See notes to consolidated financial statements. 57Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENT OF OPERATIONS(in thousands, except shares) For the periodJanuary 28, 2011(1) toDecember 31, 2011 INVESTMENT INCOME: Interest income from non-controlled, non-affiliated investments $7,890 Total investment income 7,890 EXPENSES: Investment advisory and management fees 944 Interest and other credit facility expenses 237 Administrative service fee 289 Insurance expense 341 Audit and tax preparation 206 Director’s fees 152 Other general and administrative expenses 326 Total expenses before debt issuance costs 2,495 Debt issuance costs 2,795 Total expenses 5,290 Net investment income 2,600 REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on non-controlled, non-affiliated investments (576) Net change in unrealized loss on non-controlled, non-affiliated investments (2,274) Net realized and unrealized loss on investments (2,850) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(250) Loss per share $(0.03) (1)Commencement of operationsSee notes to the consolidated financial statements. 58Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS(in thousands, except shares) For the periodJanuary 28,2011(1) toDecember 31, 2011 Decrease in net assets resulting from operations: Net investment income $2,600 Net realized loss on investments (576) Net change in unrealized loss on investments (2,274) Net decrease in net assets resulting from operations (250) Dividends declared (5,225) Capital share transactions: Proceeds from shares sold 190,002 Common stock offering costs (12,092) Net increase in net assets resulting from capital share transactions 177,910 Net increase in net assets 172,435 Net assets at beginning of period — Net assets at end of period $172,435 (1)Commencement of operationsSee notes to the consolidated financial statements. 59Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENT OF CASH FLOWS(in thousands except shares) For the periodJanuary 28, 2011(1) toDecember 31, 2011 Cash Flows from Operating Activities: Net decrease in net assets from operations $(250) Adjustments to reconcile net decrease in net assets from operations to net cash used in operating activities: Net realized loss on investments 576 Net change in unrealized loss on investments 2,274 Debt issuance costs 2,795 (Increase) decrease in operating assets: Purchase of investment securities (214,906) Proceeds from disposition of investment securities 34,307 Receivable for investments sold (4,931) Interest receivable (1,687) Prepaid expenses and other receivables (94) Increase in operating liabilities: Payable for investments purchased 4,912 Investment advisory and management fee payable 944 Due to Solar Capital Management LLC 141 Other accrued expenses and payables 363 Net Cash Used in Operating Activities (175,556) Cash Flows from Financing Activities: Proceeds from shares sold 190,002 Common stock offering costs (12,092) Dividends paid (5,225) Debt issuance costs (2,795) Proceeds from borrowings 20,450 Repayments of borrowings (11,850) Net Cash Provided by Financing Activities 178,490 NET INCREASE IN CASH AND CASH EQUIVALENTS 2,934 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD — CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,934 (1)Commencement of operationsSee notes to the consolidated financial statements. 60Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTSDecember 31, 2011(in thousands, except shares) Description(1) Industry Interest(2) Basis PointSpreadAboveIndex Maturity ParAmount Cost FairValue Bank Debt/Senior Secured Investments AmeriQual Group, LLC Beverage, Food & Tobacco 6.50% L+500(5) 3/28/2016 $13,670 $13,494 $12,646 ATI Holdings, Inc.(4) Healthcare, Education & Childcare 7.50% L+550(5) 3/12/2016 7,983 7,947 7,942 Asurion, LLC Insurance 9.00% L+750(5) 5/24/2019 10,750 10,684 10,620 Bellisio Foods, Inc.(4) Beverage, Food & Tobacco 7.00% L+550(5) 12/16/2017 5,000 4,950 4,950 Decision Resources, LLC Healthcare, Education & Childcare 9.50% L+800(5) 5/6/2018 16,000 15,851 15,360 EIG Investors Corp.(4) Personal, Food & Misc. Services 7.75% L+625(5) 12/22/2017 8,000 7,841 7,840 Engineering Solutions & Products, LLC Aerospace & Defense 7.75% L+625(5) 4/21/2017 10,667 10,325 9,600 FleetPride Corporation(4) Cargo Transport 6.75% L+550(5) 12/6/2017 8,000 7,842 7,920 Grocery Outlet Inc. Grocery 10.50% L+900(5) 12/15/2017 6,400 6,209 6,208 Hearthside Food Solutions, LLC(4) Beverage, Food & Tobacco 8.00% P+475(5) 5/10/2016 18,884 18,456 18,601 Hoffmaster Group, Inc.(4) Personal & Nondurable Consumer Products 7.00% L+550(5) 1/3/2018 5,000 4,900 4,900 Insight Pharmaceuticals LLC(4) Personal & Nondurable Consumer Products 7.50% L+600(5) 8/26/2016 7,980 7,867 7,860 KIK Custom Products, Inc. Diversified / Conglomerate Service 8.50% L+700(5) 5/31/2014 19,900 19,408 19,303 Marshall Retail Group, LLC(4) Retail Stores 8.00% L+650(5) 10/19/2016 5,000 4,928 4,950 Porex Corporation(4) Chemicals, Plastics & Rubber 6.75% L+525(5) 3/31/2015 4,787 4,724 4,643 Renaissance Learning, Inc.(4) Healthcare, Education & Childcare 7.75% L+625(5) 10/19/2017 7,980 7,669 7,820 Sotera Defense Solutions, Inc. Aerospace & Defense 7.00% L+550(5) 4/22/2017 7,960 7,888 7,841 Shield Finance Co. SARL(3)(4) Telecommunications 7.63% L+562.5(5) 6/15/2016 4,975 4,952 4,851 STHI Holding Corp. Healthcare, Education & Childcare 8.00% — 3/18/2018 3,000 3,000 3,105 Water Pik, Inc(4) Personal & Nondurable Consumer Products 6.75% L+525(5) 8/10/2017 7,980 7,904 7,741 Total Bank Debt/Senior Secured Investments $179,916 $176,839 $174,701 Unsecured Bonds Apollo Investment Corporation Finance 5.75% — 1/15/2016 3,650 3,184 3,048 Total Unsecured Bonds $3,650 $3,184 $3,048 Total Investments $183,566 $180,023 $177,749 (1)We generally acquire our investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). Our investments are therefore generally subject to certainlimitations on resale, and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2011, we do not hold any equity interests in our investments.