BKCC 10-Q Quarterly Report Sept. 30, 2011

BLACKROCK CAPITAL INVESTMENT CORP

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10-Q 1 d250620d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number 001-33559

B LACK R OCK K ELSO C APITAL C ORPORATION

(Exact Name of Registrant as Specified in Its Charter)


Delaware		20-2725151
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

40 East 52 ^nd Street, New York, NY		10022
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code: 212-810-5800

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer þ Non-Accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 2, 2011 was 73,274,412.

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011

Table of Contents


	INDEX	PAGE NO.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Statements of Assets and Liabilities as of September 30, 2011 and December 31, 2010 (unaudited)		4

	Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)		5

	Statements of Changes in Net Assets for the nine months ended September 30, 2011 and 2010 (unaudited)		6

	Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (unaudited)		7

	Schedules of Investments as of September 30, 2011 and December 31, 2010 (unaudited)		8

	Notes to Financial Statements (unaudited)		24

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		51

Item 4.	Controls and Procedures		51

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		51

Item 1A.	Risk Factors		51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52

Item 3.	Defaults Upon Senior Securities		52

Item 4.	[Reserved]		52

Item 5.	Other Information		52

Item 6.	Exhibits		53

SIGNATURES			54

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

•

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, including our ability to obtain continued financing on favorable terms;

•

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

•

the impact of increased competition;

•

the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the “Advisor”), to locate suitable investments for us and to monitor and administer our investments;

•

potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;

•

the ability of the Advisor to attract and retain highly talented professionals;

•

fluctuations in foreign currency exchange rates; and

•

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

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

Item 1. Financial Statements

BlackRock Kelso Capital Corporation

Statements of Assets and Liabilities (Unaudited)


	September 30, 2011		December 31, 2010
Assets:
Investments at fair value:
Non-controlled, non-affiliated investments (amortized cost of $891,642,736 and $822,763,237)	$	821,008,762	$	707,262,774
Non-controlled, affiliated investments (amortized cost of $63,965,899 and $80,424,668)		70,781,115		77,376,201
Controlled investments (amortized cost of $93,063,468 and $82,489,600)		100,472,026		95,446,691

Total investments at fair value (amortized cost of $1,048,672,103 and $985,677,505)		992,261,903		880,085,666
Cash and cash equivalents		30,223,195		1,344,159
Cash denominated in foreign currency (cost of $4,072 and $798,560)		3,817		816,712
Unrealized appreciation on forward foreign currency contracts		1,376,893		—
Receivable for investments sold		462,271		5,316,189
Interest receivable		16,004,557		10,763,333
Dividends receivable		12,721,070		9,849,927
Prepaid expenses and other assets		7,410,500		7,431,688

Total Assets	$	1,060,464,206	$	915,607,674

Liabilities:
Payable for investments purchased	$	2,935,476	$	2,726,437
Unrealized depreciation on forward foreign currency contracts		159,700		368,445
Debt		317,450,000		170,000,000
Interest payable		2,314,810		256,084
Dividend distributions payable		18,984,146		23,222,287
Base management fees payable		5,124,033		4,355,021
Incentive management fees payable		—		14,614,098
Accrued administrative services		254,001		80,164
Other accrued expenses and payables		1,458,101		1,505,214

Total Liabilities		348,680,267		217,127,750

Net Assets:
Common stock, par value $.001 per share, 200,000,000 common shares authorized, 74,377,615 and 73,531,317 issued and 73,015,936 and 72,569,638 outstanding		74,378		73,531
Paid-in capital in excess of par		1,002,494,654		994,200,522
Distributions in excess of net investment income		(3,770,179)		(4,029,341)
Accumulated net realized loss		(222,843,450)		(180,403,836)
Net unrealized depreciation		(55,205,167)		(105,935,052)
Treasury stock at cost, 1,361,679 and 961,679 shares held		(8,966,297)		(5,425,900)

Total Net Assets		711,783,939		698,479,924

Total Liabilities and Net Assets	$	1,060,464,206	$	915,607,674

Net Asset Value Per Share	$	9.75	$	9.62

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

BlackRock Kelso Capital Corporation

Statements of Operations (Unaudited)


