Solar Senior Capital Ltd.
Annual Report 2012

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, 2012OR ¨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. ¨Indicate 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 x Non-accelerated filer ¨ 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 29, 2012 based on the closing price on that date of $16.90on the NASDAQ Global Select Market was approximately $120.5 million. For the purposes of calculating this amount only, all directors, executive officers ofthe Registrant and stockholders holding 5% or more of the outstanding shares have been treated as affiliates. There were 11,505,616 shares of the Registrant’scommon stock outstanding as of February 21, 2013.Portions of the registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the fiscalyear covered 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, 2012TABLE OF CONTENTS Page PART I Item 1. Business 1 Item 1A. Risk Factors 24 Item 1B. Unresolved Staff Comments 45 Item 2. Properties 46 Item 3. Legal Proceedings 46 Item 4. Mine Safety Disclosures 46 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 47 Item 6. Selected Financial Data 50 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 51 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 63 Item 8. Consolidated Financial Statements and Supplementary Data 64 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 90 Item 9A. Controls and Procedures 90 Item 9B. Other Information 90 PART III Item 10. Directors and Executive Officers of the Registrant 91 Item 11. Executive Compensation 91 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 91 Item 13. Certain Relationships and Related Transactions, and Director Independence 91 Item 14. Principal Accountant Fees and Services 91 PART IV Item 15. Exhibits and Financial Statement Schedules 92 Signatures 94 Table of ContentsPART I Item 1.BusinessSolar Senior Capital Ltd.Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “SUNS”, “we”, “us” or “our”), a Maryland corporation formed in December 2010, is aclosed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company(“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes we elected to be treated as a regulatedinvestment 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 the $200 million Credit Facility (“Credit Facility”) with Citigroup Global Markets Inc. acting as administrativeagent. In connection with the Credit Facility, our wholly-owned subsidiary, SUNS SPV LLC (the “SPV”) was formed. The Credit Facility was originallyscheduled to mature on August 26, 2016 and generally bore interest at a rate of LIBOR plus 2.25%. The Credit Facility has $150 million available with anadditional $50 million available as a delayed draw. It can also be expanded up to $600 million. The Credit Facility is secured by all of the assets held by theSPV. Under the terms of the Credit Facility, Solar Senior and the SPV, as applicable, have made certain customary representations and warranties, and arerequired to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar creditfacilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature. On November 7, 2012, we amended our$200 million Credit Facility. As a result of the amendment, the stated interest rate on the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus2.25%, and the Credit Facility continues to have no LIBOR floor requirement. In addition, the amendment reduced certain non-usage fees. The amendmentalso provided us greater flexibility and extended the final maturity date to November 6, 2017.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 ourinvestment objective by investing primarily in senior loans, including first lien, uni-tranche, and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of publiccompanies that are thinly traded. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings forinvestment purposes) will be invested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floatingbase lending rate, primarily LIBOR, 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, partnerships and other business entities which operate in various industries and geographical regions. Senior loans typically are rated belowinvestment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “highrisk” compared to debt instruments that are rated 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 1Table of Contentsinvestment size will vary proportionately with the 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 opportunisticinvestments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companieslocated in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunistic investments, including senior loansissued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 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 tooperate.As of December 31, 2012, our investments totaled $212.6 million and our net asset value was $174.1 million. Our portfolio was comprised of debtinvestments in 31 portfolio companies and our income producing assets, which represented 100% of our total portfolio, had a weighted average annualizedyield on a fair value basis of approximately 7.8%.During our fiscal year ended December 31, 2012, we invested $196.2 million across 19 new and 9 existing portfolio companies through a combinationof primary and secondary market purchases. Investments sold or prepaid during the fiscal year ended December 31, 2012 totaled $162.6 million.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 $2.0 billion of investable capital that invests in the senior debt securities, mezzanine loans and equity securitiesof leveraged middle market companies similar to those we intend to target for investment. The investment team led by Messrs. Gross and Spohler has investedin more than 120 different portfolio companies for Solar Capital and Solar Senior, which investments involved more than 90 different financial sponsors,through December 31, 2012. Since Solar Senior’s inception, these investment professionals have used their relationships in the middle-market financialsponsor and financial intermediary community to generate deal flow. As of February 21, 2013, Mr. Gross and Mr. Spohler beneficially owned, either directlyor indirectly, approximately 6.2% and 4.3%, respectively, of our outstanding common stock.Solar Capital ManagementPursuant to an administration agreement (the “Administration Agreement”), Solar Capital Management furnishes us with office facilities, equipmentand clerical, 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. 2Table of ContentsOperating 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 them. A BDC may use capital provided by public stockholders and from other sourcesto make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock while sharingin the possible benefits, if any, of investing in primarily privately 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 ouroutstanding 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 inthe nature 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, reflecting the value of our total assets to our total senior securities, which include all of ourborrowings and any preferred stock we may issue in the future, of at least 200%. We may also be prohibited under the 1940 Act from knowingly participatingin certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by theSecurities and 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 we believe are relevant to our 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; 3Table of Contents(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(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 thepurchase by 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 aprice which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion ofour assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a singlecounterparty, we 4Table of Contentswould not meet the diversification tests in order to qualify as a RIC for federal income tax purposes. Thus, we do not intend to enter into repurchaseagreements with a single counterparty in excess of this limit. Our investment adviser will monitor the creditworthiness of the counterparties with which weenter into repurchase agreement transactions.Senior 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 ofthe federal 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 adviserare set 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 acase-by-case basis each proposal submitted for a proxy vote to determine its impact on our investments. Although it generally votes against proposals thatmay have a negative 5Table of Contentsimpact 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 ourinvestment adviser are made by the senior officers who are responsible for monitoring each of our investments. To ensure that our vote is not the product of aconflict of interest, it requires that: (i) anyone involved in the decision making process disclose to the managing member any potential conflict that he or sheis aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision makingprocess or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interestedparties.You may obtain information about how we voted proxies by making a written request for proxy voting information to: Solar Capital Partners, LLC,500 Park 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 followinginformation is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we mayshare information with select other parties.Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information ofour stockholders may become available to us. We do not disclose any non-public personal information about our stockholders (or former stockholders) toanyone, 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 elected to be treated, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generally will nothave to pay corporate-level federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To continue toqualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, toqualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” whichis generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the “AnnualDistribution Requirement”). If we qualify as a RIC and satisfy the Annual Distribution Requirement, then we will not be subject to federal income tax on theportion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capitallosses) we distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed(or deemed not 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 endingOctober 31 in 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 Tax Avoidance Requirement”). 6Table 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.”The Regulated Investment Company Modernization Act of 2010, which is generally effective for 2011 and subsequent tax years, provides some relieffrom RIC disqualification due to failures of the income and asset diversification requirements, although there may be additional taxes due in such cases.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 gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited); (iv) cause usto recognize income or gain without a corresponding receipt of cash; (v) adversely affect the time as to when a purchase or sale of securities is deemed tooccur; (vi) adversely alter the characterization of certain complex financial transactions; and (vii) produce income that will not be qualifying income forpurposes of the 90% gross income test described above. We will monitor our transactions and may make certain tax elections in order to mitigate thepotential adverse effect of 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 7Table of Contentsgain or loss as long-term or short-term will depend on how long we held a particular warrant. Upon the exercise of a warrant acquired by us, our tax basis inthe stock purchased under the warrant will equal the sum of the amount paid for the warrant plus the strike price paid on the exercise of the warrant. Except asset forth in “Failure to Qualify as a Regulated Investment Company,” the remainder of this discussion assumes we will qualify as a RIC for each taxable year.Failure 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, provided certain holding period and other requirements were met, could qualify for treatment as “qualified dividend income” in the hands of non-corporate stockholders (and thus eligible for the same lower maximum tax rate applicable to long-term capital gains) to the extent of our current andaccumulated earnings and profits. Subject to certain limitations under the Code, corporate shareholders 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 re-qualify 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 disqualificationand that re-qualify 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 inthe assets 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. Thebase management fee is calculated at an annual rate of 1.00% of our gross assets. Solar Capital Partners, however, waived the portion of the base managementfee payable on net proceeds of the IPO and Concurrent Private Placement that had not 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 quarterlyin arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendarquarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month orquarter have 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 andconsulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter(including the base management fee, expenses payable under the Administration Agreement to Solar Capital Management, and any interest expense anddividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the caseof investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued incomethat we have not received in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed 8Table of Contentsnet of all realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return onthe value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). Our netinvestment income used to calculate this part of the incentive fee is also included in the amount of our gross assets used to calculate the 1.00% basemanagement fee. We pay Solar Capital Partners an incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter asfollows: • no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%; • 50% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, thatexceeds the hurdle but is less than 2.9167% in any calendar quarter (11.67% annualized). We refer to this portion of our pre-incentive fee netinvestment income (which exceeds the hurdle but is less than 2.9167%) as the “catch-up.” The “catch-up” is meant to provide our investmentadviser with approximately 20% of our pre-incentive fee net investment income as if a hurdle did not apply if this net investment incomeexceeds 2.9167% in any 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)will be payable to Solar Capital Partners (once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investmentincome thereafter 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. You should be aware that a rise in the general level of interestrates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may make it easier for us tomeet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to our investment adviser withrespect 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 theaggregate amount of any previously paid capital gain incentive fees with respect to each of the investments in our portfolio. 9Table 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% 10Table 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 11Table 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 cumulativecapital 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 fee (20% multiplied by $25 million ($30 million realized capital gains on sale of Investment A less $5million unrealized capital depreciation on Investment B)) • Year 3: $1.4 million capital gains incentive fee ($6.4 million cumulative fee (20% multiplied by $32 million ($35 million cumulative realizedcapital gains less $3 million unrealized capital depreciation)) less $5 million (previous capital gains fee paid in Year 2)) (1) • Year 4: None • Year 5: None ($5 million cumulative fee (20% multiplied by $25 million ($35 million cumulative realized capital gains less $10 million realizedcapital 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 SolarSenior Capital had been wound up on December 31 of such year.Payment of Our ExpensesAll investment professionals of the investment adviser and their respective staffs, when and to the extent engaged in providing investment advisoryand management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for bySolar Capital 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; 12Table of Contents • 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 withindependent 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 otherexpenses incurred by either Solar Capital Management or us in connection with administering our business, including payments under theAdministration 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.InvestmentsThe Company 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 U.S. and, to a limited extent, non-U.S. corporations, partnerships and other businessentities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securities rated belowinvestment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “high risk” compared to debt instruments thatare rated investment grade. Senior secured loans, however, are generally less risky than subordinated debt, bearing lower leverage and higher recoverystatistics.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. 13Table of ContentsWe 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 awholly owned 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 inthe values 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 intoa hedging 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 torisk of 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.Our principal focus is to provide senior secured loans, including first lien, uni-tranche 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 broadvariety of industries in which our investment adviser has direct expertise.The following is a representative list of the industries in which we have invested: • Aerospace & Defense • Home, Office Furnishings & Durable Consumer Products• Automobile • Hotels, Motels, Inns and Gaming• Banking • Insurance• Beverage, Food & Tobacco • IT Services• Buildings & Real Estate • Leisure, Amusement, Entertainment• Broadcasting & Entertainment • Machinery• Cargo Transport • Mining, Steel, Iron & Non-Precious Metals• Chemicals, Plastics & Rubber • Personal & Nondurable Consumer Products• Containers, Packaging & Glass • Personal, Food & Misc. Services• Diversified/Conglomerate Manufacturing • Personal Transportation• Diversified/Conglomerate Services • Professional Services• Electronics • Retail Stores• Farming & Agriculture • Software• Finance • Telecommunications• Grocery• Healthcare, Education & Childcare • Textiles & Leather• Utilities 14Table of ContentsWe may also invest in other industries if we are presented with attractive opportunities.We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds. We may alsoco-invest on a concurrent basis with affiliates of ours, subject to compliance with applicable regulations and our allocation procedures. Certain types ofnegotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. There can be no assurance that any such order willbe obtained.At December 31, 2012, our portfolio consisted of 31 portfolio companies and was invested 97% in senior secured loans, 3% in unsecured loans in eachcase, measured at fair value. We expect that our portfolio will continue to include primarily senior secured loans.While our primary investment objective is to generate current income through investments in U.S. senior secured loans, and we may also invest aportion of the portfolio in opportunistic investments, including foreign securities.Listed below are our top ten portfolio companies and industries based on their fair value and represented as a percentage of total assets as ofDecember 31, 2012 and 2011:TOP TEN PORTFOLIO COMPANIES AND INDUSTRIES AS OF DECEMBER 31, 2012 Portfolio Company % of TotalAssets KIK Custom Products 6.8% AmeriQual Group, LLC 5.8% Attachmate Corporation 5.4% Hearthside Food Solutions 4.6% Shield Finance Co. SARL 4.6% TriNet HR Corporation 4.6% National Vision, Inc. 4.6% Confie Seguros Holding II Co. 4.5% SLT Environmental Inc. 4.5% Things Remembered, Inc. 4.1% Industry % of TotalAssets Food Products 14.3% Specialty Retail 10.9% Software 9.9% Insurance 9.5% Chemicals, Plastics & Rubber 8.7% Diversified/Conglomerate Service 6.8% Aerospace & Defense 5.9% Personal & Nondurable Consumer Products 5.2% IT Services 4.6% Professional Services 4.6% 15Table of ContentsTOP TEN PORTFOLIO COMPANIES AND INDUSTRIES AS OF DECEMBER 31, 2011 Portfolio Company % of TotalAssets KIK Custom Products 10.3% Hearthside Food Solutions 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 % 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% Listed below is the geographic breakdown of the portfolio based on fair value as of December 31, 2012 and 2011: Geographic Region % of Portfolioat December 31, 2012 United States 95.3% Western Europe 4.7% 100.0% Geographic Region % of Portfolioat December 31, 2011 United States 97.3% Western Europe 2.7% 100.0% Investment Selection ProcessSolar Capital Partners is committed to and utilizes a value-oriented investment philosophy with a focus on the preservation of capital and acommitment to managing downside 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. 