(2)Variable rate debt investments may bear interest at a rate determined by reference to either the London Interbank Offer Rate (LIBOR or “L”) index rate or the prime index rate (PRIME or “P”), and which mayreset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2011 or the expected reset rate if lower.(3)Shield Finance Co. SARL is domiciled in Luxembourg and is denominated in U.S. dollars. All other investments are domiciled in the United States.(4)Indicates an investment partially held by Solar Senior Capital Ltd. through its wholly-owned subsidiary SUNS SPV LLC. Such investments are pledged as collateral under the Senior Secured Revolving CreditFacility (see Note 5 to the consolidated financial statements) and are not generally available to the creditors of Solar Senior Capital Ltd. Par amounts held through Solar SPV LLC include: ATI Holdings, Inc.$5,495; Bellisio Foods, Inc. $4,000; EIG Investors Corp. $6,000; FleetPride Corporation $5,000; Hearthside Food Solutions LLC $7,337; Hoffmaster Group, Inc. $4,000; Insight Pharmaceutical LLC$5,500; Marshall Retail Group, LLC $4,000; Porex Corporation $2,909; Renaissance Learning, Inc $5,985; Shield Finance Co. SARL $3,990; and Water Pik, Inc. $5,500. Remaining par balances are helddirectly by Solar Senior Capital Ltd.(5)Represents floating rate instruments that accrued interest at a predetermined spread relative to an index, typically the LIBOR or prime rate. These instruments are subject to a LIBOR or prime rate floor. 61Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)December 31, 2011 Supplementary Industry Information Industry Classification Percentage of TotalInvestments (at fairvalue) as ofDecember 31,2011 Beverage, Food & Tobacco 20% Healthcare, Education & Childcare 19% Personal & Nondurable Consumer Products 12% Diversified / Conglomerate Service 11% Aerospace & Defense 10% Insurance 6% Cargo Transport 4% Personal, Food & Misc. Services 4% Grocery 3% Retail Stores 3% Telecommunications 3% Chemicals, Plastics & Rubber 3% Finance 2% 100% See notes to the consolidated financial statements. 62Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares)Note 1. OrganizationSolar Senior Capital Ltd. (“Solar Senior”, the “Company” or “we”), a Maryland corporation formed on December 16, 2010, is a closed-end, externallymanaged, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the InvestmentCompany Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes the Company intends to be treated as a regulated investment company(“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).On January 28, 2011, Solar Senior was capitalized with initial equity of $2 and commenced operations. On February 24, 2011, Solar Senior priced itsinitial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, at a price of $20.00 per share. Concurrent with this offering,management purchased an additional 500,000 shares through a private placement, also at $20.00 per share.The Company’s investment objective is to seek to maximize current income consistent with the preservation of capital. We will seek to achieve ourinvestment objective by investing primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, made primarily toprivate middle-market companies whose debt is rated below investment grade, which the Company refers to collectively as “senior loans.” The Company mayalso invest in debt of public companies that are thinly traded. Under normal market conditions, at least 80% of the value of the Company’s net assets will beinvested in senior loans.Note 2. Significant Accounting PoliciesBasis of Presentation—The accompanying financial statements have been prepared on the accrual basis of accounting in conformity with U.S.generally accepted accounting principles (“GAAP”) and include the accounts of the Company and its wholly-owned financing subsidiary, SUNS SPV LLC(the “SPV”), a Delaware limited liability company formed on June 24, 2011, in order to establish a senior secured revolving credit facility (the “CreditFacility”). The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fairpresentation of the results of the operations and financial condition for the period presented. All significant intercompany balances and transactions have beeneliminated.Investments—The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values itsassets on a quarterly basis, or more frequently if required under the 1940 Act. Securities transactions are accounted for on trade date.Securities for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company mayalso obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, managementdetermines whether the quote obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, the Company uses thequote obtained.Securities for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology orprovide a valuation or methodology that, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”) or the Company’s board of directors (the“Board”), does not represent fair value, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investmentprofessionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with senior management;(iii) independent third-party valuation firms engaged by, 63Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) or on behalf of, the Board will conduct independent appraisals and review management’s preliminary valuations and make their own assessment for (a) eachportfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of total assets, plus availableborrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in default; (iv) the Board willdiscuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, whereappropriate, the respective third-party valuation firms.The recommendation of fair value is generally based on the following factors, as relevant: the nature and realizable value of any collateral; the portfoliocompany’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; andcomparisons to publicly traded