	Three months ended September 30, 2011		Three months ended September 30, 2010		Nine months ended September 30, 2011		Nine months ended September 30, 2010
Investment Income:
From non-controlled, non-affiliated investments:
Interest	$	28,702,720	$	21,756,798	$	82,966,737	$	72,077,951
Dividends		610,173		543,026		2,278,768		1,588,281
Other income		—		—		37,500		37,500
From non-controlled, affiliated investments:
Interest		1,222,841		1,637,598		4,055,375		4,722,438
Dividends		383,516		327,156		1,106,309		943,730
From controlled investments:
Interest		2,327,995		553,592		5,069,254		1,458,324

Total investment income		33,247,245		24,818,170		95,513,943		80,828,224

Expenses:
Base management fees		5,124,033		4,049,347		14,547,503		12,522,832
Incentive management fees		—		—		—		493,951
Interest and credit facility fees		4,208,359		1,748,712		11,902,630		4,570,476
Amortization of debt issuance costs		634,678		713,305		1,871,184		1,469,481
Professional fees		683,095		394,589		1,345,608		790,820
Investment advisor expenses		315,435		394,306		1,176,450		1,178,267
Administrative services		319,500		203,182		866,121		681,892
Insurance		108,186		123,409		350,606		458,020
Director fees		97,000		93,500		309,269		281,169
Other		792,346		286,568		1,564,091		884,162

Total expenses		12,282,632		8,006,918		33,933,462		23,331,070

Net Investment Income		20,964,613		16,811,252		61,580,481		57,497,154

Realized and Unrealized Gain (Loss):
Net realized gain (loss):
Non-controlled, non-affiliated investments		258,039		400,317		(37,073,408)		(26,685,901)
Non-controlled, affiliated investments		176,800		—		(4,892,398)		(36,221,865)
Controlled investments		18,929		—		22,372		2,515
Foreign currency		682,083		875,621		(496,180)		166,998

Net realized gain (loss)		1,135,851		1,275,938		(42,439,614)		(62,738,253)

Net change in unrealized appreciation or depreciation on:
Non-controlled, non-affiliated investments		(4,598,697)		(9,861,152)		44,282,872		9,255,775
Non-controlled, affiliated investments		(190,180)		259,096		10,447,300		36,626,837
Controlled investments		(5,630,890)		9,594,214		(5,548,533)		29,115,151
Foreign currency translation		1,256,787		(1,763,644)		1,548,246		(623,077)

Net change in unrealized appreciation or depreciation		(9,162,980)		(1,771,486)		50,729,885		74,374,686

Net realized and unrealized gain (loss)		(8,027,129)		(495,548)		8,290,271		11,636,433

Net Increase in Net Assets Resulting from Operations	$	12,937,484	$	16,315,704	$	69,870,752	$	69,133,587

Net Investment Income Per Share	$	0.29	$	0.26	$	0.84	$	0.96

Earnings Per Share	$	0.18	$	0.25	$	0.96	$	1.15

Basic and Diluted Weighted-Average Shares Outstanding		73,101,398		65,509,414		72,966,076		59,898,128
Dividends Declared Per Share	$	0.26	$	0.32	$	0.84	$	0.96

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

BlackRock Kelso Capital Corporation

Statements of Changes in Net Assets (Unaudited)


	Nine months ended September 30, 2011		Nine months ended September 30, 2010
Net Increase in Net Assets Resulting from Operations:
Net investment income	$	61,580,481	$	57,497,154
Net realized loss		(42,439,614)		(62,738,253)
Net change in unrealized appreciation or depreciation		50,729,885		74,374,686

Net increase in net assets resulting from operations		69,870,752		69,133,587

Dividend Distributions to Stockholders from:
Net investment income		(61,321,309)		(57,233,372)

Capital Share Transactions:
Proceeds from shares sold		2,000,000		88,406,250
Less offering costs		—		(4,514,243)
Reinvestment of dividends		6,294,969		3,722,710
Purchases of treasury stock		(3,540,397)		—