16Table of ContentsStable 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 versustheir competitors, 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 that companieswith a diversified customer and supplier base are generally better able to endure economic downturns, industry consolidation, changing business preferencesand 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.Experienced 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 anddue diligence. 17Table of ContentsThe illustration below provides Solar Senior Capital’s target portfolio companies and the targeted position of its investment in a company’s capitalstructure: Investment size may vary proportionally as the size of the capital base changes.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 deep management experience and resources; • 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.Due DiligenceOur “private equity” approach to credit investing incorporates extensive in-depth due diligence often alongside the private equity sponsor. Inconducting due diligence, we will use publicly available information as well as information from relationships with former and current management teams,consultants, competitors and 18Table of Contentsinvestment bankers. We believe that our due diligence methodology allows us to screen a high volume of potential investment opportunities on a consistentand 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 due diligence process, a deal team is in constant dialogue with the management team of the company in which we are considering toinvest to ensure that any concerns are addressed as early as possible through the process and that unsuitable investments are filtered out before considerabletime has been 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 ofthe investment, 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.Investment StructureOnce we determine that a prospective portfolio company is suitable for investment, we will 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. 19Table of ContentsWe 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 also expect that our portfolio companies oftenmay repay 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 ourportfolio companies as much flexibility in managing their businesses as possible, consistent with preservation of our capital. Such restrictions may includeaffirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights, including either observation orparticipation rights.We typically seek to hold most of our investments to maturity or repayment, but have the ability to sell our investments earlier.Managerial assistanceAs a business development company, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance couldinvolve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with andadvising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services.Ongoing Relationships with Portfolio CompaniesSolar Capital Partners monitors our portfolio companies on an ongoing basis. Solar Capital Partners monitors the financial trends of each portfoliocompany 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. 20Table 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 31,2012, the weighted average investment rating on the fair market value of our portfolio was 2. In connection with our valuation process, Solar Capital Partnersreviews these investment ratings on a quarterly basis.Valuation ProceduresWe conduct the valuation of our assets, pursuant to which our net asset value shall be determined, at all times consistent with U.S. generally acceptedaccounting principles (“GAAP”) and the 1940 Act and generally value our assets on a quarterly basis, or more frequently if required. Our valuationprocedures 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,or on behalf of, the board of directors will conduct independent appraisals and review management’s preliminary valuations and make their own assessmentfor (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of our total assets, plusavailable borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in default; (iv) the boardof directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviserand, where appropriate, the respective third-party valuation firms.The recommendation of fair value will generally consider the following factors among others, 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. 21Table 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 consolidated financial statements express theuncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated 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 continue to believe that there has been a reduction in the amount of debt capital available since thedownturn in the credit markets, which began in mid-2007, and that this has resulted in a less competitive environment for making new investments. Whilemany middle-market companies were previously able to raise senior debt financing through traditional large financial institutions, we believe this approachto financing will become more difficult as implementation of U.S. and international financial reforms, such as Basel 3, will limit the capacity of largefinancial institutions to hold non-investment grade leveraged loans on their balance sheets. We believe that many of these financial institutions have de-emphasized their service and product 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. Richard Peteka, our chief financial officer andcorporate secretary, is an employee of Solar Capital Management, and performs his functions as chief financial officer under the terms of our AdministrationAgreement. Guy Talarico, our chief compliance officer, is the chief executive officer of Alaric Compliance Services, LLC, and performs his functions as ourchief compliance 22Table of Contentsofficer under the terms of an agreement between Solar Capital Management and Alaric Compliance Services, LLC. Solar Capital Management has retainedMr. Talarico and Alaric Compliance Services, LLC pursuant to its obligations under our Administration Agreement.Our day-to-day investment operations are 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 feesand expenses 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 consolidatedfinancial statements 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 obtain an audit of the effectiveness of internal controls over financial reporting performed by ourindependent 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,including any 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 andthe regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act andwill take 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, on officialbusiness 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 SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that fileelectronically 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. 23Table of ContentsItem 1A.Risk FactorsAn investment in our securities involves certain risks relating to our structure and investment objectives. The risks set forth below are not the onlyrisks we face, and we face other risks which we have not yet identified, which we do not currently deem material or which are not yet predictable. If any ofthe following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net assetvalue and the trading price of our common stock could decline, and you may lose all or part of your investment.Risks 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, publicand private funds, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing,private equity funds. 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 competitorsmay have higher risk tolerances or different risk assessments than we do, which could allow them to consider a wider variety of investments and establishmore relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us. We cannotassure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. 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 can offer no assurancethat 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 interestrates that 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 and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased riskof credit loss.Our investments are very risky and highly speculative.We invest primarily in senior secured loans, including first lien, uni-tranche and second lien debt instruments, made to middle-market companieswhose debt is rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, andmay be considered “high risk” compared to debt instruments that are rated 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 theportfolio company, including the equity interests of its subsidiaries, which we expect to help mitigate the risk that we will not be repaid. However, there is arisk that the collateral securing our loans may decrease in value over time, may be difficult to sell in a timely manner, may be difficult to appraise and mayfluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raiseadditional capital, and, in some circumstances, our lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’sfinancial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for theloan. 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 atall, or that we will be able to collect on the loan should we be forced to enforce our remedies. 24Table of ContentsIn 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 mayhave obtained 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; • 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. We invest and expect to continue investing in companies whose securities have no establishedtrading market and whose securities are and will be subject to legal and other restrictions on resale or whose securities are and will be less liquid than arepublicly-traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we arerequired to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded ourinvestments. As a result, we do not expect to achieve liquidity in our investments in the near-term. However, to maintain our qualification as a businessdevelopment company and as a RIC, we may have to dispose of investments if we do not satisfy one or more of the applicable criteria under the respectiveregulatory frameworks. In addition, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we havematerial 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 loss if any ofthese companies performs poorly or defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.Our portfolio may be concentrated in a limited number of portfolio companies and industries. Beyond the asset diversification requirements associatedwith our qualification as a RIC under Subchapter M of the Code, we do not have fixed guidelines for diversification, and while we are not targeting anyspecific industries, our investments may be concentrated in relatively few industries or portfolio companies. As a result, the aggregate returns we realize maybe significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.Additionally, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize. 25Table of ContentsCapital markets have recently been in a period of disruption and instability. These market conditions have materially and adversely affected debt andequity capital markets in the United States and abroad, which had, and 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, significantwrite-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financialinstitutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economicconditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for themarket as a whole and financial services firms in particular. These conditions could continue for a prolonged period of time or worsen in the future. Whilethese conditions persist, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equitycapital. Equity capital may be difficult to raise because as a BDC we are generally not able to issue additional shares of our common stock at a price less thannet asset value without first obtaining the approval for such issuance from our stockholders and our independent directors. At our 2012 Annual StockholdersMeeting, subject to certain determinations required to be made by our board of directors, our stockholders approved our ability to sell or otherwise issueshares of our common stock, not exceeding 25% of our then outstanding common stock immediately prior to each such offering, at a price below the thencurrent net asset value per share during a period beginning on May 3, 2012 and expiring on the earlier of the one-year anniversary of the date of the 2012Annual Stockholders Meeting and the date of our 2013 Annual Stockholders Meeting, which is expected to be held in late April or early May 2013.However, notwithstanding such stockholder approval, since our initial public offering on February 24, 2011, we have not sold any shares of our commonstock at a price below our then current net asset value per share. In addition, our ability to incur indebtedness (including by issued preferred stock) is limitedby applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 200% immediately after each time we incurindebtedness. The debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inabilityto 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 than thevalue at which we have recorded our investments. In addition, significant changes in the capital markets, including the recent extreme volatility anddisruption, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involvingour investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on ourbusiness, financial condition or results of operations.If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lendingand investment activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely.Our ability to secure additional financing and satisfy our financial obligations under indebtedness outstanding from time to time will depend upon ourfuture operating performance, which is subject to the prevailing general economic and credit market conditions, including interest rate levels and theavailability of credit generally, and financial, business and other factors, many of which are beyond our control. The prolonged continuation or worsening ofcurrent economic and capital market conditions could have a material adverse effect on our ability to secure financing on favorable terms, if at all.If we are unable to obtain debt capital, then our equity investors will not benefit from the potential for increased returns on equity resulting fromleverage to the extent that our investment strategy is successful and we may be limited in our ability to make new commitments or fundings to our portfoliocompanies. 26Table of ContentsThe downgrade of the U.S. credit rating and the economic crisis in Europe could negatively impact our business, financial condition and results ofoperations.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 affect 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 portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans during these periods.Therefore, our non-performing assets may increase and the value of our portfolio may decrease during these periods as we are required to record the values ofour investments. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investmentsat fair value. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorableeconomic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit 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 andjeopardize the portfolio company’s ability to meet its obligations under the debt that we hold. We may incur additional expenses to the extent necessary toseek recovery 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 actually provided significant managerial assistance to that portfolio company, abankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors.These portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensiveresearch and development, manufacturing, marketing and service capabilities and greater number of qualified and experienced managerial and technicalpersonnel. They may need additional financing which they are unable to secure and which we are unable or unwilling to provide, or they may be subject toadverse developments unrelated to the technologies they acquire.We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlyingcollateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, which are subject to the risk thatother lenders may be 27Table of Contentsdirectly secured by the assets of the portfolio company. In the event of a default, those collateralized lenders would have priority over us with respect to theproceeds of a sale of the underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlyingassets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of theassets.In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject toequitable subordination. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loanor on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment. Wheredebt senior to our loan exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, acceptprepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company.Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral inthe event of a default, during which time the collateral may decline in value, causing us to suffer losses.If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able toobtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder aportfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtainnew financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.The business, financial condition and results of operations of our portfolio companies could be adversely affected by worldwide economic conditions,as well as political and economic conditions in the countries in which they conduct business.The business and operating results of our portfolio companies may be impacted by worldwide economic conditions. Although the U.S. economy has inrecent quarters shown signs of recovery from the 2008–2009 global recession, the strength and duration of any economic recovery will be impacted byworldwide economic growth. For instance, a number of recent reports indicate that growth in China and other emerging markets may be slowing relative tohistorical growth rates. The significant debt in U.S. and European countries is expected to hinder growth in those countries for the foreseeable future.Multiple factors relating to the international operations of some of our portfolio companies and to particular countries in which they operate couldnegatively impact their business, financial condition and results of operations.Some of the products of our portfolio companies are developed, manufactured, assembled, tested or marketed outside the U.S. Any conflict oruncertainty in these countries, including due to natural disasters, public health concerns, political unrest or safety concerns, could harm their business,financial condition and results of operations. In addition, if the government of any country in which their products are developed, manufactured or sold setstechnical or regulatory standards for products developed or manufactured in or imported into their country that are not widely shared, it may lead some oftheir customers to suspend imports of their products into that country, require manufacturers or developers in that country to manufacture or develop productswith different technical or regulatory standards and disrupt cross-border manufacturing, marketing or business relationships which, in each case, could harmtheir businesses.The effect 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 28Table of Contentsweather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increasesin the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to theirbusiness. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues.Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including serviceinterruptions.Price declines and illiquidity in the corporate debt markets may adversely affect, and may continue to adversely affect, the fair value of our portfolioinvestments, reducing our net asset value through increased net unrealized depreciation. Any unrealized depreciation that we experience on our loanportfolio may be an indication of future realized losses, which could reduce our income available for distribution and could adversely affect our abilityto service our outstanding borrowings.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 by orunder the direction of our board of directors. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. Anyunrealized depreciation in our loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to us with respect tothe affected loans. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods andcould materially adversely affect our ability to service our outstanding borrowings. The unprecedented declines in prices and liquidity in the corporate debtmarkets from 2008 through mid-2010 resulted in significant declines in the fair value of loans and other debt investments. Depending on market conditions,we could incur substantial losses in future periods, which could further reduce our net asset value and have a material adverse impact on our business,financial condition and results of operations.