securities.When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricingindicated by the external event to corroborate the private equity valuation. Due to the inherent uncertainty of determining the fair value of investments that donot have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readilyavailable market value existed for such investments, and the differences could be material.Investments of sufficient credit quality purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium,which approximates fair value.Credit Facility—The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance withASC 825-10. We use an independent third-party valuation firm to measure the fair value of our Credit Facility.Cash and Cash Equivalents—Cash and cash equivalents include investments in money market accounts or investments with original maturities ofthree months or less.Revenue Recognition—The Company’s revenue recognition policies are as follows:Sales: Gains or losses on the sale of investments are calculated by using the specific identification method.Interest Income: Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closingand/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans.Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as partof interest income. The Company may purchase loans in its portfolio that contain a payment-in-kind (“PIK”) provision. PIK interest is accrued at thecontractual rates and added to the loan principal on the reset dates.Non-accrual: Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonabledoubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments receivedon non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrualstatus when past due principal and interest is paid and, in management’s judgment, are likely to remain current. 64Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) U.S. Federal Income Taxes—The Company intends to elect to be treated as a RIC under subchapter M of the Code and operates in a manner so as toqualify for the tax treatment applicable to RICs. In order to qualify as a RIC, among other things, the Company is required to timely distribute to itsstockholders at least 90% of investment company taxable income, as defined by the Code, for each year. The Company, among other things, intends to makethe requisite distributions to its stockholders, which will generally relieve the Company from U.S. federal income taxes.Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current yeardividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimatedcurrent year annual taxable income will be in excess of estimated current year dividend distributions, the Company accrues excise tax, if any, on estimatedexcess taxable income as taxable income is earned. For the period ended December 31, 2011, $11 was recorded for U.S. Federal excise tax.The Company evaluates tax positions taken or expected to be taken in the course of preparing its financial statements to determine whether the taxpositions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” thresholdare reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income taxexpense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-goinganalyses of tax laws, regulations and interpretations thereof. We did not have any uncertain tax positions that met the recognition or measurement criteria of theguidance nor did we have any unrecognized tax benefits as of the periods presented herein.Capital Accounts—Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, net unrealizedappreciation or depreciation, and paid in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition,the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.Dividends—Dividends and distributions to common stockholders are recorded on the ex-dividend date. Monthly dividend payments are determined bythe Board and are generally based upon taxable earnings estimated by management. Net realized capital gains, if any, are distributed at least annually,although we may decide to retain such capital gains for investment. We have adopted a dividend reinvestment plan that provides for reinvestment of anydistributions we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board authorizes and declares acash dividend, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash dividends automatically reinvested inadditional shares of our common stock, rather than receiving the cash dividend. While we generally use newly issued shares to implement the plan (especiallyif our shares are trading at a premium to net asset value), we may purchase shares in the open market in connection with our obligations under the Company’sdividend reinvestment plan. In particular, if our shares are trading at a significant enough discount to net asset value and we are otherwise permitted underapplicable law to purchase such shares, we intend to purchase shares in the open market in connection with our obligations under our dividend reinvestmentplan.Use of Estimates in the Preparation of Financial Statements—The preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reportedamounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used indetermining these estimates could cause actual results to differ materially. 65Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) Subsequent Events Evaluation—The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events throughthe date the financial statements were issued and determined that none are required.Note 3. InvestmentsInvestments consisted of the following as of December 31, 2011: December 31, 2011 Cost Fair Value Bank Debt/Senior Secured Investments $176,839 $174,701 Unsecured Bonds 3,184 3,048 Total $180,023 $177,749 There were no non-accrual assets as of December 31, 2011.Note 4. AgreementsSolar Senior has an Investment Advisory and Management Agreement with the Investment Adviser, under which the Investment Adviser manages theday-to-day operations of, and provides investment advisory services to, Solar Senior. For providing these services, the Investment Adviser receives a fee fromSolar Senior, consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.00% ofgross assets. The Investment Adviser, however, has agreed to waive the portion of the base management fee payable on any net proceeds of the Company’sinitial public offering and the concurrent private placement that have not yet been invested in portfolio investments, exclusive of any temporary investments incash, cash equivalents, U.S. government securities and other high-quality investment grade debt investments that mature in 12 months or less from the date ofinvestment. For services rendered under the Investment Advisory and Management Agreement, the base management fee is payable quarterly in arrears. Thebase management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters, andappropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter willbe appropriately pro-rated.The incentive fee has two parts, as follows: one is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income forthe immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any otherincome (other than fees for providing managerial assistance) accrued during the calendar quarter, minus our operating expenses for the quarter (excluding theincentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debtinstruments with pay-in-kind interest and zero-coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investmentincome does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive feenet investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to ahurdle of 1.75% per quarter (7.00% annualized). The Company pays the Investment Adviser an incentive fee with respect to pre-incentive fee net investmentincome in each calendar quarter as follows: • no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%; 66Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) • 50% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds thehurdle but is less than 2.9167% in any calendar quarter (11.67% annualized); and • 20% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.9167% in any calendar quarter (11.67% annualized) will bepayable to the Investment Adviser.For the period ended December 31, 2011, the pre-incentive net income was below the hurdle, therefore there is no accrual for the related incentive fee.The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the InvestmentAdvisory and Management Agreement, as of the termination date), and equals 20% of realized capital gains, if any, on a cumulative basis from inceptionthrough the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregateamount of any previously paid capital gain incentive fees. For financial statement purposes, the fee is accrued based upon 20% of net realized and unrealizedcapital gains and losses. As of December 31, 2011, there was a net realized and unrealized capital loss, and the Company did not accrue for the incentive fee.Solar Senior has also entered into an Administration Agreement with Solar Capital Management, LLC (the “Administrator”) under which theAdministrator provides administrative services for Solar Senior. For providing these services, facilities and personnel, Solar Senior reimburses theAdministrator for Solar Senior’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under theAdministration Agreement, including rent. The Administrator will also provide, on Solar Senior’s behalf, managerial assistance to those portfolio companies towhich Solar Senior is required to provide such assistance.Note 5. Borrowing FacilitiesSenior Secured Revolving Credit Facility—On August 26, 2011, the Company established a $200 million senior secured revolving credit facility withCitigroup Global Markets Inc. acting as administrative agent. In connection with this senior secured revolving credit facility, the SPV, as borrower, entered intoa Loan and Servicing Agreement, dated as of August 26, 2011 (the “Loan and Servicing Agreement”), whereby the Company will transfer certain loans it hasoriginated or acquired or will originate or acquire (the “Loans”) from time to time to the SPV via a Contribution Agreement, dated as of August 26, 2011 (the“Contribution Agreement”). The Contribution Agreement, together with the Loan and Servicing Agreement and various supporting documentation form theCredit Facility.The Credit Facility, among other things, matures on August 26, 2016 and generally bears interest at a rate of LIBOR plus 2.25%. Under the CreditFacility, $150 million will be available initially with an additional $50 million available as a delayed draw. The Credit Facility can also be expanded up to$600 million. The Credit Facility is secured by all of the assets held by the SPV. Under the Credit Facility, the Company and the SPV, as applicable, havemade certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reportingrequirements and other customary requirements for similar credit facilities. The Credit Facility includes usual and customary events of default for creditfacilities of this nature. 67Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10.Accounting for the Credit Facility at fair value will better align the measurement methodologies of assets and liabilities, which may mitigate certain earningsvolatility. As a result of this election, $2,795 of costs related to the establishment of the Credit Facility was expensed during the period ended December 31,2011, rather than being deferred and amortized over the life of the Credit Facility. ASC 825-10 requires entities to display the fair value of the selected assetsand liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in theConsolidated Statement of Operations. The Company elected not to apply ASC 825-10 to any other financial assets or liabilities. For the period fromJanuary 28, 2011 to December 31, 2011, the Credit Facility had no net change in unrealized (appreciation) depreciation.The weighted average annualized interest cost for all borrowings for the period ended December 