Net increase in net assets resulting from capital share transactions		4,754,572		87,614,717

Total Increase in Net Assets		13,304,015		99,514,932
Net assets at beginning of period		698,479,924		539,562,762

Net assets at end of period	$	711,783,939	$	639,077,694

Capital Share Activity:
Shares issued from subscriptions		200,000		8,625,000
Shares issued from reinvestment of dividends		646,298		410,782
Purchases of treasury stock		(400,000)		—

Net increase in shares outstanding		446,298		9,035,782

Undistributed (distributions in excess of) net investment income at end of period	$	(3,770,179)	$	19,727,731

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

BlackRock Kelso Capital Corporation

Statements of Cash Flows (Unaudited)


	Nine months ended September 30, 2011		Nine months ended September 30, 2010
Operating Activities:
Net increase in net assets resulting from operations	$	69,870,752	$	69,133,587
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:
Proceeds from dispositions of short-term investments—net		—		358,276
Purchases of investments		(260,528,598)		(321,716,307)
Purchases of foreign currency contracts—net		(526,385)		171,325
Proceeds from sales/repayments of investments		163,013,170		354,230,907
Net change in unrealized appreciation or depreciation on investments		(49,181,639)		(74,997,763)
Net change in unrealized appreciation or depreciation on foreign currency translation		(1,548,246)		623,077
Net realized loss on investments		41,943,434		62,905,251
Net realized loss (gain) on foreign currency		496,180		(166,998)
Amortization of premium/discount—net		(7,411,408)		(7,788,930)
Amortization of debt issuance costs		1,871,184		1,469,481
Decrease in receivable for investments sold		4,853,918		—
(Increase) decrease in interest receivable		(5,241,224)		6,425,100
Increase in dividends receivable		(2,871,143)		(2,481,418)
Increase in prepaid expenses and other assets		(159,416)		(14,949)
Increase in payable for investments purchased		209,039		45,032,517
Increase (decrease) in interest payable		2,058,726		(810,496)
Increase (decrease) in base management fees payable		769,012		(497,782)
Decrease in incentive management fees payable		(14,614,098)		(16,818,602)
Increase in accrued administrative services		173,837		2,902
Decrease in other accrued expenses and payables		(47,113)		(1,301,912)

Net cash (used in) provided by operating activities		(56,870,018)		113,757,266


Financing Activities:
Net proceeds from issuance of common stock		2,000,000		83,892,007
Dividend distributions paid		(59,264,457)		(50,619,212)
Proceeds from debt		278,250,000		229,600,000
Repayments of debt		(130,800,000)		(320,100,000)
Deferred debt issuance costs		(1,690,580)		(7,801,398)
Purchases of treasury stock		(3,540,397)		—

Net cash provided by (used in) financing activities		84,954,566		(65,028,603)

Effect of exchange rate changes on cash and cash equivalents		(18,407)		14,671

Net increase in cash		28,066,141		48,743,334
Cash and cash equivalents, beginning of period		2,160,871		5,807,901

Cash and cash equivalents, end of period	$	30,227,012	$	54,551,235


Supplemental disclosure of cash flow information and non-cash financing activities:
Cash paid during period for:
Interest	$	8,800,205	$	4,490,212
Taxes	$	914,847	$	1,110,381
Dividend distributions reinvested	$	6,294,969	$	3,722,710

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Senior Secured Notes—16.1%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14	Glass Yarns/ Fibers	$	16,200,000	$	15,940,484	$	15,147,000
American Residential Services L.L.C. et al., Second Lien, 12.00%, 4/15/15, acquired 4/9/10(c)	HVAC/ Plumbing Services		40,000,000		39,857,915		40,400,000
Sizzling Platter LLC et al., First Lien, 12.25%, 4/15/16, acquired 4/14/11(c)	Restaurants		30,000,000		29,024,593		30,000,000
TriMark USA, Inc., Second Lien, 11.50% (LIBOR + 1.75% cash, 2.00% PIK), 11/30/13	Food Service Equipment		32,457,590		32,457,590		29,082,001