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 inthe original 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 ofcapital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and ourinitial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital tomake a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, eitherbecause we prefer other opportunities or because we are subject to BDC requirements that would prevent such follow-on investments or the desire to maintainour RIC tax status.Because we generally do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over ourportfolio 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, we do not currently hold controlling equity positions in our portfolio companies. As a result, we are subject to therisk that a portfolio company may make business decisions with which we disagree, and that the management and/or stockholders of a portfolio companymay take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the investments that we typically hold in our portfoliocompanies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and may therefore suffer adecrease in the value of our investments. 29Table of ContentsPrepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity.We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs, we will generallyreinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typicallyhave substantially lower yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investmentin a new portfolio company may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adverselyaffected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments could negatively impact our return onequity, which could result in a decline in the market price of our common stock.We may choose to waive or defer enforcement of covenants in the debt securities held in our portfolio, which may cause us to lose all or part of ourinvestment in these companies.We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligationson the operation of the company’s business and its financial condition. However, from time to time we may elect to waive breaches of these covenants,including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending uponthe financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of futurepayments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may havelimited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay dividends, couldadversely affect our results of operation and financial condition and cause the loss of all or part of your investment.Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans.Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of othercreditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also appliedthe doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resultingfrom the ownership of equity interests in a client. Payments on one or more of our loans, particularly a loan to a client in which we may also hold an equityinterest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over thebusiness and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influencemay constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the portfoliocompany. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debtor, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s commonequity only after all of its obligations relating to its debt and preferred securities had been satisfied.An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information aboutthese companies, a dependence on the talents and efforts of only a few key portfolio company personnel and a greater vulnerability to economicdownturns.We invest primarily in privately held companies. Generally, little public information exists about these companies, and we are 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.If we will be unable to uncover all material information about these companies, we may not make a fully informed investment decision, 30Table of Contentsand we may lose money on our investments. Also, privately held companies frequently have less diverse product lines and smaller market presence thanlarger competitors. These factors could adversely affect our investment returns as compared to companies investing primarily in the securities of publiccompanies.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 uni-tranche, second lien, as well as unsecured debt instruments issued by our portfoliocompanies. If we invest in uni-tranche, second lien, or unsecured debt instruments, our portfolio companies typically may be permitted to incur other debtthat ranks equally with, or senior to, such debt instruments. By their terms, such debt instruments may provide that the holders are entitled to receive paymentof interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we 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.In such 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 invest, we would have to share on an equal basis any distributions with other creditors holdingsuch debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company. Any such limitations onthe ability of our portfolio companies to make principal or interest payments to us, if at all, may reduce our net asset value and have a negative materialadverse impact to our business, financial condition and results of operation.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 tradebalances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investmentand capital appreciation, 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 floors to seek to hedge against fluctuations in the relative values of our portfoliopositions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does noteliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging canestablish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Suchhedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible tohedge against an exchange rate or interest rate fluctuation that is so generally 31Table of Contentsanticipated that we are not able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish aperfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us fromachieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuationsaffecting 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 relatedto currency fluctuations. To the extent we engage in hedging transactions, we also face the risk that counterparties to the derivative instruments we hold maydefault, which may expose us to unexpected losses from positions where we believed that our risk had been appropriately hedged.Our investment adviser may not be able to achieve the same or similar returns as those achieved by our senior investment professionals while they wereemployed 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, not exceeding 25% ofour then outstanding common stock immediately prior to each such offering, at its market price without first obtaining the approval for such issuance fromour stockholders and our independent directors. At our 2012 Annual Stockholders Meeting, subject to certain determinations required to be made by ourboard of directors, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below the then current net assetvalue per share during a period beginning on May 3, 2012 and expiring on the earlier of the one-year anniversary of the date of the 2012 AnnualStockholders Meeting and the date of our 2013 Annual Stockholders Meeting, which is expected to be held in late April or early May 2013. However,notwithstanding such stockholder approval, since our initial public offering on February 24, 2011, we have not sold any shares of our common stock at aprice below our then current net asset value per share. If additional funds are not available to us, we could be forced to curtail or cease our new lending andinvestment 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 operatingperformance. 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; 32Table of Contents • 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; • 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, we may become the target of securities litigation in the future. Securities litigation couldresult 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 monthly 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,due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. As a RIC, if we do not distribute a certainpercentage of our income annually, we will suffer adverse tax consequences, including failure to obtain, or possible loss of, the federal income tax benefitsallowable to RICs. We cannot assure you that you will receive distributions at a particular level or at all.We may choose to pay dividends in our own common stock, in which case our stockholders may be required to pay federal income taxes in excess of thecash 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. Under certainapplicable provisions of the Code and the Treasury regulations, distributions payable in cash or in shares of stock at the election of stockholders are treatedas taxable dividends. The Internal Revenue Service has issued private rulings indicating that this rule will apply even where the total amount of cash thatmay be distributed is limited to no more than 20% of the total distribution. Under these rulings, if too many stockholders elect to receive their distributions incash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares ofstock. If we decide to make any distributions consistent with these rulings that are payable in part in our stock, taxable stockholders receiving such dividendswill be required to include the full amount of the dividend (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-termcapital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profitsfor United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cashreceived. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included inincome with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, wemay be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. Inaddition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downwardpressure on the trading price of our stock. 33Table of ContentsSales 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 substantialamounts of our common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. Ifthis occurs 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 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 of Mr. Grossor Mr. Spohler, or any of the other senior investment professionals who serve on Solar Capital Partners’ investment team, could have a material adverse effecton our ability to achieve our investment objective as well as on our financial condition and results of operations. In addition, we can offer no assurance thatSolar 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. Specifically, each of Messrs. Gross and Spohler serve as chief executive officer and chief operating officer,respectively, of Solar Capital.Our business model depends to a significant extent upon strong referral relationships with financial sponsors, and the inability of the senior investmentprofessionals of our investment adviser to maintain or develop these relationships, or the failure of these relationships to generate investmentopportunities, 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 to develop new relationships with other sponsors or sources of investment opportunities, we will not beable to grow our investment portfolio. In addition, individuals with whom the senior investment professionals of our investment adviser have relationshipsare not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investmentopportunities for us. 34Table of ContentsA 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 and the CreditFacility. Any such failure could result in an event of default and all of our debt being declared immediately due and payable and would affect our ability toissue senior securities, including borrowings, and pay dividends, which could materially impair our business operations. Our liquidity could be impairedfurther by an inability to access the capital markets or to draw on our Credit Facility. For example, we cannot be certain that we will be able to renew ourCredit Facility as it matures or to consummate new borrowing facilities to provide capital for normal operations, including new originations. Reflectingconcern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers. Thismarket turmoil and tightening of credit have led to increased market volatility and widespread reduction of business activity generally.If we are unable to renew or replace our Credit Facility and consummate new facilities on commercially reasonable terms, our liquidity will be reducedsignificantly. If we consummate new facilities but are then unable to repay amounts outstanding under such facilities, and are declared in default or areunable to renew or refinance these facilities, we would not be able to initiate significant originations or to operate our business in the normal course. Thesesituations may arise due to circumstances that we may be unable to control, such as inaccessibility to the credit markets, a severe decline in the value of theU.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, weare unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over thelong term, adverse conditions in particular sectors of 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 companiesthat meet 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 provide managerialassistance to our portfolio companies as the principals of our administrator. In addition, the members of Solar Capital Partners’ investment team have similarresponsibilities with respect to the management of Solar Capital’s investment portfolio. Such demands on their time may distract them or slow our rate ofinvestment. In order to grow, Solar Capital Partners will need to retain, train, supervise and manage new investment professionals. However, we can offer noassurance that any such investment professionals will contribute effectively to the work of the investment adviser. Any failure to manage our future growtheffectively 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 financialinstitutions in the future. A reduction in the availability of new capital could 35Table of Contentslimit our ability to grow. We must distribute at least 90% of our investment company taxable income to our stockholders to maintain our regulatedinvestment company status. As a result, any such cash earnings may not be available to fund investment originations. We expect to borrow from financialinstitutions and issue additional debt and equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it couldlimit our ability to grow, which may have an adverse effect on the value of our securities. In addition, as a BDC, our ability to borrow or issue preferred stockmay be restricted if our total assets are less than 200% of our total borrowings and preferred stock.Any failure on our part to maintain our status as a BDC would reduce our operating flexibility and we may be limited in our investment choices as aBDC.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 securities, primarily in private companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities andother high quality debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority ofour 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 ourqualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance withsuch regulations would 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, the necessity ofraising additional capital may expose us to risks, including the typical risks associated with leverage.In order to satisfy the tax requirements applicable to a RIC, to avoid payment of excise taxes and to minimize or avoid payment of income taxes, weintend to distribute to our stockholders substantially all of our ordinary income and realized net capital gains except for certain realized net long-term capitalgains, which we may retain, pay applicable income taxes with respect thereto and elect to treat as deemed distributions to our stockholders. We may issuedebt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up tothe maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts suchthat our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by seniorsecurities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be requiredto sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may bedisadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.As of December 31, 2012, we had $39.1 million outstanding under our 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 are not 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 36Table of Contentssale. In any such case, 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 ofdirectors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuingmore common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at thattime will decrease, and you might experience dilution. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest inour earnings and assets and voting interest in us than the increase in our assets resulting from such issuance. Because the number of future shares of commonstock that may be issued below our net asset value per share and the price and timing of such issuances are not currently known, we cannot predict the actualdilutive effect of any such issuance. We cannot determine the resulting reduction in our net asset value per share of any such issuance. We also cannot predictwhether shares of our common stock will trade above, at or below our net asset value.At our 2012 Annual Stockholders Meeting, subject to certain determinations required to be made by our board of directors, our stockholders approvedour ability to sell or otherwise issue shares of our common stock at a price below the then current net asset value per share during a period beginning onMay 3, 2012 and expiring on the earlier of the one-year anniversary of the date of the 2012 Annual Stockholders Meeting and the date of our 2013 AnnualStockholders Meeting, which is expected to be held in late April or early May 2013. However, notwithstanding such stockholder approvals, since theCompany’s initial public offering on February 24, 2011, the Company has not sold any shares of its common stock at a price below the Company’s thencurrent NAV.Our Stockholders may experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.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.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 December 31, 2012, we had $39.1 million outstanding under our Credit Facility. We may borrow from and/or issue senior debt securities tobanks, insurance companies and other lenders in the future. Lenders of these senior securities, including our credit facility, will have fixed dollar claims onour assets that are superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of adefault. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we notleveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a declinecould also negatively affect our ability to make dividend payments on our common stock. Leverage is generally considered a speculative investmenttechnique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economicconditions and competitive pressures. Moreover, as the management fee payable to our investment adviser, Solar Capital Partners, will be payable based onour gross assets, including those assets acquired through the use of leverage, Solar Capital Partners will have a financial incentive to incur leverage whichmay not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a resultof leverage, including any increase in the management fee payable to Solar Capital Partners. 37Table of ContentsAs a BDC, we generally are 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%. Additionally, the credit facility requires us to comply with certainfinancial and other restriction covenants, including maintaining an asset coverage ratio of at least 200% at any time. Failure to maintain compliance withthese covenants could result in an event of default and all of our debt being declared immediately due and payable. If this ratio declines below 200%, we maynot be able to incur additional debt 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 material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ willdepend on our investment adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We cannotassure you that we will be able to obtain credit at all or on terms acceptable to us.In addition, our Credit Facility imposes, and any other debt facility into which we may enter would likely impose financial and operating covenantsthat restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make thedistributions required to maintain 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 inthe future 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 Company assuming various annual returns onour total assets, net of interest expense. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing inthe table below. Assumed total return(net of interest expense) (10)% (5)% 0% 5% 10% Corresponding return to stockholder(1) (13.0)% (6.8)% (0.6)% 5.7% 11.9% (1)Assumes $217.0 million in total assets and $39.1 million in total debt outstanding, which reflects our total assets and total debt outstanding as ofDecember 31, 2012, and a debt cost of funds of 2.5%. Excludes non-leverage related expenses.It is likely that the terms of any current or future long-term or revolving credit or warehouse facility we may enter into in the future could constrain ourability to grow our business.Under our borrowings and Credit Facility, current lenders have, and any future lender or lenders may have, fixed dollar claims on our assets that aresenior to the claims of our stockholders and, thus, will have a preference over our stockholders with respect to our assets in the collateral pool. Our CreditFacility and borrowings also subject us to various financial and operating covenants, including, but not limited to, maintaining certain financial ratios andminimum tangible net worth amounts. Future credit facilities and borrowings will likely subject us to similar or additional covenants. In addition, we maygrant a securities interest in our assets in connection with any such credit facilities and borrowings.Our Credit Facility contains customary default provisions such as a minimum net worth amount, a profitability test, and a restriction on changing ourbusiness and loan quality standards. In addition, our Credit Facility requires the repayment of all outstanding debt on the maturity which may disrupt ourbusiness and potentially the business of our portfolio companies that are financed through the credit facility. An event of default under our credit facilitywould likely result, among other things, in termination of the availability of further funds under our Credit Facility and accelerated maturity dates for allamounts outstanding under our Credit Facility, which would likely disrupt our business and, potentially, the business of the portfolio companies 38Table of Contentswhose loans we finance through our Credit Facility. This could reduce our revenues and, by delaying any cash payment allowed to us under our CreditFacility until the lender has been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our status as a RIC.The terms of future available financing may place limits on our financial and operation flexibility. If we are unable to obtain sufficient capital in thefuture, we may be forced to reduce or discontinue our operations, not be able to make new investments, or otherwise respond to changing business conditionsor competitive pressures.To the extent we use debt or preferred stock to finance our investments, changes in interest rates will affect our cost of capital and net investmentincome.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-termdebt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may includevarious interest 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 debtinvestments. Accordingly, an increase in interest rates may 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 our pre-incentive fee net investment income.We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and therisks 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.Pending legislation may allow us to incur additional leverage.As a business development company, under the 1940 Act generally we are not permitted to incur indebtedness unless immediately after suchborrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recentlegislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt thatbusiness development companies may incur by modifying the percentage from 200% to 150%. As a result, we may be able to incur additional indebtednessin the future and therefore your risk of an investment in us may increase.There will be uncertainty as to the value of our portfolio investments.A large percentage of our portfolio investments are 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 value these securities and the credit facility on a quarterly basis in accordancewith our valuation policy, which will be at all times consistent with GAAP. Our board of directors utilizes the services of third-party valuation 39Table of Contentsfirms to aid it in determining the fair value of these securities and the credit facility. The board of directors discusses valuations and determines the fair valuein good faith based on the input of our investment adviser and the respective third-party valuation firms. The factors that may be considered in fair valuepricing 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 time andmay 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 higherthan the values that we ultimately realize upon the disposal of such securities.Our quarterly and annual operating results are subject to fluctuation as a result of the nature of our business, and if we fail to achieve our investmentobjective, the net asset value of our common stock may decline.We could experience fluctuations in our quarterly and annual operating results due to a number of factors, some of which are beyond our control,including, but not limited to, the interest rate payable on the debt securities that we 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 or losses, changes in our portfolio composition, the degree to which weencounter competition in our markets, market volatility in our publicly traded securities and the securities of our portfolio companies, and general economicconditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods. In addition, anyof these factors could negatively impact our ability to achieve our investment objectives, which may cause our net asset value of our common stock todecline.Our investments may be in portfolio companies which may have limited operating histories and financial resources.Our portfolio companies compete with larger, more established companies with greater access to, and resources for, further development in newtechnologies. We also expect that our portfolio will continue to consist of investments that may have relatively limited operating histories. These companiesmay be particularly vulnerable to U.S. and foreign economic downturns such as the current recession and European financial crisis, may have more limitedaccess to capital and higher funding costs, may have a weaker financial position and may need more capital to expand or compete. These businesses also mayexperience substantial variations in operating results. They may face intense competition, including from companies with greater financial, technical andmarketing resources. Furthermore, some of these companies do business in regulated industries and could be affected by changes in government regulation.Accordingly, these factors could impair their cash flow or result in other events, such as bankruptcy, which could limit their ability to repay their obligationsto us, and may adversely affect the return on, or the recovery of, our investment in these companies. We cannot assure you that any of our investments in ourportfolio companies will be successful. Therefore, we may lose our entire investment in any or all of our portfolio companies.There are significant potential conflicts of interest, including Solar Capital Partners’ management of Solar Capital, which could impact our investmentreturns.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 bestinterests of us or our stockholders. In 40Table of Contentsaddition, we note that any affiliate currently existing, or formed in the future, and managed by our investment adviser or any of its affiliates may,notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classessimilar to those targeted by us. As a result, Solar Capital Partners may face conflicts in allocating investment opportunities between us and such other entities.Although Solar Capital Partners will endeavor to allocate investment opportunities in a fair and equitable manner, it is possible that, in the future, we may notbe given the opportunity to participate in investments made by investment funds managed by our investment adviser or an investment manager affiliatedwith our investment adviser. In any such case, when Solar Capital Partners identifies an investment, it will be forced to choose which investment fund shouldmake the investment.We may co-invest on a concurrent basis with Solar Capital, and any other affiliates that our investment adviser has or 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 forcertain expenses 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 longas Solar 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 ourchief financial 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 depreciationthat we 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, wemay be 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 anet loss for 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 iscalculated 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 41Table of Contentsreceives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike that portion of the incentive fee based on income, there isno hurdle rate applicable to the portion of the incentive fee based on net capital gains. As a result, the investment adviser may have a tendency to invest morecapital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing inmore speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during 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 would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of theterm. Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of thisincentive fee would be based on income that we have not received in cash. In addition, the “catch-up” portion of the incentive fee may encourage SolarCapital Partners to accelerate or defer interest payable by portfolio companies from one calendar quarter to another, potentially resulting in fluctuations intiming 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 alsoremain obligated 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 weinvest.We will become subject to corporate-level income tax if we are unable to qualify and maintain our qualification as a regulated investment companyunder Subchapter M of the Code.Although we have elected to be treated as a RIC under Subchapter M of the Code for 2012, no assurance can be given that we will continue to be ableto qualify for and maintain RIC status. To obtain and maintain RIC tax treatment under the Code, we must meet the following annual distribution, incomesource 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 incometax. • 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 ourtaxable year. Failure to meet those requirements may result in our having to dispose of certain investments quickly in order to prevent the loss ofRIC status. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions couldbe made at disadvantageous prices and could result in substantial losses.If 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 42Table of Contentsdistribution and the amount of our distributions. Such a failure would have a material adverse effect on us, the net asset value of our common stock and thetotal return, if any, obtainable from your investment in our common stock. Any net operating losses that we incur in periods during which we qualify as a RICwill not offset net capital gains (i.e., net realized long-term capital gains in excess of net realized short-term capital losses) that we are otherwise required todistribute, and we cannot pass such net operating losses through to our stockholders. In addition, net operating losses that we carry over to a taxable year inwhich we qualify as a RIC normally cannot offset ordinary income or capital gains.We may have difficulty satisfying the annual distribution requirement in order to qualify and maintain RIC status if we recognize income before orwithout receiving cash representing such income.In accordance with generally accepted accounting principles and tax requirements, we include in income certain amounts that we have not received incash, such as contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term. In addition to thecash yields received on our loans, in some instances, certain loans may also include any of the following: end-of-term payments, exit fees, balloon paymentfees or prepayment fees. The increases in loan balances as a result of contractual PIK arrangements are included in income for the period in which suchpayment-in-kind interest was accrued, which is often in advance of receiving cash payment, and are separately identified on our statements of cash flows. Wealso may be required to include in income certain other amounts prior to receiving the related cash.Any warrants that we receive in connection with our debt investments will generally be valued as part of the negotiation process with the particularportfolio company. As a result, a portion of the aggregate purchase price for the debt investments and warrants will be allocated to the warrants that wereceive. This will generally result in “original issue discount” for tax purposes, which we must recognize as ordinary income, increasing the amount that weare required to distribute to qualify for the federal income tax benefits applicable to RICs. Because these warrants generally will not produce distributablecash for us at the same time as we are required to make distributions in respect of the related original issue discount, we would need to obtain cash from othersources or to pay a portion of our distributions using shares of newly issued common stock, consistent with Internal Revenue Service requirements, to satisfysuch distribution requirements.Other features of the debt instruments that we hold may also cause such instruments to generate an original issue discount, resulting in a dividenddistribution requirement in excess of current cash interest received. Since in certain cases we may recognize income before or without receiving cashrepresenting such income, we may have difficulty meeting the RIC tax requirement to distribute at least 90% of our net ordinary income and realized netshort-term capital gains in excess of realized net long-term capital losses, if any. Under such circumstances, we may have to sell some of our investments attimes we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distributionrequirements. If we are unable to obtain cash from other sources and are otherwise unable to satisfy such distribution requirements, we may fail to qualify forthe federal income tax benefits allowable to RICs and, thus, become subject to a corporate-level income tax on all our income.Our board of directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could conveyspecial 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 directors isrequired 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 43Table of Contentsand conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price forholders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by our existing commonstockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holdersof preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Act providesthat holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. We currently have no plansto issue preferred stock. The issuance of preferred shares convertible into shares of common stock might also reduce the net income and net asset value pershare of our common stock upon conversion, provided, that we will only be permitted to issue such convertible preferred stock to the extent we comply withthe requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effecton 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 impact on theprice 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 CombinationAct may 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 withthe 1940 Act. The SEC staff has issued informal guidance setting forth its position that certain provisions of the Control Share Act would, if implemented,violate Section 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, to cause the issuance of additional shares of our stock, to amend our charter without stockholder approval and to increase or decreasethe number of shares of stock that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer orprevent a transaction or a change 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 bythe 1940 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. 44Table of ContentsOur business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect ourbusiness and financial results.We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed.These entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQ Stock Market, have issued a significant number ofnew and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations andrequirements in response to laws enacted by Congress. On July 21, 2010, the Dodd-Frank Wall Street Reform and Protection Act, or the Dodd-Frank Act, wasenacted. There are significant corporate governance-related provisions in the Dodd-Frank Act, and the SEC has adopted additional rules and regulations thatmay impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversionof management’s time from other business activities.Changes in laws or regulations governing our operations may adversely affect our business.Changes in the laws or regulations, or the interpretations of the laws and regulations, which govern business development companies, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws andregulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, feesand other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures, and other trade practices. Ifthese laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in whichwe currently conduct business, then we may have to incur significant expenses in order to comply or we may have to restrict our operations. In addition, if wedo not comply with applicable laws, regulations and decisions, then we may lose licenses needed for the conduct of our business and be subject to civil finesand criminal penalties, any of which could have a material adverse effect upon our business results of operations or financial condition.Our investment adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruptionin 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 on 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 doso quickly, 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 theexpertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, theintegration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adverselyaffect our financial condition, business and results of operations. Item 1B.Unresolved Staff CommentsNone. 45Table 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 presently conducted. Item 3.Legal ProceedingsWe are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. Fromtime to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of ourrights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect thatthese proceedings will have a material effect upon our financial condition or results of operations. Item 4.Mine Safety DisclosuresNot applicable 46Table 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 intraday sales prices forour common stock, such sales prices as a percentage of NAV per share and quarterly distributions per share. NAV(1) Price Range High SalesPrice as aPercentageof NAV(2) Low SalesPrice as aPercentageof NAV(2) CashDistributionsPer Share(3) Fiscal 2012 High Low Fourth Quarter $18.33 $18.90 $16.68 3.1% (9.0)% $0.3525 Third Quarter $18.60 $18.53 $16.58 (0.4)% (10.9)% $0.3375 Second Quarter $18.54 $17.31 $15.57 (6.6)% (16.0)% $0.30 First Quarter $18.45 $17.43 $15.39 (5.5)% (16.6)% $0.30 Fiscal 2011 Fourth Quarter $18.15 $16.58 $13.50 (8.7)% (25.6)% $0.27 Third Quarter $17.97 $18.49 $14.14 2.9% (21.3)% $0.23 Second Quarter $18.78 $19.17 $16.95 2.1% (9.7)% $0.05 First Quarter (from February 24, 2011 through March 31, 2011) $18.73 $19.80 $18.52 5.7% (1.1)% — (1)Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date ofthe high and low sales prices. The net asset values shown are based on outstanding shares at the end of each period.(2)Calculated as the respective high or low intraday sales price divided by NAV and subtracting 1.(3)Represents the cash distribution declared for 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 risk thatour 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 22, 2013 was $18.61 per share. As of February 22, 2013, we had 6stockholders of record.DIVIDENDSWe intend to continue to distribute monthly dividends to our stockholders. Our monthly dividends, if any, will be determined by our board ofdirectors.We have elected 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. 47Table 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 assetcoverage test for borrowings when applicable to us as a business development company under the 1940 Act and due to provisions in current and future creditfacilities. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our RICstatus. We cannot 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 reinvestedin shares 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 summarizes our dividends to stockholders: Date Declared Record Date Payment Date Amount Fiscal 2013 February 25, 2013 March 21, 2013 April 2, 2013 $0.1175 February 5, 2013 February 21, 2013 March 1, 2013 0.1175 January 8, 2013 January 24, 2013 February 1, 2013 0.1175 Total (2013) $0.3525 Fiscal 2012 December 6, 2012 December 20, 2012 January 3, 2013 $0.1175 November 1, 2012 November 22, 2012 December 4, 2012 0.1175 October 4, 2012 October 25, 2012 November 2, 2012 0.1175 September 11, 2012 September 20, 2012 October 2, 2012 0.1175 July 31, 2012 August 23, 2012 September 5, 2012 0.115 July 9, 2012 July 19, 2012 August 2, 2012 0.105 June 11, 2012 June 21, 2012 July 2, 2012 0.10 May 1, 2012 May 18, 2012 June 4, 2012 0.10 April 5, 2012 April 18, 2012 May 2, 2012 0.10 February 22, 2012 March 20, 2012 April 3, 2012 0.10 February 3, 2012 February 17, 2012 March 2, 2012 0.10 January 6, 2012 January 19, 2012 February 2, 2012 0.10 Total (2012) $1.29 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 48Table of ContentsSale 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.STOCK 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, as we do not believe there is an appropriate index of companies with an investment strategy similar to our own with which to compare the return onour common stock, for the period from February 24, 2011 (the date that shares of our common stock began trading on the NASDAQ Global Select Market)through December 31, 2012. The graph assumes that a person invested $10,000 in each of the following: our common stock (SUNS), the S&P 500 Index, andthe Russell 2000 Financial Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. Itassumes that dividends paid are invested in like securities. The graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed”with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the 1934 Act. The stock price performance included in the abovegraph is not necessarily indicative of future stock price performance. 