31, 2011 was 2.575%. These costs are exclusive ofcommitment fees and for other prepaid expenses related to establishing the Credit Facility. This weighted average annualized interest cost reflects the averageinterest cost for all outstanding borrowings. The maximum amount borrowed on the Credit Facility during the period ended December 31, 2011 was $12,650.There was $8,600 drawn on the Credit Facility as of December 31, 2011. At December 31, 2011, the Company was in compliance with all financial andoperational covenants required by the Credit Facility.Note 6. Fair ValueFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used inmeasuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair valuehierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. Thelevels of the fair value hierarchy are as follows:GAAP fair value measurement guidance classifies the inputs used to measure these fair values into the following hierarchy:Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that theCompany has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, and most U.S. Government andagency securities).Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable eitherdirectly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following: a)Quoted prices for similar assets or liabilities in active markets; b)Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which tradeinfrequently); c)Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counterderivatives, including foreign exchange forward contracts); and d)Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means forsubstantially the full term of the asset or liability. 68Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable andsignificant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would usein pricing the asset or liability (examples include certain of our private debt investments and our Credit Facility) and long-dated or complex derivatives(including certain equity and currency derivatives).When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorizedis based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may includeinputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, itshould be noted that the following tables do not take into consideration the effect of offsetting Levels 1 and 2 financial instruments entered into by theCompany that economically hedge certain exposures to the Level 3 positions.A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in areclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of theLevel 3 category as of the beginning of the quarter in which the reclassifications occur.The following table presents the balances of assets and liabilities measured at fair value on a recurring basis, as of December 31, 2011:Fair Value MeasurementsAs of December 31, 2011 Level 1 Level 2 Level 3 Total Assets: Bank Debt/Senior Secured Loans $— $13,725 $160,976 $174,701 Unsecured Bonds — 3,048 — 3,048 Total Investments — 16,773 160,976 177,749 Credit Facility $— $— $8,600 $8,600 69Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) The following table provides a summary of the changes in fair value of Level 3 assets for the period ended December 31, 2011 as well as the portion ofgains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2011:Fair Value Measurements Using Level 3 InputsAs of December 31, 2011 Bank Debt/SeniorSecured Loans Fair value, January 28, 2011 $— Total gains or losses included in earnings: Net realized gain 415 Net change in unrealized gain (loss) (2,179) Purchase of investment securities 176,895 Proceeds from dispositions of investment securities (14,155) Transfers in/out of Level 3 — Fair value, December 31, 2011 $160,976 Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the endof the period: Net change in unrealized loss: $(2,179) During the period from January 28, 2011 to December 31, 2011, there were no transfers in and out of Levels 1, 2, or 3. The Company had no assets orliabilities measured at fair value on a nonrecurring basis during the period.The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservableinputs (Level 3) for the period from January 28, 2011 to December 31, 2011: Credit Facility Fair Value Fair value, January 28, 2011 $— Total unrealized appreciation — Borrowings 20,450 Repayments (11,850) Transfers in/out of Level 3 — Fair value, December 31, 2011 $8,600 The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. OnDecember 31, 2011, there were borrowings of $8,600 on the Credit Facility. For the period from January 28, 2011 to December 31, 2011, the Credit Facilityhad no net change in unrealized (appreciation) depreciation. The Company uses an independent third-party valuation firm to measure the fair value of ourCredit Facility. 70Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) Note 7. Stockholders’ EquityThe table below illustrates the effect of certain transactions on our capital accounts for the period January 28, 2011 (commencement of operations) toDecember 31, 2011: Common Stock Paid-in Capitalin ExcessofPar Distributionsin Excess ofNet InvestmentIncome AccumulatedNet RealizedLoss Net UnrealizedDepreciation TotalStockholdersEquity Shares Par Amount Balance at January 28, 2011(1) — $— $— $— $— $— $— Initial capitalization 100 — 2 — — — 2 Issuances of common stock in IPO(2) 9,000,000 90 167,818 — — — 167,908 Issuances of common stock in private placement(2) 500,000 5 9,995 — — — 10,000 Net increase in stockholders’ equity resulting fromoperations — — — 2,600 (576) (2,274) (250) Dividends declared ($0.55 per share) — — — (5,225) — — (5,225) Balance at December 31, 2011 9,500,100 $95 $177,815 $(2,625) $(576) $(2,274) $172,435 (1)Commencement of operations(2)On February 24, 2011 Solar Senior Capital Ltd. priced its initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, at a price of $20.00 per share. Concurrent with this offering,management purchased an additional 500,000 shares through a private placement, also at $20.00 per share. Amounts are