Total Senior Secured Notes					117,280,582		114,629,001

Unsecured Debt—0.8%
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		54,264,611		46,419,028		651,175
Maple Hill Acquisition LLC, 13.50%, 10/1/15	Rigid Packaging		5,000,000		4,874,914		5,000,000

Total Unsecured Debt					51,293,942		5,651,175

Subordinated Debt—23.2%
A & A Manufacturing Co., Inc., 14.00%, 5/16/16	Protective Enclosures		27,403,430		27,132,430		27,403,430
Conney Safety Products, LLC, 16.00%, 10/1/14(d)	Safety Products		25,582,734		24,779,610		25,582,734
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c)	Information Services		19,950,000		18,827,840		19,112,100
MedQuist Inc. et al., 13.00%, 10/15/16	Medical Transcription		43,000,000		41,917,059		43,860,000
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15	Financial Services		15,366,867		15,261,099		15,366,867
PGA Holdings, Inc., 12.50%, 3/12/16	Healthcare Services		5,000,000		4,944,718		5,000,000
Sarnova HC, LLC et al., 14.00% (12.00% cash, 2.00% PIK), 4/6/16	Healthcare Products		25,762,284		25,207,769		25,762,284
Wastequip, Inc., 14.50% (10.00% cash, 4.50% PIK), 2/5/15	Waste Management Equipment		8,864,536		8,375,955		3,315,336

Total Subordinated Debt					166,446,480		165,402,751

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Senior Secured Loans—83.2%(e)
Advantage Sales & Marketing Inc., Second Lien, 9.25% (LIBOR + 7.75%), 6/17/18	Marketing Services	$	10,000,000	$	9,865,478	$	9,830,000
Airvana Network Solutions Inc., First Lien, 10.00% (LIBOR + 8.00%), 3/25/15	Software		20,561,905		20,202,673		20,561,905
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13	Publishing		4,793,143		3,772,308		1,083,250
American SportWorks LLC, Second Lien, 13.00%, 6/16/15(f)	Utility Vehicles		8,000,000		8,000,000		6,320,000
AmQuip Crane Rental LLC, Second Lien, 6.02% (LIBOR + 5.75%), 6/29/14	Construction Equipment		24,017,329		22,921,002		20,726,955
Arclin US Holdings Inc., Second Lien, 7.75% (LIBOR + 6.00%), 1/15/15(d)(g)	Chemicals		3,532,302		2,944,878		3,451,059
Ascend Learning, LLC, Second Lien, 11.50% (LIBOR + 10.00%), 12/6/17	Education		20,000,000		19,466,614		20,000,000
Ashton Woods USA L.L.C., Second Lien, 11.75%, 7/6/15	Homebuilding		37,500,000		37,217,826		37,500,000
Attachmate Corporation et al., Second Lien, 9.50% (LIBOR + 8.00%), 10/27/17	Software		5,000,000		4,930,903		4,906,250
Bankruptcy Management Solutions, Inc., Term Loan A, First Lien, 7.50% (LIBOR + 6.00%), 8/20/14(f)	Financial Services		2,000,000		1,545,437		1,944,000
Bankruptcy Management Solutions, Inc., Term Loan B, First Lien, 7.50% (LIBOR + 5.00% cash, 1.00% PIK), 8/20/14(f)	Financial Services		18,689,230		10,011,516		15,268,251
Bankruptcy Management Solutions, Inc., Term Loan A, Second Lien, 8.25% (LIBOR + 1.00% cash, 7.00% PIK), 8/20/15(f)	Financial Services		29,880,420		21,175,135		21,244,978
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 16.00%, 6/29/12(g)	Discount Stores		10,520,640(h)		10,309,000		10,096,099
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 16.00%, 7/1/12(g)	Discount Stores		14,461,360(h)		13,593,798		13,877,799
Berlin Packaging L.L.C., Second Lien, 6.78% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000		23,650,370		23,064,000