49Table of ContentsItem 6.Selected Financial DataThe selected financial and other data below should be read in conjunction with our “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements and notes thereto. Financial information is presented for December 31, 2012 and 2011as well as for the fiscal year ended December 31, 2012 and for the period from January 28, 2011 (commencement of operations) through December 31, 2011.Financial information has been derived from our consolidated financial statements that were audited by KPMG LLP (“KPMG”), an independent registeredpublic accounting firm. ($ in thousands, except per share data) Year EndedDecember 31, 2012 Period fromJanuary 28, 2011toDecember 31, 2011 Income statement data: Total investment income $20,539 $7,890 Total expenses (8,046) (5,290) Net investment income 12,493 2,600 Net realized gain (loss) 618 (576)Net change in unrealized gain (loss) 801 (2,274)Net increase (decrease) in net assets resulting fromoperations 13,912 (250)Per share data: Net investment income $1.32 $0.30 Net realized and unrealized gain (loss) 0.15 (0.33)Dividends and distributions declared 1.29 0.55 ($ in thousands, except per share data) As ofDecember 31, 2012 As ofDecember 31, 2011 Balance sheet data: Total investment portfolio $212,602 $177,749 Total cash and cash equivalents 2,647 2,934 Total assets 217,029 187,395 Credit facility payable 39,100 8,600 Net assets 174,103 172,435 Per share data: Net asset value per share $18.33 $18.15 Other data (unaudited): Weighted average annualized yield on incomeproducing investments(2): Based on fair value 7.8% 8.5% Based on cost 7.7% 8.4% Number of portfolio companies at period end: 31 21 (1)Commencement of operations(2)Unaudited 50(1) Table of ContentsItem 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 Consolidated FinancialStatements and notes thereto appearing elsewhere in this report.Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financialcondition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to: • our future operating results; • our business prospects and the prospects of our portfolio companies; • the impact of investments that we expect to make; • our contractual arrangements and relationships with third parties; • the dependence of our future success on the general economy and its impact on the industries in which we invest; • the ability of our portfolio companies to achieve their objectives; • our expected financings and investments; • the adequacy of our cash resources and working capital; and • the timing of cash flows, if any, from the operations of our portfolio companies.We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Ouractual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors”and elsewhere in this report.We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume noobligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whetheras a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or throughreports that we in the future may file with the SEC, including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.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 was originally scheduled to mature on August 26,2016 and generally bore interest at a rate of LIBOR plus 2.25%. The Credit Facility has $150 million available with an additional $50 million available as adelayed draw. It can also be expanded up to $600 million. The Credit Facility is secured by all of the assets held by the SPV. Under the terms of the CreditFacility, Solar Senior and the SPV, as applicable, have made certain customary representations and warranties, and are required to comply with variouscovenants, 51Table of Contentsincluding leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usualand customary events of default for credit facilities of this nature. On November 7, 2012, we amended our $200 million Credit Facility. As a result of theamendment, the stated interest rate on the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues tohave no LIBOR floor requirement. In addition, the amendment reduced certain non-usage fees. The amendment also provided us greater flexibility andextended the final maturity date to November 6, 2017.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 ourinvestment objective by investing primarily in senior loans, including first lien, uni-tranche, and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of publiccompanies that are thinly traded. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings forinvestment purposes) will be invested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floatingbase lending rate, primarily LIBOR, 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, partnerships and other business entities which operate in various industries and geographical regions. Senior loans typically are rated belowinvestment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “highrisk” compared to debt instruments that are rated 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 proportionatelywith the 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 opportunisticinvestments, which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are notlimited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of theUnited States. We may invest up to 30% of our total assets in such opportunistic investments, including senior loans issued by non-U.S. issuers, subject tocompliance with our regulatory obligations as a BDC under the 1940 Act.As of December 31, 2012, our investment portfolio totaled $212.6 million and our net asset value was $174.1 million. Our portfolio was comprised ofdebt investments in 31 different 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 7.8%, and 7.7% at cost.During our fiscal year ended December 31, 2012, we invested $196.2 million across 19 new and 9 existing portfolio companies through a combinationof primary and secondary market purchases. Investments sold and/or prepaid during the fiscal year ended December 31, 2012 totaled $162.6 million.Our advisor Solar Capital Partners has invested approximately $3.4 billion in more than 120 different portfolio companies since it was founded in2006. Over the same period, Solar Capital Partners completed transactions with more than 90 different financial sponsors.Recent DevelopmentsOn January 8, 2013, our board of directors declared a monthly dividend of $0.1175 per share, which was paid on February 1, 2013 to holders of recordas of January 24, 2013. 52Table of ContentsOn January 16, 2013, the Company closed a follow-on public equity offering of 2.0 million shares of common stock at $18.85 per share raisingapproximately $37.2 million in net proceeds.On February 5, 2013, our board of directors declared a monthly dividend of $0.1175 per share payable on March 1, 2013 to holders of record as ofFebruary 21, 2013.On February 25, 2013, our board of directors declared a monthly dividend of $0.1175 per share payable on April 2, 2013 to holders of record as ofMarch 21, 2013.InvestmentsOur level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt andequity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment andthe competitive environment for the types of investments we make. As a business development company, we must not acquire any assets other than“qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certainlimited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Pursuant to rules adopted in 2006, the SEC expanded thedefinition of “eligible portfolio company” to include certain public companies that do not have any securities listed on a national securities exchange. TheSEC also adopted an additional rule under the 1940 Act to expand the definition of “eligible portfolio company” to include companies whose securities arelisted on a national securities exchange but whose market capitalization is less than $250 million. This rule became effective on July 21, 2008.RevenueWe generate revenue primarily in the form of interest income from the securities we hold and capital gains, if any, on investment securities that we maysell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of abenchmark LIBOR, commercial paper rate, or the prime rate. Interest on our debt investments is generally payable quarterly but may be monthly or semi-annually. In addition, our investments may provide PIK interest. Such amounts of accrued PIK interest are added to the cost of the investment on therespective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may alsogenerate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.ExpensesAll investment professionals of the investment adviser and their staff, when and to the extent engaged in providing investment advisory andmanagement services to us, and the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paidfor by Solar Capital Partners. We bear all other costs and expenses of our operations and transactions, including those relating to: • investment advisory and management fees; • expenses incurred by Solar Capital Partners payable to third parties, including agents, consultants or other advisors, in monitoring our financialand legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; • calculation of our net asset value (including the cost and expenses of any independent valuation firm utilized); • direct costs and expenses of administration, including independent registered public accounting and legal costs; 53Table of Contents • costs of preparing and filing reports or other documents with the SEC; • interest payable on debt, if any, incurred to finance our investments; • offerings of our common stock and other securities; • registration and listing fees; • fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments; • transfer agent and custodial fees; • taxes; • independent directors’ fees and expenses; • marketing and distribution-related expenses; • the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs; • our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; • organizational costs; and • all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overheadunder the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief complianceofficer and their respective staffs.We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periodsof asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase duringperiods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overalloperating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among otherfactors.Portfolio and Investment ActivityDuring our fiscal year ended December 31, 2012, we invested $196.2 million across 19 new and 9 existing portfolio companies through a combinationof primary and secondary market purchases. This compares to investing $219.1 million in 23 portfolio companies for the previous fiscal year endedDecember 31, 2011. Investments sold or prepaid during the fiscal year ended December 31, 2012 totaled $162.6 million versus $34.2 million for the fiscalyear ended December 31, 2011.At December 31, 2012, our portfolio consisted of 31 portfolio companies and was invested 97% in senior secured loans and 3% in unsecured loansmeasured at fair value versus 21 portfolio companies invested 98% in senior secured loans and 2% in unsecured loans at December 31, 2011.The weighted average yields on our portfolio of investments were 7.8% and 8.5%, respectively, at December 31, 2012 and December 31, 2011measured at fair value.Since the initial public offering of Solar Senior Capital Ltd. on February 24, 2011 and through December 31, 2012, invested capital totaled over$408.4 million in 42 portfolio companies. Over the same period, Solar Senior Capital Ltd. completed transactions with more than 30 different financialsponsors. 54Table of ContentsAt December 31, 2012, 98.2% or $208.8 million of our income-producing investment portfolio is floating rate debt and 1.8% or $3.8 million is fixedrate debt, measured at fair value. On a cost basis, 98.5% or $210.8 million of our income-producing investment portfolio is floating rate debt and 1.5% or$3.3 million is fixed rate debt. At December 31, 2011, 96.5% or $171.6 million of our income-producing investment portfolio is floating rate debt and 3.5%or $6.2 million is fixed rate debt, measured at fair value. On a cost basis, 96.6% or $173.8 million of our income-producing investment portfolio is floatingrate debt and 3.4% or $6.2 million is fixed rate debt.Critical Accounting PoliciesThe preparation of consolidated 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 consolidated financialstatements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified thefollowing items as critical accounting 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 does not represent fair value in the judgment of Solar Capital Partners or our board of directors, shall be valued asfollows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminaryvaluation conclusions are documented and discussed with senior management; (iii) independent third-party valuation firms engaged by, or on behalf of, theboard of directors will conduct independent appraisals and review management’s preliminary valuations and make their own assessment for (a) each portfolioinvestment that, when taken together with all other investments in the same portfolio company, exceeds 10% of total assets, plus available borrowings, as ofthe end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in default; (iv) the board of directors will discussvaluations and determine the fair value of each investment in our portfolio in good faith based on the input of the investment adviser and, where appropriate,the respective third-party valuation firms.The recommendation of fair value will generally consider the following factors among others, 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; 55Table of Contents • 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 consolidated financial statements express theuncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market thatthe Company 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 observableeither directly 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; c)Pricing models whose inputs are observable for substantially the full term of the asset or liability; 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 and long-dated or complex derivatives.Valuation of 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. Webelieve accounting for the Credit Facility at fair value will better align the measurement methodologies of assets and liabilities, which may mitigate certainearnings volatility. As a result of this election, approximately $2.8 million of costs related to the establishment of the original Credit Facility was expensedduring the period January 28, 2011 (commencement of operations) to December 31, 2011, and approximately $1.0 million was expensed during the yearended December 31, 2012 related to the amendment, rather than being deferred and amortized over the life of the Credit Facility.Revenue RecognitionThe Company records interest and dividend income, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investmentsthat are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividendcash payments are past due 30 days or more and/or when it is no longer probable that principal or interest/dividend cash payments will be collected. Suchnon-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in management’s judgment, arelikely to continue timely payment of their 56Table of Contentsremaining interest or dividend obligations. Interest or dividend cash payments received on non-accrual designated investments may be recognized as incomeor applied to principal depending upon management’s judgment. Some of our investments may have contractual payment-in-kind (“PIK”) interest ordividends. PIK interest and dividends computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIKinvestments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received,they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Companycapitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes dueat the maturity of the investment or upon the investment being called by the issuer. At the point the Company believes PIK is not expected to be realized, thePIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividendsis reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interestor dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual statusare restored to accrual status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue discount, and marketdiscounts are capitalized and amortized into income using the interest method or straight-line, as applicable. Upon the prepayment of a loan, anyunamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income whenwe receive such amounts. Capital structuring fees are recorded as other income when earned.Net Realized Gains or Losses and Net Change in Unrealized Appreciation or DepreciationWe generally measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of theinvestment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment feesand prepayment penalties. The net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reportingperiod, including the reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would resultin materially different amounts being reported.RESULTS OF OPERATIONSResults comparisons are for the fiscal year ended December 31, 2012, and the period January 28, 2011 (commencement of operations) to December 31,2011.Investment IncomeFor the fiscal year ended December 31, 2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011, gross investmentincome totaled $20.5 million and $7.9 million, respectively. The increase in gross investment income from fiscal year 2011 to fiscal year 2012 was primarilydue to an increase in the size of the income-producing portfolio as compared to the previous fiscal year combined with having a full fiscal year for 2012 ascompared to a partial fiscal 2011.ExpensesExpenses totaled $8.0 million and $5.3 million, respectively, for the fiscal year ended December 31, 2012, and the period January 28, 2011(commencement of operations) to December 31, 2011, of which $2.8 million and $0.9 million, respectively, were base management fees and performance-based incentive fees and $2.4 million and $3.0 million, respectively, were interest and other debt related expenses. Administrative 57Table of Contentsservices, insurance and other general and administrative expenses totaled $2.8 million and $1.3 million, respectively, for the fiscal year ended December 31,2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011. Expenses consist of base investment advisory and managementfees, insurance expenses, administrative services fees, legal fees, directors’ fees, audit and tax services expenses, transfer agent fees, and other general andadministrative expenses. The increase in expenses from fiscal 2011 to fiscal 2012 was primarily due to a year that saw significant growth in our portfolio ofassets and business in general, as compared to our partial first fiscal year of operations in 2011.Net Investment IncomeThe Company’s net investment income totaled $12.5 million or $1.32 per average share and $2.6 million or $0.30 per average share, for the fiscal yearended December 31, 2012 and the period January 28, 2011 (commencement of operations) to December 31, 2011, respectively.Net Realized Gains (Losses)The Company had investment sales and prepayments totaling $162.6 million and $34.2 million, respectively, for the fiscal year ended December 31,2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011. Net realized gains (losses) for the fiscal year endedDecember 31, 2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011 totaled $0.6 million and ($0.6) million,respectively. Net realized gains for the fiscal year ended 2012 were primarily related to selected sales of assets such as Genesys Telecommunications, KIKCustom Products, and STHI Holdings. Net realized losses incurred in fiscal 2011 were primarily related to our investment in American Airlines.Net Unrealized Appreciation (Depreciation) on Investments and Cash EquivalentsFor the fiscal year ended December 31, 2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011, net change inunrealized appreciation (depreciation) on the Company’s assets and liabilities totaled $0.8 million and ($2.3) million, respectively. Net unrealizedappreciation for fiscal 2012 was primarily attributable to general market improvements, modest yield tightening and overall positive net changes in generalportfolio company fundamentals. During fiscal 2011, unrealized depreciation was recorded