stated net of associated offering costs of $12,092.Note 8. Earnings Per ShareThe following information sets forth the computation of basic and diluted net increase (decrease) in shareholders’ equity per share resulting fromoperations for the period ended December 31, 2011: For the periodJanuary 28, 2011(1) toDecember 31, 2011 Numerator for basic and diluted earnings per share: $(250) Denominator for basic and diluted weighted average share: 8,627,696 Basic and diluted net increase in shareholders’ equity resulting from operations per share: $(0.03) (1)Commencement of operations 71Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) Note 9. Financial HighlightsThe following is a schedule of financial highlights for the period from January 28, 2011 to December 31, 2011: Per Share Data:(b) For the periodJanuary 28, 2011(a) toDecember 31, 2011 Net asset value, beginning of period $— Net investment income 0.30 Net realized and unrealized loss on investments (0.33) Net decrease in net assets resulting from operations (0.03) Issuance of common stock 20.00 Offering costs (1.27) Dividends to shareholders declared (0.55) Net asset value, end of period $18.15 Total return(c)(d) (18.49)% Net assets, end of period $172,435 Per share market value at December 30, 2011 $15.75 Shares outstanding end of year 9,500,100 Ratio to average net assets: Expenses without incentive fees(d) 3.08% Incentive fees 0.00% Total expenses 3.08% Net investment income(d) 1.51% Portfolio turnover ratio 36.96% (a)Commencement of operations.(b)Calculated using the average shares outstanding method.(c)Total return is based on the change in market price per share during the period and takes into account dividends, if any, reinvested in accordance withthe dividend reinvestment plan.(d)Not annualized for periods less than one year.Note 11. Income Tax Information and Distributions to StockholdersThe tax character of dividends for the period ended December 31, 2011 was as follows: Ordinary income $5,225 100.0%Total dividends $5,225 100.0% 72Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2011(in thousands, except shares) As of December 31, 2011, the reconciliation of net increase in net assets resulting from operations to taxable income is as follows: Net decrease in net assets resulting from operations $(250) Change in net unrealized depreciation on investments 2,274 Deferred credit facility expense 2,581 Post-October capital losses 665 Other book-to-tax differences 392 Taxable income before deductions for dividends $5,662 As of December 31, 2011, the components of accumulated gain and losses on a tax basis were as follows: Undistributed ordinary income $437 Undistributed long-term net capital gains — Total undistributed net earnings 437 Post-October capital losses (665) Net unrealized depreciation on investments (2,274) Total undistributable taxable income $(2,502) Tax information for the period ended December 31, 2011 is an estimate and will not be finally determined until the Company files its 2011 tax return inSeptember 2012.The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes, nor did wehave any unrecognized tax benefits as of the period presented herein. Although we file federal and state tax returns, our major tax jurisdiction is federal. TheCompany’s inception-to-date federal tax years remain subject to examination by the Internal Revenue Service.Note 12. New Accounting Pronouncements and Accounting Standards UpdatesIn May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820):Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 wasissued concurrently with International Financial Reporting Standards No. 13 (“IFRS 13”), Fair Value Measurements, to provide largely identical guidanceabout fair value measurement and disclosure requirements as is currently required under ASU 2010-06, Fair Value Measurements and Disclosures (Topic820). The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is requiredor permitted under IFRS or GAAP. For GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. ASU2011-04 eliminates the concepts of in-use and in-exchange when measuring fair value of all financial instruments. For Level 3 fair value measurements, theASU requires that our disclosure include quantitative information about significant unobservable inputs, a qualitative discussion about the sensitivity of thefair value measurement to changes in the unobservable inputs and the interrelationship between inputs, and a description of our valuation process. Publiccompanies are required to apply ASU 2011-04 prospectively for interim and annual periods beginning after December 15, 2011. Upon adoption of ASU 2011-04, it is not expected that it will have a significant impact on the Company’s financial statements and the Company is currently evaluating the impact on itsdisclosures. 73Table of ContentsItem 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone. Item 9A.Controls and Procedures(a) Evaluation of Disclosure Controls and ProceduresAs of December 31, 2011 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on thatevaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures wereeffective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized andreported within the time periods specified in the SEC s rules and forms, and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, inevaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated canprovide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluatingthe cost-benefit relationship of such possible controls and procedures.(b) Management’s Report on Internal Control Over Financial ReportingThis annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of thecompany’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly publiccompanies.(c) Changes in Internal Control Over Financial ReportingManagement has not identified any change in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2011that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B.Other InformationNone. 