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13	Party Rentals	$	3,011,194	$	3,011,194	$	2,439,068
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(f)(i)	Personal Fitness		6,647,179		6,647,179		6,424,075
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14	Automobile Repair		3,194,307		3,193,529		2,989,871
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14	Automobile Repair		2,340,288		2,340,186		2,113,280
Henniges Automotive Holdings, Inc., First Lien, 12.00% (LIBOR + 10.00%), 11/30/16	Automotive		38,333,333		37,343,347		38,333,333
Hoffmaster Group, Inc., First Lien, 7.00% (LIBOR + 5.00%), 6/2/16	Consumer Products		4,699,813		4,552,898		4,699,813
Hoffmaster Group, Inc., Second Lien, 13.50%, 6/2/17	Consumer Products		33,000,000		32,331,805		33,000,000
InterMedia Outdoors, Inc., Second Lien, 7.12% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		8,670,000
MCCI Group Holdings, LLC, Second Lien, 10.75% (LIBOR + 9.00%), 1/29/18	Healthcare Services		40,000,000		40,000,000		40,000,000
Navilyst Medical, Inc., Second Lien, 13.00%, 8/14/15	Healthcare Services		15,000,000		14,864,234		14,685,000
Penton Media, Inc. et al., First Lien, 5.00% (LIBOR + 3.00% cash, 1.00% PIK), 8/1/14(d)	Information Services		11,426,881		8,869,902		8,869,902
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		16,711,000
Potters Holdings II, L.P., Term Loan B, Second Lien, 10.25%, (LIBOR + 8.50%), 11/6/17	Engineered Glass Beads		15,000,000		14,788,481		14,850,000
Pre-Paid Legal Services, Inc., Term Loan B, First Lien, 11.00% (LIBOR + 9.50%), 12/31/16	Legal Services		15,000,000		14,570,811		15,000,000
Progress Financial Corporation, Second Lien, 12.00%, 7/26/16	Financial Services		25,000,000		24,515,805		24,515,805
SOURCEHOV LLC, Second Lien, 10.50% (LIBOR + 9.25%), 4/29/18	Process Outsourcing		20,000,000		18,001,726		17,860,000
Sur La Table, Inc., Second Lien, 12.00%, 7/28/17	Consumer Products		50,000,000		50,000,000		50,000,000
Total Safety U.S., Inc., Second Lien, 6.77% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		9,000,000

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
United Subcontractors, Inc., First Lien, 4.37% PIK (LIBOR + 4.00%), 6/30/15(d)	Building and Construction	$	1,862,364	$	1,807,407	$	1,538,313
Volume Services America, Inc. et al., Term Loan B, First Lien, 10.50% (LIBOR + 8.50%), 9/16/16	Concession Services		44,550,000		43,071,527		44,550,000
WBS Group LLC et al., Second Lien, 10.50% (LIBOR + 9.00%), 6/7/13	Software		20,000,000		19,880,705		18,700,000
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.24% (LIBOR + 4.00%), 10/31/11	Restaurants		6,850,000		6,850,000		2,760,550
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.24% (LIBOR + 7.00%), 10/31/11(i)	Restaurants		8,334,656		8,334,656		4,482,926

Total Senior Secured Loans					600,582,330		592,067,482

Preferred Stock—1.1%
Alpha Media Group Holdings Inc., Series A-2(j)	Publishing		5,000		—		—
Fitness Together Holdings, Inc., Series A(f)(j)	Personal Fitness		187,500		173,326		—
Fitness Together Holdings, Inc., Series A-1(f)(j)	Personal Fitness		49,056		49,056		—
Fitness Together Holdings, Inc., Series B Convertible(f)(j)	Personal Fitness		15,881,325		9,100,000		2,595,644
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(d)	Sheet Metal Fabrication		4,968		4,968,000		5,117,040