primarily due to the general market dislocation and the thenoverall market expectations for pricing increased credit risk.Net Increase (Decrease) in Net Assets From OperationsFor the fiscal year ended December 31, 2012, and the period January 28, 2011 (commencement of operations) to December 31, 2011, the Company hada net increase (decrease) in net assets resulting from operations of $13.9 million and ($0.3) million, respectively. For the fiscal year ended December 31, 2012,and the period January 28, 2011 (commencement of operations) to December 31, 2011, basic and diluted earnings (loss) per average share were $1.46 and($0.03), respectively.LIQUIDITY AND CAPITAL RESOURCESThe Company’s liquidity and capital resources are generally available through our senior secured $200 million revolving Credit Facility, throughperiodic follow-on equity offerings, as well as from cash flows from operations, investment sales and pre-payments of investments. At December 31, 2012, theCompany had $39.1 million in borrowings outstanding on its Credit Facility and $160.9 million of unused capacity.On January 16, 2013, the Company closed a follow-on public equity offering of 2.0 million shares of common stock at $18.85 per share raisingapproximately $37.2 million in net proceeds. In the future, the Company may raise additional equity or debt capital, among other considerations. Theprimary use of funds will 58Table of Contentsbe investments in portfolio companies, reductions in debt outstanding and other general corporate purposes. The issuance of debt or equity securities willdepend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.We expect that all current liquidity needs will be met with cash flows from operations, borrowings on our Credit Facility, and other activities.Cash EquivalentsWe deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. From time to time,including at the end of each fiscal quarter, we consider using various treasury strategies for our business. One strategy includes taking proactive steps byutilizing cash equivalents with the objective of enhancing our investment flexibility during the following quarter pursuant to Section 55 of the 1940 Act.More specifically, we may purchase U.S. Treasury bills from time-to-time on the last business day of the quarter and typically close out that position on thefollowing business day, settling the sale transaction on a net cash basis with the purchase, subsequent to quarter end. We may also utilize repurchaseagreements or other balance sheet transactions, including drawing down on our Credit Facility, as deemed appropriate. The amount of these transactions orsuch drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. Therewere no cash equivalents held as of December 31, 2012.DebtCredit FacilityOn August 26, 2011, we established the $200 million Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. In connectionwith the Credit Facility, the SPV was formed. The Credit Facility was originally scheduled to mature on August 26, 2016 and generally bore interest at a rateof LIBOR plus 2.25%. The Credit Facility has $150 million available with an additional $50 million available as a delayed draw. It can also be expanded upto $600 million. The Credit Facility is secured by all of the assets held by the SPV. Under the terms of the Credit Facility, Solar Senior and the SPV, asapplicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions,reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of defaultfor credit facilities of this nature. On November 7, 2012, we amended our $200 million Credit Facility. As a result of the amendment, the stated interest rateon the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues to have no LIBOR floor requirement. Inaddition, the amendment reduced certain non-usage fees. The amendment also provided us greater flexibility and extended the final maturity date toNovember 6, 2017. At December 31, 2012, the Company was in compliance with all financial and operational covenants required by the Credit Facility.Contractual Obligations Payments due by Period as of December 31, 2012(dollars in millions) Total Less than1 year 1-3 years 3-5 years More than5 years Senior Secured Revolving Credit Facility (1) $39.1 $— $— $39.1 $— (1)At December 31, 2012, $160.9 million remained unused. 59Table of ContentsInformation about our senior securities is shown in the following table as of each year ended December 31 since the Company commenced operations,unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities. Class and Year Total AmountOutstanding (dollarsin thousands) (1) AssetCoveragePer Unit (2) InvoluntaryLiquidatingPreferencePer Unit (3) AverageMarket ValuePer Unit (4) Revolving Credit Facility Fiscal 2012 $39,100 $5,453 $— N/A Fiscal 2011 8,600 21,051 — N/A (1)Total amount of each class of senior securities outstanding at the end of the period presented.(2)The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities andindebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by$1,000 to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total AssetCoverage Per Unit was divided based on the amount outstanding at the end of the period for each.(3)The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security juniorto it.(4)Not applicable, we do not have senior securities that are registered for public trading.We have entered into two contracts under which we have future commitments: the Investment Advisory and Management Agreement, pursuant towhich Solar Capital Partners has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which Solar Capital Managementhas agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerialassistance to those portfolio companies to which we are required to provide such assistance. Payments under the Investment Advisory and ManagementAgreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the AdministrationAgreement are equal to an amount based upon our allocable portion of Solar Capital Management’s overhead in performing its obligations under theAdministration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chiefcompliance officer and their respective staffs. Either party may terminate each of the investment advisory and management agreement and administrationagreement without penalty upon 60 days’ written notice to the other.Off-Balance Sheet ArrangementsNoneDividends and DistributionsDividends and distributions paid to stockholders for the fiscal years ended December 31, 2012 and 2011 totaled $12.3 million or $1.29 per share and$5.2 million and $0.55 per share, respectively. Tax characteristics of all dividends are reported to shareholders on Form 1099 after the end of each calendaryear. Our dividends, if any, will be determined by our Board of Directors. We expect that our dividends and distributions to stockholders will generally befrom accumulated net investment income and from net realized capital gains, if any, as applicable. 60Table of ContentsThe following table summarizes our dividends to stockholders: Date Declared Record Date Payment Date Amount Fiscal 2013 February 25, 2013 March 21, 2013 April 2, 2013 $0.1175 February 5, 2013 February 21, 2013 March 1, 2013 0.1175 January 8, 2013 January 24, 2013 February 1, 2013 0.1175 Total (2013) $0.3525 Fiscal 2012 December 6, 2012 December 20, 2012 January 3, 2013 $0.1175 November 1, 2012 November 22, 2012 December 4, 2012 0.1175 October 4, 2012 October 25, 2012 November 2, 2012 0.1175 September 11, 2012 September 20, 2012 October 2, 2012 0.1175 July 31, 2012 August 23, 2012 September 5, 2012 0.115 July 9, 2012 July 19, 2012 August 2, 2012 0.105 June 11, 2012 June 21, 2012 July 2, 2012 0.10 May 1, 2012 May 18, 2012 June 4, 2012 0.10 April 5, 2012 April 18, 2012 May 2, 2012 0.10 February 22, 2012 March 20, 2012 April 3, 2012 0.10 February 3, 2012 February 17, 2012 March 2, 2012 0.10 January 6, 2012 January 19, 2012 February 2, 2012 0.10 Total (2012) $1.29 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 We have elected 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.We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of thesedistributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future belimited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare dividends if we default under certainprovisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax 61Table of Contentsconsequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with U.S. generallyaccepted accounting principles and tax regulations, we include in income certain amounts that we have not received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue ormarket discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirementto distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.With respect to the dividends to stockholders, income from origination, structuring, closing, commitment and certain other upfront fees associated withinvestments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders.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 byit in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performingcompliance functions, and the compensation of our chief compliance officer, our chief financial officer and any administrative support staff.Solar Capital Partners, 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 Capital.”Solar Capital Partners and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and inpart, with ours. For example, Solar Capital Partners presently serves as investment adviser to Solar Capital Ltd., a publicly traded BDC, which to focuses oninvesting primarily in senior secured loans, mezzanine loans and equity securities. In addition, Michael S. Gross, our chairman and chief executive officer,Bruce Spohler, our chief operating officer, and Richard L. Peteka, our chief financial officer, serve in similar capacities for Solar Capital Ltd. Solar CapitalPartners and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on theavailability of such investment and other appropriate factors, Solar Capital Partners or its affiliates may determine that we should invest side-by-side with oneor more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, andconsistent with Solar Capital Partners’ allocation procedures.In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remainsubject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law. 62Table of ContentsItem 7A.Quantitative and Qualitative Disclosure about Market RiskWe are subject to financial market risks, including changes in interest rates. During the fiscal year ended December 31, 2012, all but one of the loans inour portfolio had floating interest rates. These loans were primarily based on floating LIBOR and typically have durations of one to three months after whichthey reset to current market interest rates. Most of our loans to portfolio companies have LIBOR floors. The Company also has a revolving credit facility thatis based on floating LIBOR and commercial paper rates. Assuming no changes to our balance sheet as of December 31, 2012, a hypothetical one percentincrease in LIBOR on our floating rate assets and liabilities would decrease our earnings by approximately four cents per average share over the next twelvemonths. Assuming no changes to our balance sheet as of December 31, 2012, a hypothetical one-quarter of one percent decrease in LIBOR on our floatingrate assets and liabilities would increase our earnings by approximately one cent per average share over the next twelve months. However, we may hedgeagainst interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options and forward contracts subject to therequirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participatein the benefits of lower interest rates with respect to our portfolio of investments. Increase (Decrease) in LIBOR (0.25%) 1.00% Increase (Decrease) in Net Investment Income Per Share Per Year $0.01 ($0.04) 63Table of ContentsItem 8.Consolidated Financial Statements and Supplementary DataINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Management’s Report on Internal Control over Financial Reporting 65 Reports of Independent Registered Public Accounting Firm 66 Consolidated Statements of Assets & Liabilities as of December 31, 2012 and December 31, 2011 68 Consolidated Statements of Operations for the year ended December 31, 2012 and the period January 28, 2011* to December 31, 2011 69 Consolidated Statements of Changes in Net Assets for the year ended December 31, 2012 and the period January 28, 2011* to December 31, 2011 70 Consolidated Statements of Cash Flows for the year ended December 31, 2012 and the period January 28, 2011* to December 31, 2011 71 Consolidated Schedules of Investments as of December 31, 2012 and December 31, 2011 72 Notes to Consolidated Financial Statements 76 *Commencement of operations 64Table of ContentsMANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGManagement is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of theeffectiveness of internal control over financial reporting as of December 31, 2012. Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes inaccordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and proceduresthat (i) pertain to assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidatedfinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only inaccordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 basedupon criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2012 basedon the criteria on Internal Control — Integrated Framework issued by COSO.The effectiveness of the Company’s internal control over financial reporting as of December 31, 2012 has been audited by KPMG LLP, an independentregistered public accounting firm, as stated in their report which appears herein. 65Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and ShareholdersSolar Senior Capital Ltd.:We have audited the accompanying consolidated statements of assets and liabilities, including the consolidated schedules of investments, of SolarSenior Capital Ltd. (and subsidiary) (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, changes in netassets and cash flows for the year ended December 31, 2012 and for the period from January 28, 2011 (commencement of operations) to December 31, 2011.These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure in the consolidated financial statements. Ourprocedures included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian, portfolio companies or agents. Anaudit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide 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. (and subsidiary) as of December 31, 2012 and 2011, and the results of its operations, the changes in its net assets and cash flows for the yearended December 31, 2012 and for the period from January 28, 2011 (commencement of operations) to December 31, 2011, in conformity with U.S. generallyaccepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Solar Senior CapitalLtd.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework, issued bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2013 expressed an unqualified opinionon the effectiveness of the Company’s internal control over financial reporting./s/ KPMG LLPNew York, New YorkFebruary 25, 2013 66Table of ContentsReport of Independent Registered Public Accounting FirmOn Internal Control Over Financial ReportingThe Board of Directors and ShareholdersSolar Senior Capital Ltd.:We have audited Solar Senior Capital Ltd.’s (the Company) internal control over financial reporting as of December 31, 2012, based on criteriaestablished in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Management of the Company is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the Annual Report on Form 10-K, and Item 9A, Controls and Procedures–Management’s Report onInternal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based onour 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 effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that couldhave a material effect on the consolidated financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate.In our opinion, Solar Senior Capital Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31,2012, based on criteria established in Internal Control – Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedstatements of assets and liabilities of Solar Senior Capital Ltd. (and subsidiary) as of December 31, 2012 and 2011, and the related consolidated statements ofoperations, changes in net assets and cash flows for the year ended December 31, 2012 and for the period from January 28, 2011 (commencement ofoperations) to December 31, 2011, and our report dated February 25, 2013 expressed an unqualified opinion on those consolidated financial statements./s/ KPMG LLPNew York, New YorkFebruary 25, 2013 67Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES(in thousands, except share amounts) December 31, 2012 December 31, 2011 Assets Non-controlled/non-affiliated investments, at fair value (cost—$214,075 and $180,023,respectively) $212,602 $177,749 Cash and cash equivalents 2,647 2,934 Receivable for investments sold 282 4,931 Interest receivable 1,294 1,687 Deferred offering costs 148 — Prepaid expenses and other assets 56 94 Total assets $217,029 $187,395 Liabilities Credit facility payable (see note 6 and 7) $39,100 $8,600 Dividends payable 1,116 — Payable for investments purchased 995 4,912 Investment advisory and management fee payable (see note 3) 581 944 Accrued performance-based incentive fees payable (see note 3) 84 — Interest payable 121 53 Accrued administrative services expenses 431 141 Other liabilities and accrued expenses 498 310 Total liabilities $42,926 $14,960 Net Assets Common stock, par value $.01 per share, 200,000,000 and 200,000,000 common shares authorized,respectively, and 9,500,100 and 9,500,100 issued and outstanding, respectively $95 $95 Paid-in capital in excess of par (see note 2f) 177,728 177,815 Distributions in excess of net investment income (see note 2f) (2,247) (2,625) Accumulated net realized gain (loss) (see note 2f) — (576) Net unrealized depreciation (1,473) (2,274) Total net assets $174,103 $172,435 Net Asset Value Per Share $18.33 $18.15 See notes to consolidated financial statements. 68Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts) Year EndedDecember 31,2012 Period January 28,2011* toDecember 31,2011 INVESTMENT INCOME: From non-controlled/non-affiliated investments: Interest $20,539 $7,890 EXPENSES: Management fees (see note 3) $2,216 $944 Interest expense 1,485 237 Performance-based incentive fees (see note 3) 580 — Administrative services expense 983 289 Insurance expense 403 341 Other general and administrative expenses 1,418 684 Expenses before debt issuance costs 7,085 2,495 Debt issuance costs (see note 7) 961 2,795 Total expenses 8,046 5,290 Net investment income $12,493 $2,600 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on non-controlled/non-affiliated investments $618 $(576) Net change in unrealized gain (loss) on non-controlled/non-affiliated investments 801 (2,274) Net realized and unrealized gain (loss) on non-controlled/non-affiliated investments 1,419 (2,850) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROMOPERATIONS $13,912 $(250) EARNINGS (LOSS) PER SHARE (see note 5) $1.46 $(0.03) *Commencement of operationsSee notes to consolidated financial statements. 69Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(in thousands, except shares) Year endedDecember 31,2012 PeriodJanuary 28,2011* toDecember 31,2011 Increase (Decrease) in net assets from operations: Net investment income $12,493 $2,600 Net realized gain (loss) 618 (576) Net change in unrealized gain (loss) 801 (2,274) Net increase (decrease) in net assets resulting from operations 13,912 (250) Dividends and distributions to stockholders (see note 9a): (12,255) (5,225) Capital share transactions: Net proceeds from shares sold — 190,002 Offering costs and other 11 (12,092) Net increase in net assets from capital share transactions 11 177,910 Total increase in net assets: 1,668 172,435 Net assets at beginning of period 172,435 — Net assets at end of period $174,103 $172,435 Capital share activity Shares sold — 9,500,100 Shares issued from reinvestment of dividends — — Net increase from capital share activity — 9,500,100 *Commencement of operationsSee notes to consolidated financial statements. 70Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Year endedDecember 31, 2012 For the periodJanuary 28, 2011* toDecember 31, 2011 Cash Flows from Operating Activities: Net increase (decrease) in net assets from operations $13,912 $(250)Adjustments to reconcile net increase (decrease) in net assets from operations to netcash used in operating activities: Net realized (gain) loss on investments (618) 576 Net change in unrealized (gain) loss on investments (801) 2,274 Debt issuance costs 961 2,795 (Increase) decrease in operating assets: Purchase of investment securities (194,447) (214,906)Proceeds from disposition of investment securities 161,013 34,307 Receivable for investments sold 4,649 (4,931)Deferred offering costs (148) — Interest receivable 393 (1,687)Prepaid expenses and other assets 38 (94)Increase (decrease) in operating liabilities: Payable for investments purchased (3,917) 4,912 Investment advisory and management fee payable (363) 944 Accrued performance-based incentive fees payable 84 — Accrued administrative services expenses 290 141 Interest payable 68 53 Other liabilities and accrued expenses 188 310 Net Cash Used in Operating Activities (18,698) (175,556)Cash Flows from Financing Activities: Proceeds from shares sold — 190,002 Offering costs and other 11 (12,092)Dividends paid (11,139) (5,225)Debt issuance costs (961) (2,795)Proceeds from borrowings 130,383 20,450 Repayments of borrowings (99,883) (11,850)Net Cash Provided by Financing Activities 18,411 178,490 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (287) 2,934 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,934 — CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,647 $2,934 Supplemental disclosure of cash flow information: Cash paid for interest $1,417 $184 Cash paid for income taxes 99 — *Commencement of operationsSee notes to consolidated financial statements. 71Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTSDecember 31, 2012(in thousands) Description Industry Interest(2) Basis PointSpreadAboveIndex(5) Maturity ParAmount Cost FairValue Bank Debt/Senior Secured Investments — 118.1% ABB/Concise Optical LLC(4) Health Care Providers & Services 6.50% L+525 10/24/2018 $4,000 $3,961 $4,000 Aderant North America, Inc. Software 7.25% P+400 12/20/2018 5,000 4,950 4,950 AmeriQual Group, LLC Food Products 6.50% L+500 3/28/2016 12,522 12,391 12,522 Amwins Group, LLC Insurance 9.25% L+800 12/6/2019 2,500 2,453 2,525 Asurion, LLC Insurance 9.00% L+750 5/24/2019 4,793 4,759 4,947 Attachmate Corporation(4) Software 7.25% L+575 11/22/2017 11,550 11,344 11,677 Bellisio Foods, Inc.(4) Food Products 7.00% L+550 12/16/2017 4,650 4,611 4,650 BJ’S Wholesale Club, Inc. Food & Staples Retailing 9.75% L+850 3/26/2020 5,000 4,951 5,150 Catapult Learning LLC(4) Education Services 7.50% L+600 4/5/2017 3,900 3,841 3,763 Citadel Plastics Holdings, Inc.(4) Chemicals, Plastics & Rubber 6.75% L+525 2/28/2018 4,814 4,772 4,814 Confie Seguros Holding II Co.(4) Insurance 6.50% L+525 11/9/2018 10,000 9,853 9,850 EIG Investors Corp. 2nd Lien Internet Software & Services 10.25% L+900 5/9/2020 5,000 4,951 5,000 Engineering Solutions & Products, LLC Aerospace & Defense 8.50% P+525 4/21/2017 9,941 9,669 5,468 Hearthside Food Solutions LLC(4) Food Products 6.50% L+525 6/7/2018 10,000 9,950 9,950 Hoffmaster Group, Inc.(4) Paper & Forest Products 6.50% L+525 1/3/2018 4,863 4,841 4,838 Hoffmaster Group, Inc. 2nd Lien Paper & Forest Products 10.25% L+900 1/3/2019 3,000 2,972 2,970 Insight Pharmaceuticals LLC(4) Personal & Nondurable Consumer Products 6.25% L+500 8/26/2016 7,900 7,900 7,900 KIK Custom Products, Inc. Diversified / Conglomerate Service 8.50% L+700 5/31/2014 14,725 14,504 14,725 Landslide Holdings, Inc.(4) Software 7.00% L+575 6/19/2018 4,875 4,787 4,875 Marshall Retail Group, LLC(4) Specialty Retail 8.00% L+650 10/19/2016 4,750 4,694 4,750 National Vision, Inc.(4) Specialty Retail 7.00% L+575 8/2/2018 9,925 9,787 9,925 Porex Corporation(4) Chemicals, Plastics & Rubber 6.75% L+525 3/31/2015 4,284 4,244 4,284 Renaissance Learning, Inc.(4) Education Services 5.75% L+450 11/13/2018 3,990 3,951 3,990 Shield Finance Co. SARL(3,4,6) IT Services 6.50% L+525 5/10/2019 9,950 9,817 9,950 Shoes for Crews, Inc.(4) Textiles & Leather 6.50% L+500 3/27/2017 4,803 4,793 4,803 SLT Environmental, Inc.(4) Chemicals, Plastics & Rubber 7.00% L+550 5/27/2016 9,924 9,819 9,825 Smart Balance, Inc.(4,6) Food Products 7.00% L+575 7/2/2018 3,880 3,808 3,919 Sotera Defense Solutions, Inc. Aerospace & Defense 7.50% L+600 4/22/2017 7,415 7,359 7,341 Things Remembered, Inc.(4) Specialty Retail 8.00% L+650 5/24/2018 8,978 8,814 8,888 TriNet HR Corp.(4) Professional Services 6.50% L+525 10/24/2018 10,000 9,951 9,950 Water Pik, Inc(4) Personal & Nondurable Consumer Products 6.75% L+525 8/10/2017 3,425 3,398 3,425 Total Bank Debt/Senior Secured Investments 210,357 207,895 205,624 Unsecured Bank Debt/Bonds — 4.0% Apollo Investment Corporation(6) Finance 5.75% — 1/15/2016 3,650 3,262 3,778 Asurion Holdco(7) Insurance 11.00% L+950 3/2/2019 3,000 2,918 3,200 Unsecured Bank Debt/Bonds 6,650 6,180 6,978 Total Investments 122.1%(8) 217,007 214,075 212,602 Liabilities in Excess of Other Assets — (22.1%) (38,499) Net Assets — 100.0% $174,103 (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 tocertain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act.(2)Variable rate debt investments typically 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”), andwhich typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2012. As of December 31, 2012 all investmentsare paying cash interest.(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 that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned subsidiary SUNS SPV LLC. Such investments are pledged as collateral under the SeniorSecured Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to the creditors, if any, of Solar Senior Capital Ltd. The respective par amounts heldthrough SUNS SPV LLC are: ABB/Concise Optical Group $4,000; Attachmate Corporation $9,625; Bellisio Foods, Inc. $3,720; Catapult Learning, LLC $3,900; Citadel 72(1)Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)December 31, 2012 Plastics Holdings, Inc. $3,851; Confie Seguros Holdings II Co. $5,000; Hearthside Food Solutions, LLC $9,000; Hoffmaster Group, Inc. $3,890; Insight Pharmaceuticals LLC $5,445; LandslideHoldings, Inc. $1,950; Marshall Retail $4,750; National Vision, Inc. $9,925; Porex Corporation $4,284; Renaissance Learning, Inc. $3,990; Shield Finance Co. SARL $9,950; Shoes for Crews, Inc.$4,803; SLT Environmental, Inc. $9,924; Smart Balance, Inc. $1,940; Things Remembered, Inc. $ 8,978; TriNet HR Corporation $10,000; and WaterPik, Inc. $3,425. Par balances in excess of thesestated amounts are held directly by Solar Senior Capital Ltd.(5)Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.(6)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% ofthe Company’s total assets at the time of acquisition of any additional non-qualifying assets.(7)Asurion Holdco has the option to pay interest in kind at L+1025 if certain specified conditions are met.(8)Aggregate gross unrealized depreciation for federal income tax purposes is $3,918; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $1,309 and $5,227, respectively, basedon a tax cost of $216,520. Industry Classification Percentage of TotalInvestments (at fairvalue) as ofDecember 31, 2012 Food Products 14.5% Specialty Retail 11.1% Software 10.1% Insurance 9.7% Chemicals, Plastics & Rubber 8.9% Diversified/Conglomerate Service 6.9% Aerospace & Defense 6.0% Personal & Nondurable Consumer Products 5.3% IT Services 4.7% Professional Services 4.7% Paper & Forest Products 3.7% Education Services 3.6% Food & Staples Retailing 2.4% Internet Software & Services 2.4% Textiles & Leather 2.3% Health Care Providers & Services 1.9% Finance 1.8% Total Investments 100.0%See notes to consolidated financial statements. 73Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTSDecember 31, 2011(in thousands, except shares) Description(1) Industry Interest(2) Basis PointSpreadAboveIndex Maturity Par Amount Cost FairValue Bank Debt/Senior Secured Investments — 101.3% 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 PharmaceuticalsLLC(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)(6) 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 —101.3% $176,839 $174,701 Unsecured Bonds —1.8% Apollo Investment Corporation(6) Finance 5.75% — 1/15/2016 3,650 3,184 3,048 Total Investments —103.1% $180,023 $177,749 Liabilities in Excess of Other Assets — (3.1%) (5,314)Net Assets —100.0% $172,435 (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 tocertain limitations 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 whichmay reset 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 RevolvingCredit Facility (see Note 7 to the consolidated financial 74Table of ContentsSOLAR SENIOR CAPITAL LTD.CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)December 31, 2011 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; EIGInvestors 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 held directly 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.(6)Indicates assets that the Company believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended. Qualifying assets must represent at least 70% ofthe Company’s total assets at the time of acquisition of any additional non-qualifying assets. Industry Classification Percentage of TotalInvestments (at fairvalue) as ofDecember 31, 2011 Beverage, Food & Tobacco 20.4% Healthcare, Education & Childcare 19.2% Personal & Nondurable Consumer Products 11.5% Diversified / Conglomerate Service 10.9% Aerospace & Defense 9.8% Insurance 6.0% Cargo Transport 4.5% Personal, Food & Misc. Services 4.4% Grocery 3.5% Retail Stores 2.8% Telecommunications 2.7% Chemicals, Plastics & Rubber 2.6% Finance 1.7% Total Investments 100% See notes to consolidated financial statements. 75Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts)Note 1. OrganizationSolar Senior Capital Ltd. (“Solar Senior”, the “Company”, “SUNS”, “we”, “us”, or “our”), a Maryland corporation formed on December 16, 2010, is aclosed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company(“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes we have elected to be treated as a regulated investmentcompany (“RIC”), under 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, uni-tranche 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 Companymay also 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 assetswill be invested in senior loans.Note 2. Significant Accounting PoliciesThe accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”), and include the accounts of the Company and its wholly-owned subsidiary SUNS SPV LLC, aDelaware limited liability company formed in August 2011. The consolidated financial statements reflect all adjustments and reclassifications which, in theopinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the years presented. All significantintercompany balances and transactions have been eliminated.The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America andpursuant to the requirements for reporting on Form 10-K and Regulation S-X, as appropriate, also requires management to make estimates and assumptionsthat affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during thereported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actualresults to differ materially.In the opinion of management, all adjustments, which are of normal recurring nature, considered necessary for the fair presentation of financialstatements have been included.The significant accounting policies consistently followed by the Company are:(a) Security transactions are accounted for on the trade date;(b) The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on aquarterly basis, or more frequently if required. Securities for which market quotations are readily available on an exchange are valued at the closing price onthe date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers 76Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fairvalue of the security. If determined adequate, the Company uses 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, LLC (the “Investment Adviser”) or the Company’s board of directors (the“Board”) does not represent fair value, each shall 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, or on behalf of, the Board will conduct independent appraisals and review management’spreliminary valuations and make their own assessment for (a) each portfolio investment that, when taken together with all other investments in the sameportfolio company, exceeds 10% of total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolioinvestment that is presently in payment default; (iv) the Board will discuss valuations and determine the fair value of each investment in our portfolio ingood faith based on the input of the Investment Adviser and, where appropriate, the respective third-party valuation firms.The recommendation of fair value generally considers the following factors among others, 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.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 valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have areadily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily availablemarket 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.Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices andother relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The incomeapproach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). Themeasurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factorsthat we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicablemarket trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, thenature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in whichthe portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, amongother factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For thefiscal year ended December 31, 2012, there has been no change to the Company’s valuation techniques and related inputs considered in the valuationprocess. 77Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) Accounting Standards Codification (“ASC”) 820 classifies the inputs used to measure these fair values into the following hierarchy:Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that arenot active, or other observable inputs other than quoted prices.Level 3: Unobservable inputs for the asset or liability.In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowestlevel of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in itsentirety requires judgment and considers factors specific to each investment.(c) Gains or losses on investments are calculated by using the specific identification method.(d) The Company records interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, originalissue discount, and market discounts are capitalized and we amortize such amounts into income using the interest method or on a straight-line basis, asapplicable. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loansand other investments as interest income when we receive such amounts. Capital structuring and other fees for services rendered are recorded as other incomewhen earned.(e) The Company intends to comply with the applicable provisions of the Internal Revenue Code pertaining to regulated investment companies tomake distributions of taxable income sufficient to relieve it of substantially all Federal income taxes. The Company, at its discretion, may carry forwardtaxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on estimated excesstaxable income as required.(f) Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are typicallyreclassified among the Company’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with incometax regulations that may differ from accounting principles generally accepted in the United States of America; accordingly, at December 31, 2012, $98 wasreclassified on our balance sheet between distributions in excess of net investment income and paid-in capital in excess of par and $42 was reclassified on ourbalance sheet between accumulated net realized gain (loss) and distributions in excess of net investment income. Total earnings and net asset value are notaffected.(g) Dividends and distributions to common stockholders are recorded as of the record date. The amount to be paid out as a dividend is determined bythe board of directors each month. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.(h) In accordance with Regulation S-X Article 6.03 and ASC 810—Consolidation, the Company generally will not consolidate its interest in anyoperating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all ofwhose business consists of providing services to the Company. 78Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) (i) The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translatedinto U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company will not isolate that portion ofthe results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices ofsecurities held. Such fluctuations would be included with the net realized and unrealized gain or loss from investments. The Company’s investments inforeign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political,social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreigncurrencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.(j) The Company has made an irrevocable election to apply the fair value option of accounting to its SUNS SPV Credit Facility, in accordance withASC 825-10 and uses an independent third-party valuation firm to measure its fair value.(k) The Company records expenses related to shelf filings and applicable offering costs as prepaid assets. These expenses are charged as a reduction ofcapital upon utilization, in accordance with ASC 946-20-25.(l) Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cashpayments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrualinvestments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timelypayment of their remaining interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income orapplied to principal depending upon management’s judgment.(m) The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that theypresent insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less from thedate of purchase would qualify, with limited exceptions. The Company deems that certain U.S. Treasury bills, repurchase agreements and other high-quality,short-term debt securities would qualify as cash equivalents.Note 3. 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%of gross assets. For services rendered under the Investment Advisory and Management Agreement, the base management fee is payable quarterly in arrears.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, 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 79Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) the quarter (excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such asoriginal issue discount, debt instruments with pay-in-kind interest and zero-coupon securities), accrued income that we have not received in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital appreciationor depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately precedingcalendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Company pays the Investment Adviser an incentive fee with respectto 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%; • 50% of 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); 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 fiscal year ended December 31, 2012, and for the period January 28, 2011 (commencement of operations) to December 31, 2011, the Companyrecognized $2,216 and $944, respectively, in base management fees and $580 and $0, respectively, in performance-based incentive fees.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 Agreement, as of the termination date) and will equal 20% of the Company’s cumulative realized capital gains less cumulative realized capitallosses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capitalgains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For accounting purposesonly, we are required under GAAP to accrue a theoretical capital gains incentive fee based upon net realized capital gains and unrealized capital appreciationand depreciation on investments held at the end of each period. The accrual of this theoretical capital gains incentive fee assumes all unrealized capitalappreciation and depreciation is realized in order to reflect a theoretical capital gains incentive fee that would be payable to the Investment Adviser at eachmeasurement date. There was no such required accrual under GAAP for the fiscal year ended December 31, 2012, and for the period January 28, 2011(commencement of operations) to December 31, 2011. It should be noted that a fee so calculated and accrued would not be payable under the InvestmentAdvisers Act of 1940 (“Advisers Act”) or the Investment Advisory Agreement, and would not be paid based upon such computation of capital gains incentivefees in subsequent periods. Amounts actually paid to the Investment Adviser will be consistent with the Advisers Act and formula reflected in the InvestmentAdvisory Agreement which specifically excludes consideration of unrealized capital appreciation.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 companiesto which Solar Senior is required to provide such assistance. 80Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) For the fiscal year ended December 31, 2012, and for the period January 28, 2011 (commencement of operations) to December 31, 2011, the Companyrecognized expenses under the Administration Agreement of $983 and $289, respectively.Note 4. Net Asset Value Per ShareAt December 31, 2012, the Company’s total net assets and net asset value per share were $174,103 and $18.33, respectively. This compares to total netassets and net asset value per share at December 31, 2011 of $172,435 and $18.15, respectively.Note 5. Earnings (Loss) Per ShareThe following table sets forth the computation of basic and diluted earnings (loss) per share, pursuant to ASC 260-10, for the year ended December 31,2012 and for the period January 28, 2011 (commencement of operations) to December 31, 2011: Year EndedDecember 31,2012 January 28,2011* toDecember 31,2011 Earnings (Loss) per share (basic & diluted)Numerator for increase (decrease) in net assets per share: $13,912 $(250) Denominator for weighted average shares: 9,500,100 8,627,696 Earnings (loss) per share: 1.46 (0.03) *Commencement of operationsNote 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:Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market thatthe Company has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, and most U.S. Governmentand agency 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 observableeither directly 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; 81Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) c)Pricing models whose inputs are observable for substantially the full term of the asset or liability; 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 investments and our Credit Facility).