74‘Table of ContentsPART IIIWe will file a definitive Proxy Statement for our 2012 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than 120days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Onlythose sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference. Item 10.Directors, Executive Officers and Corporate GovernanceThe information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2012 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. Item 11.Executive CompensationThe information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2012 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2012 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. Item 13.Certain Relationships and Related Transactions, and Director IndependenceThe information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2012 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. Item 14.Principal Accountant Fees and ServicesThe information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2012 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. 75Table of ContentsPART IV Item 15.Exhibits and Financial Statement Schedulesa. Documents Filed as Part of this ReportThe following financial statements are set forth in Item 8: Page Report of Independent Registered Public Accounting Firm 56 Consolidated Statements of Assets and Liabilities as of December 31, 2011 57 Consolidated Statement of Operations for the period from January 28, 2011 (commencement of operations) through December 31, 2011 58 Consolidated Statement of Changes in Net Assets for the period from January 28, 2011 (commencement of operations) through December 31, 2011 59 Consolidated Statement of Cash Flows for the period from January 28, 2011 (commencement of operations) through December 31, 2011 60 Consolidated Schedules of Investments as of December 31, 2011 61 Notes to Consolidated Financial Statements 63 b. ExhibitsThe following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC: ExhibitNumber Description 3.1 Articles of Amendment and Restatement* 3.2 Amended and Restated Bylaws* 4.1 Form of Common Stock Certificate*10.1 Dividend Reinvestment Plan*10.2 Investment Advisory and Management Agreement by and between Registrant and Solar Capital Partners, LLC*10.3 Form of Custody Agreement*10.4 Administration Agreement by and between Registrant and Solar Capital Management, LLC*10.5 Form of Indemnification Agreement by and between Registrant and each of its directors*10.6 Trademark License Agreement by and between Registrant and Solar Capital Partners, LLC*10.7 Form of Share Purchase Agreement by and between Registrant and Solar Senior Capital Investors, LLC*10.8 Form of Loan and Servicing Agreement, dated as of August 26, 2011, by and among Registrant, as the servicer and the transferor, SUNSSPV LLC, as the borrower, each of the conduit lenders from time to time party thereto, each of the liquidity banks from time to time partythereto, each of the lender agents from time to time party thereto, Citibank, N.A., as the collateral agent, Wells Fargo Bank, N.A., as theaccount bank, the backup servicer and the collateral custodian, and Citigroup Global Markets Inc., as the administrative agent.**10.9 Form of Contribution Agreement, dated as of August 26, 2011, by and between SUNS SPV LLC, as the contributee, and Solar SeniorCapital Ltd., as the contributor.**10.10 Form of Amendment No. 1 to Share Purchase Agreement by and between Registrant and Solar Senior Capital Investors, LLC. 76Table of ContentsExhibitNumber Description11 Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report).31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.32.1 Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.32.2 Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002. * Previously filed in connection with Solar Senior Capital Ltd.’s registration statement on Form N-2 (File No . 333-171330) filed onFebruary 14, 2011.** Previously filed in connection with Solar Senior Capital Ltd.’s report on Form 8-K filed on August 31, 2011. 77Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. SOLAR SENIOR CAPITAL LTD.By: /s/ MICHAEL S. GROSS Michael S. GrossChief Executive Officer, President, Chairman of the Board and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacity and on the dates indicated. Date Signature TitleFebruary 22, 2012 /s/ MICHAEL S. GROSS Michael S. Gross Chief Executive Officer, President, Chairman of the Boardand Director (Principal Executive Officer)February 22, 2012 /s/ STEVEN HOCHBERG Steven Hochberg DirectorFebruary 22, 2012 /s/ DAVID S. WACHTER David S. Wachter DirectorFebruary 22, 2012 /s/ LEONARD A. POTTER Leonard A. Potter DirectorFebruary 22, 2012 /s/ BRUCE SPOHLER Bruce Spohler Chief Operating Officer and DirectorFebruary 22, 2012 /s/ NICHOLAS RADESCA Nicholas Radesca Chief Financial Officer (Principal Financial Officer) andSecretary 78Exhibit 10.10[Form of Amendment No. 1 to the Shares Purchase Agreement]FIRST AMENDMENT TO THE SHARE PURCHASE AGREEMENTThis First Amendment to the Share Purchase Agreement (this “Amendment”), dated February 22, 2012, is to the Share Purchase Agreement, dated asof February 24, 2011 (the “Share Purchase Agreement”), by and between SOLAR SENIOR CAPITAL LTD., a Maryland corporation (the “Company”),and SOLAR SENIOR CAPITAL INVESTORS LLC, a Delaware limited liability company (the “Purchaser”).WHEREAS, each of the Company and the Purchaser now desires to make certain revisions to the Share Purchase Agreement reflected in thisAmendment for the purpose of amending the terms of the registration rights granted to the Purchaser thereunder; andNOW, THEREFORE, in consideration of the mutual agreements contained herein, and of other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows:1. Share Purchase Agreement. The Share Purchase Agreement is amended hereby by amending and restating Section 4(A) thereto as follows:“A. Mandatory Shelf Registration. The Company shall use its commercially reasonable efforts to prepare