Total Preferred Stock					14,290,382		7,712,684

Common Stock—10.1%(j)
Alpha Media Group Holdings Inc., Class B	Publishing		12,500		—		—
Arclin Cayman Holdings Ltd.(d)(g)	Chemicals		450,532		9,722,203		6,920,000
Bankruptcy Management Solutions, Inc.(f)	Financial Services		325,415		9,600,072		1,416,697
BKC ARS Blocker, Inc. (American Residential)(k)	HVAC/Plumbing Services		1,000		—		637,000
BKC ASW Blocker, Inc. (American SportWorks)(f)(l)	Utility Vehicles		1,000		7,428,827		—
BKC CSP Blocker, Inc. (Conney Safety)(d)(m)	Safety Products		100		952,259		1,101,652

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
BKC DVSH Blocker, Inc. (DynaVox Systems)(n)	Augmentative Communication Products		100	$	758,069	$	888,502
BKC MTCH Blocker, Inc. (Marquette Transportation)(o)	Transportation		1,000		5,000,000		3,913,111
ECI Holdco, Inc., Class A-1 (Electrical Components)(f)	Electronics		18,848,836		18,848,836		45,255,301
Fitness Together Holdings, Inc.(f)	Personal Fitness		173,547		118,500		—
M & M Tradition Holdings Corp.(d)	Sheet Metal Fabrication		500,000		5,000,000		5,000,000
MGHC Holding Corporation (Mattress Giant)(d)	Bedding—Retail		109,336		1,093,360		88,900
USI Senior Holdings, Inc. (United Subcontractors)(d)	Building and Construction		97,519		7,309,066		6,327,747

Total Common Stock					65,831,192		71,548,910

Limited Partnership/Limited Liability Company Interests—4.2%
Big Dumpster Coinvestment, LLC(j)	Waste Management Equipment		—		5,333,333		—
Marsico Holdings, LLC, acquired 11/12/10(c)(j)	Financial Services		91,445		1,848,077		292,624
Penton Business Media Holdings LLC(d)(j)	Information Services		—		9,050,000		17,154,827
PG Holdco, LLC (Press Ganey), 15.00% PIK	Healthcare Services		333		280,739		281,020
PG Holdco, LLC (Press Ganey), Class A(j)	Healthcare Services		16,667		166,667		224,996
Sentry Security Systems Holdings, LLC(j)	Security Services		147,271		147,271		3,015
Sentry Security Systems Holdings, LLC, 8.00% PIK	Security Services		602,729		602,729		602,729
VSS-AHC Holdings LLC (Advanstar)(j)	Printing/Publishing		352,941		4,199,161		4,508,313
WBS Group Holdings, LLC, Class B-1, 16.00% PIK	Software		8,000		8,000,000		7,144,690

Total Limited Partnership/Limited Liability Company Interests					29,627,977		30,212,214

Equity Warrants/Options—0.7%(j)
Arclin Cayman Holdings Ltd., Tranche 1, expire 1/15/14(d)(g)	Chemicals		230,159		403,815		1,110,897
Arclin Cayman Holdings Ltd., Tranche 2, expire 1/15/15(d)(g)	Chemicals		230,159		323,052		1,293,405
Arclin Cayman Holdings Ltd., Tranche 3, expire 1/15/14(d)(g)	Chemicals		230,159		484,578		913,612
Arclin Cayman Holdings Ltd., Tranche 4, expire 1/15/15(d)(g)	Chemicals		230,159		403,815		1,113,459

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

BlackRock Kelso Capital Corporation

Schedules of Investments (Unaudited)—(Continued)

September 30, 2011


Portfolio Company	Industry	Principal Amount or Number of Shares/Units		Cost(a)		Fair Value(b)
Bankruptcy Management Solutions, Inc., expire 10/1/17(f)	Financial Services		23,046	$	365,584	$	3,080
Facet Investment, Inc., expire 1/18/21	Medical Devices		1,978		250,000		96,606
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c)	Financial Services		455		444,450		—
MGHC Holding Corporation, expire 1/31/12(d)	Bedding—Retail		75,928		136,297		—
Progress Financial Corporation, expire 7/26/18	Financial Services		429,596		502,627		502,627
Twin River Worldwide Holdings, Inc., Contingent Value Rights, expire 11/5/17	Gaming		1,000		5,000		4,000

Total Equity Warrants/Options					3,319,218		5,037,686

TOTAL INVESTMENTS—139.4%				$	1,048,672,103		992,261,903

OTHER ASSETS & LIABILITIES (NET)—(39.4)%							(280,477,964)

NET ASSETS—100.0%						$	711,783,939

(a)

Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(b)

Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).