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 theLevel 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).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, 2012 andDecember 31, 2011:Fair Value MeasurementsAs of December 31, 2012 Level 1 Level 2 Level 3 Total Assets: Bank Debt/Senior Secured Loans $— $21,774 $183,850 $205,624 Unsecured Loans/ Bonds — 6,978 — 6,978 Total Investments — 28,752 183,850 212,602 Credit Facility $— $— $39,100 $39,100 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 82Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) The following table provides a summary of the changes in fair value of Level 3 assets for the year ended December 31, 2012 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, 2012:Fair Value Measurements Using Level 3 InputsAs of December 31, 2012 Bank Debt/SeniorSecured Loans Fair value, December 31, 2011 $160,976 Total gains or losses included in earnings: Net realized gain 28 Net change in unrealized gain (loss) (812) Purchase of investment securities 167,834 Proceeds from dispositions of investment securities (144,176) Transfers in/out of Level 3 — Fair value, December 31, 2012 $183,850 Unrealized gains (losses) for the year relating to those Level 3 assets that were still held by the Company at theend of the year: Net change in unrealized gain (loss) $(652) During the year ended December 31, 2012, there were no transfers in and out of Levels 1, 2, or 3. The Company had no assets or liabilities measured atfair value on a nonrecurring basis during the year.The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservableinputs (Level 3) for the year ended December 31, 2012: Credit Facility Fair Value Fair value, December 31, 2011 $8,600 Total unrealized appreciation — Borrowings 130,383 Repayments (99,883) Transfers in/out of Level 3 — Fair value, December 31, 2012 $39,100 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, 2012, there were borrowings of $39,100 on the Credit Facility. For the year ended December 31, 2012, the Credit Facility had no net change inunrealized (appreciation) depreciation. The Company uses an independent third-party valuation firm to measure the fair value of our Credit Facility. 83Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) The following table provides a summary of the changes in fair value of Level 3 assets for the period January 28, 2011 (commencement of operations) toDecember 31, 2011 as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilitiesstill 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 theend of the period: Net change in unrealized loss $(2,179) During the period from January 28, 2011 (commencement of operations) to December 31, 2011, there were no transfers in and out of Levels 1, 2, or 3.The Company had no assets or liabilities 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 (commencement of operations) 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. 84Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of December 31, 2012 is summarized in the tablebelow:Quantitative Information about Level 3 Fair Value Measurements Asset orLiability Fair Value atDecember 31,2012 ValuationTechniques/Methodology Unobservable Input Range (WeightedAverage)Senior Secured / Bank Debt Asset $183,850 Yield Analysis/MarketApproach/Broker quotedEnterprise value Market Yields /Bid-Ask Spreads/EBITDA Multiples 5.8% – 10.6%(7.8%)/3.6x –7.3x(5.8x)Credit Facility Liability $39,100 Yield Analysis/MarketApproach Market Yields L+0.5% – L+5.5%(L+2.7%)Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-askspreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets and liabilities.Note 7. DebtSenior 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, enteredinto a Loan and Servicing Agreement, dated as of August 26, 2011 (the “Loan and Servicing Agreement”), whereby the Company transferred certain loans ithad originated or acquired or thereafter, will originate or acquire (the “Loans”) from time to time to the SPV via a Contribution Agreement, dated as ofAugust 26, 2011 (the “Contribution Agreement”). The Contribution Agreement, together with the Loan and Servicing Agreement and various supportingdocumentation form the Credit Facility.The Credit Facility was originally scheduled to mature on August 26, 2016 and generally bore interest at a rate of LIBOR plus 2.25%. The CreditFacility has $150 million available with an additional $50 million available as a delayed draw. It can also be expanded up to $600 million. The CreditFacility is secured by all of the assets held by the SPV. Under the terms of the Credit Facility, Solar Senior and the SPV, as applicable, have made certaincustomary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements andother customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of thisnature.On November 7, 2012, we amended our $200 million Credit Facility. As a result of the amendment, the stated interest rate on the Credit Facility wasreduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues to have no LIBOR floor requirement. In addition, the amendmentreduced certain non-usage fees. The amendment also provided us greater flexibility and extended the final maturity date to November 6, 2017.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, $961 and $2,795 of costs related to the amendment and establishment of the Credit Facility was 85Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) expensed during the year ended December 31, 2012 and the period January 28, 2011 (commencement of operations) to December 31, 2011, respectively,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 assets andliabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in the ConsolidatedStatement of Operations.The weighted average annualized interest cost for all borrowings for the year ended December 31, 2012 and the period from the Company’s firstborrowing during the fourth fiscal quarter of 2011 through December 31, 2011 was 2.48% and 2.58%, respectively. These costs are exclusive of commitmentfees and for other prepaid expenses related to establishing the Credit Facility. This weighted average annualized interest cost reflects the average interest costfor all outstanding borrowings. The maximum amount borrowed on the Credit Facility during the year ended December 31, 2012, and the period January 28,2011 (commencement of operations) to December 31, 2011 was $74,500 and $12,650, respectively.Note 8. Financial HighlightsThe following is a schedule of financial highlights for the year ended December 31, 2012 and the period January 28, 2011 (commencement of operations) toDecember 31, 2011: Per Share Data(b): Year endedDecember 31,2012 For the periodJanuary 28,2011(a) toDecember 31,2011 Net asset value, beginning of period $18.15 $— Net investment income 1.31 0.30 Net realized and unrealized gain (loss) on investments 0.15 (0.33) Net increase (decrease) in net assets resulting from operations 1.46 (0.03) Issuance of common stock — 20.00 Offering costs and other 0.01 (1.27) Dividends to shareholders (1.29) (0.55) Net asset value, end of period $18.33 $18.15 Total return(c)(d) 27.65% (18.49%) Net assets, end of period 174,103 $172,435 Per share market value $18.66 $15.75 Shares outstanding end of period 9,500,100 9,500,100 Ratio to average net assets: Net Investment Income 7.14% 1.51% Operating expenses(d)(e) 3.20% 1.31% Interest and related expenses(d)(e) 1.40% 1.77% Total expenses(d)(e) 4.60% 3.08% Average debt outstanding 41,439 7,123 Portfolio turnover ratio 74.5% 37.0% (a)Commencement of operations 86Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) (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 any dividends, if any, reinvested in accordancewith the dividend reinvestment plan.(d)Not annualized for periods less than one year.(e)The Company has reclassified the ratios of expenses to average net assets for the period January 28, 2011 (commencement of operations) toDecember 31, 2011 to conform to the current period’s presentation.Information about our senior securities is shown in the following table as of each year ended December 31 since the Company commenced operations,unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities. Class and Year Total AmountOutstanding(1) AssetCoveragePer Unit(2) InvoluntaryLiquidatingPreferencePer Unit(3) AverageMarket ValuePer Unit(4) Revolving Credit Facility Fiscal 2012 $39,100 $5,453 $— N/A Fiscal 2011 8,600 21,051 — N/A (1)Total amount of each class of senior securities outstanding at the end of the period presented.(2)The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities andindebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by onethousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total AssetCoverage Per Unit was divided based on the amount outstanding at the end of the period for each.(3)The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security juniorto it.(4)Not applicable, we do not have senior securities that are registered for public trading.Note 9(a). Income Tax Information and Distributions to StockholdersThe tax character of dividends for the fiscal year ended December 31, 2012 was as follows: Ordinary income $11,830 Capital Gains 425 $12,255 As of December 31, 2012, the components of accumulated ordinary income and gains (losses) on a tax basis were as follows: Distributable ordinary income $1,014 Other book/tax temporary differences 867 Unrealized depreciation (3,918) Total accumulated losses $(2,037) (1)Tax information for the fiscal year ended December 31, 2012 is an estimate and will not be determined and final until the Company files its 2012 taxreturn expected in September 2013. 87(1) Table of ContentsSOLAR SENIOR CAPITAL LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(in thousands except share and per share amounts) The tax character of dividends for the fiscal year ended December 31, 2011 was as follows: Ordinary income $5,225 As of December 31, 2011, the components of accumulated ordinary income and gains (losses) on a tax basis were as follows: Distributable ordinary income $437 Post-October capital losses (665) Net unrealized depreciation (2,274) Total accumulated losses $(2,502) (1)As of December 31, 2011, we had a post-October capital loss deferral of $665.Note 9(b). Other Tax Information (unaudited)No distributions paid during the fiscal year ended December 31, 2012 or for the period January 28, 2011 (commencement of operations) toDecember 31, 2011 were eligible for qualified dividend income treatment or were eligible for the 70% dividends received deduction for corporatestockholders.The Company recognizes in its consolidated financial statements the tax effect of a tax position when it is more likely than not, based on the technicalmerits, that the position will be sustained upon examination. To the best of our knowledge, we did not have any uncertain tax positions that met therecognition or measurement criteria of ASC 740-10-25 nor did we have any unrecognized tax benefits as of the periods presented herein. Although we filefederal and state tax returns, our major tax jurisdiction is federal. Our tax returns for each of our federal tax years since 2011 remain subject to examination bythe Internal Revenue Service and the state department of revenue.Note 10. Selected Quarterly Financial Data (unaudited) Quarter Ended InvestmentIncome Net InvestmentIncome (loss) Net Realized AndUnrealized Gain(Loss) on Assets Net Increase(Decrease) InNet Assets FromOperations Total PerShare Total PerShare Total PerShare Total PerShare December 31, 2012 $6,141 $0.65 $3,425 $0.36 $(2,670) $(0.28) $755 $0.08 September 31, 2012 4,890 0.51 3,001 0.32 806 0.08 3,807 0.40 June 30, 2012 5,599 0.59 3,441 0.36 192 0.02 3,633 0.38 March 31, 2012 3,909 0.41 2,626 0.28 3,091 0.32 5,717 0.60 December 31, 2011 3,554 0.37 2,570 0.27 1,676 0.18 4,246 0.45 September 31, 2011 2,874 0.30 (644) (0.07) (4,844) (0.51) (5,488) (0.58) June 30, 2011 1,405 0.15 794 0.08 180 0.02 974 0.10 March 31, 2011* 57 0.01 (120) (0.01) 138 0.01 18 0.00 *For the period January 28, 2011 (commencement of operations) to March 31, 2011 88(1) Table of ContentsNote 11. Subsequent EventsOn January 8, 2013, our board of directors declared a monthly dividend of $0.1175 per share payable on February 1, 2013 to holders of record as ofJanuary 24, 2013.On January 16, 2013, the Company closed on a follow-on public equity offering of 2.0 million shares of common stock at $18.85 per share raisingapproximately $37,200 in net proceeds.On February 5, 2013, our board of directors declared a monthly dividend of $0.1175 per share payable on March 1, 2013 to holders of record as ofFebruary 21, 2013.On February 25, 2013, our board of directors declared a monthly dividend of $0.1175 per share payable on April 2, 2013 to holders of record as ofMarch 21, 2013.The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financialstatements were issued. 89Table 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, 2012 (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 onthat evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedureswere effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarizedand reported 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 ReportingManagement’s Report on Internal Control Over Financial Reporting, which appears on page 65 of this Form 10-K, is incorporated by reference herein.(c) Attestation Report of the Independent Registered Public Accounting FirmOur independent registered public accounting firm, KPMG LLP, has issued an attestation report on the Company’s internal control over financialreporting, which is set forth above under the heading “Report of Independent Registered Public Accounting Firm on Internal Control Over FinancialReporting” in Item 8.(d) Changes in Internal Controls Over Financial ReportingManagement has not identified any change in the Company’s internal control over financial reporting that occurred during the fourth fiscal quarter of2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Item 9B.Other InformationNone. 90Table of ContentsPART IIIWe will file a definitive Proxy Statement for our 2013 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 2013 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 2013 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 2013 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 2013 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 2013 Annual Meeting ofStockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year. 91Table of ContentsPART IV Item 15.Exhibits and Financial Statement Schedules(a) Financial Statements. Management’s Report on Internal Control over Financial Reporting 65 Reports of Independent Registered Public Accounting Firm 66 Consolidated Statements of Assets & Liabilities as of December 31, 2012 and December 31, 2011 68 Consolidated Statements of Operations for the year ended December 31, 2012 and the period January 28, 2011* to December 31, 2011 69 Consolidated Statements of Changes in Net Assets for the year ended December 31, 2012 and the period January 28, 2011* to December 31,2011 70 Consolidated Statements of Cash Flows for the year ended December 31, 2012 and the period January 28, 2011* to December 31, 2011 71 Consolidated Schedules of Investments as of December 31, 2012 and December 31, 2011 72 Notes to Consolidated Financial Statements 76 (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, SUNS SPVLLC, as the borrower, each of the conduit lenders from time to time party thereto, each of the liquidity banks from time to time party thereto,each of the lender agents from time to time party thereto, Citibank, N.A., as the collateral agent, Wells Fargo Bank, N.A., as the account 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 Senior CapitalLtd., as the contributor.**10.10 Form of Amendment No. 1 to Share Purchase Agreement by and between Registrant and Solar Senior Capital Investors, LLC.*** 92Table of Contents10.11 Agreement and First Amendment to Loan and Servicing Agreement, dated as of November 7, 2012, by and among the Registrant, as theservicer and the transferor, SUNS SPV LLC, as the borrower, each of the conduit lenders from time to time party thereto, each of the liquiditybanks from time to time party thereto, each of the lender agents from time to time party thereto, Citibank, N.A., as the administrative agent andcollateral agent, and Wells Fargo Bank, N.A., as the account bank, the collateral custodian and the backup servicer.****10.12 Form of Loan and Servicing Agreement, dated as of August 26, 2011 (as amended through November 7, 2012), by and among the Registrant,as the servicer and the transferor, SUNS SPV LLC, as the borrower, each of the conduit lenders from time to time party thereto, each of theliquidity banks from time to time party thereto, each of the lender agents from time to time party thereto, Citibank, N.A., as the administrativeagent and collateral agent, and Wells Fargo Bank, N.A., as the account bank, the backup servicer and the collateral custodian.****11.1 Computation of Per Share Earnings.14.1 Code of Ethics*21.1 Subsidiaries of Solar Senior Capital Ltd.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.*** Previously filed in connection with Solar Senior Capital Ltd.’s annual report on Form 10-K filed on February 22, 2012.**** Previously filed in connection with Post-Effective Amendment No. 1 to Solar Senior Capital Ltd.’s Registration Statement on Form N-2 (FileNo. 333-179433) on January 16, 2013.c. Consolidated Financial Statement SchedulesNo consolidated financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presentedin the aforementioned financial statements. 93Table 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 behalfby the 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 25, 2013 /S/ MICHAEL S. GROSS Michael S. Gross Chief Executive Officer, President, Chairman of the Board andDirector (Principal Executive Officer)February 25, 2013 /S/ STEVEN HOCHBERG Steven Hochberg DirectorFebruary 25, 2013 /S/ DAVID S. WACHTER David S. Wachter DirectorFebruary 25, 2013 /S/ LEONARD A. POTTER Leonard A. Potter DirectorFebruary 25, 2013 /S/ BRUCE SPOHLER Bruce Spohler Chief Operating Officer and DirectorFebruary 25, 2013 /S/ RICHARD L. PETEKA Richard L. Peteka Chief Financial Officer (Principal Financial Officer) andSecretary 94Exhibit 11.1STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGSThe following information sets forth the computation of basic and diluted net increase in net assets per share resulting from operations for the yearended December 31, 2012 Numerator for increase in net assets per share – basic: $13,912 Denominator for basic weighted average shares: 9,500,100 Earnings per share – basic: $1.46 Numerator for increase in net assets per share – diluted: $13,912 Denominator for diluted weighted average shares: 9,500,100 Earnings per share – diluted: $1.46 Exhibit 21.1The following list sets forth each of our subsidiaries, the state or country under whose laws the subsidiary is organized, and the percentage of voting securitiesor membership interests owned by us in such subsidiary:SUNS SPV LLC (Delaware) – 100%The subsidiary listed above is consolidated for financial reporting purposes.Exhibit 31.1Certification Pursuant to Section 302Certification 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c) 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; andd) 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 25, 2013 /S/ MICHAEL S. GROSS Michael S. GrossChief Executive OfficerExhibit 31.2Certification Pursuant to Section 302Certification of Chief Financial OfficerI, Richard L. Peteka, 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(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles;c) 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; andd) 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(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’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; andb) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 25, 2013 /S/ RICHARD L. PETEKA Richard L. PetekaChief Financial OfficerExhibit 32.1Certification Pursuant to Section 906Certification 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 fiscal year ended December 31, 2012 (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 theRegistrant, hereby certify, to the 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 25, 2013Exhibit 32.2Certification Pursuant to Section 906Certification 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 fiscal year ended December 31, 2012 (the “Report”) of SOLAR SENIOR CAPITAL LTD.(the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, RICHARD L. PETEKA, the Chief Financial Officer of theRegistrant, hereby certify, to the 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/ RICHARD L. PETEKA Name: Richard L. PetekaDate: February 25, 2013

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