and file with the Commission a RegistrationStatement for the resale of any or all the Shares (but not involving any underwritten offerings) on a “shelf” Form N-2 under Rule 415 under the Securities Act(the “Registration Statement”) within sixty (60) days after receiving a notice from the Purchaser instructing the Company to file the Registration Statementwith the Commission (the “Notice Date”), and shall use its commercially reasonable efforts to cause such Registration Statement to be declared effectiveunder the Securities Act as soon as reasonably practicable thereafter; provided, however, that the Company shall have the right to defer such filing for up toone hundred and eighty (180) days after the Notice Date if the Company shall have notified the Purchaser that it would be materially detrimental to theCompany and its security holders for such Registration Statement to be effected at such time. The Company shall use its commercially reasonable efforts tokeep the Registration Statement continuously effective under the Securities Act until the earliest of (A) the date on which the Shares have been sold pursuant tothe Registration Statement, (B) the date all the Shares have been sold pursuant to Rule 144 under the Securities Act, (C) the date on which the Shares cease tobe outstanding and (D) the date on which the Shares become eligible for sale under Rule 144 under the Securities Act without restriction. The Company shallnotify the Purchaser when the Registration Statement has been declared effective.”2. Miscellaneous.a. Mutual Consent. Each of the Company and the Purchaser, by the execution of this Amendment, hereby consents to the amendments,modifications and supplements to the Share Purchase Agreement contemplated herein.b. No Other Amendments. Except as set forth above, no other amendments to the Share Purchase Agreement are intended by the parties hereto, aremade, or shall be deemed to be made, pursuant to this Amendment, and all provisions of the Share Purchase Agreement unaffected by this Amendmentshall remain in full force and effect.c. Effective Date. Each of the Company and the Purchaser agrees that this Amendment shall be deemed to have been effective as of the date thatwas one hundred and eighty (180) days after the Purchase Date (as defined in the Share Purchase Agreement).d. Severability. Whenever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid underapplicable law, but if any provision of this Amendment is held to be prohibited by or invalid under applicable law, such provision shall be ineffectiveonly to the extent of such prohibition or invalidity, without invalidating the remainder of this Amendment.e. Counterparts. This Amendment may be executed simultaneously in two or more counterparts, any one of which need not contain the signaturesof more than one party, but all such counterparts taken together shall constitute one and the same agreement.f. Descriptive Headings. The descriptive headings of this Amendment are inserted for convenience only and do not constitute a substantive part ofthis Amendment.g. Governing Law. This Amendment shall be governed by and interpreted and construed in accordance with the laws of the State of New Yorkapplicable to contracts formed and to be performed entirely within the State of New York, without regard to the conflicts of law provisions thereof to theextent such principles or rules would require or permit the application of the laws of another jurisdiction, and the Investment Company Act of 1940, asamended (the “1940 Act”). In the event of any conflict between the laws of the State of New York and the 1940 Act, the applicable provision of the 1940Act shall control.[Remainder of Page Intentionally Left Blank]IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to the Share Purchase Agreement as of the date first written above. SOLAR SENIOR CAPITAL LTD.By: Name: Michael S. GrossTitle: Chief Executive OfficerSOLAR SENIOR CAPITAL INVESTORS LLCBy: Name: Michael S. GrossTitle: Managing MemberExhibit 31.1Certification of Chief Executive OfficerI, Michael S. Gross, Chief Executive Officer of Solar Senior Capital Ltd. certify that:1. I have reviewed this annual report on Form 10-K of Solar Senior Capital Ltd.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Dated this 22nd day of February 2012. By: /s/ MICHAEL S. GROSS Michael S. Gross Chief Executive OfficerExhibit 31.2Certification of Chief Financial OfficerI, Nicholas Radesca, Chief Financial Officer of Solar Senior Capital Ltd. certify that:1. I have reviewed this annual report on Form 10-K of Solar Senior Capital Ltd.;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Dated this 22 day of February 2012. By: /s/ NICHOLAS RADESCA Nicholas Radesca Chief Financial OfficerndExhibit 32.1Certification of Chief Executive OfficerPursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)In connection with the Annual Report on Form 10-K for the year ended December 31, 2011 (the “Report”) of Solar Senior Capital Ltd. (the “Registrant”),as filed with the Securities and Exchange Commission on the date hereof, I, Michael S. Gross, the Chief Executive Officer of the Registrant, hereby certify, tothe best of my knowledge, that:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theRegistrant. /s/ MICHAEL S. GROSS Name: Michael S. GrossDate: February 22, 2012Exhibit 32.2Certification of Chief Financial OfficerPursuant toSection 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)In connection with the Annual Report on Form 10-K for the year ended December 31, 2011 (the “Report”) of Solar Senior Capital Ltd. (the “Registrant”),as filed with the Securities and Exchange Commission on the date hereof, I, Nicholas Radesca, the Chief Financial Officer of the Registrant, hereby certify, tothe best of my knowledge, that:(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theRegistrant. /s/ NICHOLAS RADESCA Name: Nicholas RadescaDate: February 22, 2012

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