(c)

Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 12.6% of the Company’s net assets at September 30, 2011.

(d)

Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities, is as follows:

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


Non-controlled, Affiliated Investments	Fair Value at December 31, 2010		Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at September 30, 2011			Net Realized Gain (Loss)***			Interest Income***		Dividend Income***
Arclin Cayman Holdings Ltd.:
Common Stock	$	8,370,000	$	—	$	(8,507,789	)	$	137,789		$	—	†	$	—		$	—	$	—
Warrants		5,453,023		—		(4,419,495	)		(1,033,528	)		—	†		—			—		—
Arclin US Holdings Inc.
Senior Secured Loan		3,459,541		44,416		(3,547,259	)		43,302			—	†		1,288			113,406		—
BKC CSP Blocker, Inc.
Common Stock		1,062,247		63,359		—			(23,954	)		1,101,652			—			—		—
Conney Safety Products, LLC
Subordinated Debt		29,665,252		225,971		(4,829,858	)		521,369			25,582,734			170,143			3,693,677		—
M&M Tradition Holdings Corp.:
Preferred Stock		5,117,040		—		—			—			5,117,040			—			—		1,106,309
Common Stock		5,000,000		—		—			—			5,000,000			—			—		—
Mattress Giant Corporation
Subordinated Debt		1,229,657		102,434		(4,014,328	)		2,682,237			—	††		(2,784,672	)		94,327		—
MGHC Holding Corporation:
Common Stock		—		—		(2,285,815	)		2,285,815			—	††		(2,285,815	)		—		—
Common Stock		—		1,093,360		—			(1,004,460	)		88,900			—			—		—
Warrants		—		136,297		—			(136,297	)		—			—			—		—
Penton Business Media Holdings LLC
Limited Liability Co. Interest		9,050,000		—		—			8,104,827			17,154,827			—			110,624		—
Penton Media, Inc. et al.
Senior Secured Loan		—		8,869,902		—			—			8,869,902			6,658			—		—
United Subcontractors, Inc.
Senior Secured Loan		1,589,952		26,419		—			(78,058	)		1,538,313			—			43,341		—
USI Senior Holdings, Inc.
Common Stock		7,379,489		—		—			(1,051,742	)		6,327,747			—			—		—

Totals	$	77,376,201	$	10,562,158	$	(27,604,544	)	$	10,447,300		$	70,781,115		$	(4,892,398	)	$	4,055,375	$	1,106,309

Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

***

For the nine months ended September 30, 2011.

†

Investment moved out of the non-controlled, affiliated category into the non-controlled, non-affiliated category during the period.

††

Investment no longer held at September 30, 2011.

The aggregate fair value of non-controlled, affiliated investments at September 30, 2011 represents 9.9% of the Company’s net assets.

(e)

Approximately 66% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 51% of such senior secured loans have floors of 1.00% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2011 of all contracts within the specified loan facility.

(f)

Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities, is as follows:

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


Controlled Investments	Fair Value at December 31, 2010		Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at September 30, 2011			Net Realized Gain (Loss)***			Interest/Other Income***
Al Solutions, Inc.
Senior Secured Loan	$	115,000	$	—	$	(115,000	)	$	—		$	—	†	$	—		$	6,738
American SportWorks LLC
Senior Secured Loan		7,200,000		—		—			(880,000	)		6,320,000			—			788,667
Bankruptcy Management Solutions, Inc.:
Senior Secured Loan, First Lien, A		1,427,700		117,736		—			398,564			1,944,000			—			231,488
Senior Secured Loan, First Lien, B		—		10,011,517		—			5,256,734			15,268,251			22,372			839,790
Senior Secured Loan, Second Lien		21,342,029		2,659,369		—			(2,756,420	)		21,244,978			—			3,190,130
Common Stock		4,516,560		60,832		—			(3,160,695	)		1,416,697			—			—
Warrants		125,880		—		—			(122,800	)		3,080			—			—
BKC ASW Blocker, Inc.
Common Stock		—		—		—			—			—			—			—
ECI Holdco, Inc.
Common Stock		51,480,000		—		—			(6,224,699	)		45,255,301			—			—
Electrical Components International, Inc.
Senior Secured Loan		1,641,718		—		(1,641,718	)		—			—	†		—	†		14,730
Fitness Together Franchise Corporation
Senior Secured Loan		6,119,804		—		(518,868	)		823,139			6,424,075			—			(2,289	)
Fitness Together Holdings, Inc.:
Preferred Stock Series A		—		—		—			—			—			—			—
Preferred Stock Series A-1		—		—		—			—			—			—			—
Preferred Stock Series B Convertible		1,478,000		—		—			1,117,644			2,595,644			—			—
Common Stock		—		—		—			—			—			—			—

Totals	$	95,446,691	$	12,849,454	$	(2,275,586	)	$	(5,548,533	)	$	100,472,026		$	22,372		$	5,069,254

***

For the nine months ended September 30, 2011. There was no dividend income from these securities during the period.

†

Investment no longer held at September 30, 2011.

The aggregate fair value of controlled investments at September 30, 2011 represents 14.1% of the Company’s net assets.

(g)

Non-U.S. company or principal place of business outside the U.S.

(h)

Principal amount is denominated in Canadian dollars.

(i)

Non-accrual status (in default) at September 30, 2011 and therefore non-income producing. At September 30, 2011, the aggregate fair value and amortized cost of the Company’s debt investments on non-accrual status represents 1.2% and 1.6% of total debt investments at fair value and amortized cost, respectively.

(j)

Non-income producing equity securities at September 30, 2011.

(k)

The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. and thus a non-controlled, non-affiliated investment.

(l)

The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC and thus a controlled investment.

(m)

The Company is the sole stockholder of BKC CSP Blocker, Inc., which is the beneficiary of more than 5% (but less than 25%) of the voting securities of Conney Prime Holdings, LLC and thus a non-controlled, affiliated investment.

(n)

The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC and thus a non-controlled, non-affiliated investment.

(o)

The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC and thus a non-controlled, non-affiliated investment.

PIK

Payment-in-kind.

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

BlackRock Kelso Capital Corporation

Schedules of Investments

December 31, 2010


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Senior Secured Notes—12.6%
AGY Holding Corp., Second Lien, 11.00%, 11/15/14	Glass Yarns/ Fibers	$	23,500,000	$	23,191,282	$	21,385,000
American Residential Services L.L.C. et al., Second Lien, 12.00%, 4/15/15, acquired 4/9/10(d)	HVAC/ Plumbing Services		40,000,000		39,836,651		40,400,000
TriMark USA, Inc., Second Lien, 11.50% (LIBOR + 1.75% cash, 2.00% PIK), 11/30/13	Food Service Equipment		32,136,228		32,136,228		26,480,252

Total Senior Secured Notes					95,164,161		88,265,252

Unsecured Debt—1.0%
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15	Waste Management Equipment		49,067,970		44,935,199		2,046,844
Maple Hill Acquisition LLC, 13.50%, 10/1/15	Rigid Packaging		5,000,000		4,851,541		4,851,541

Total Unsecured Debt					49,786,740		6,898,385

Subordinated Debt—31.7%
A & A Manufacturing Co., Inc., 14.00%, 5/16/16	Protective Enclosures		27,403,430		27,088,627		27,088,627
Aspen Marketing Holdings, Inc., 13.00%, 8/12/16	Marketing Services		50,000,000		48,830,976		48,830,976
Conney Safety Products, LLC, 16.00%, 10/1/14(e)	Safety Products		30,582,734		29,383,496		29,665,252
Mattress Giant Corporation, 11.00% PIK, 12/31/12(e)	Bedding —Retail		6,404,461		3,911,894		1,229,657
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(d)	Information Services		8,000,000		8,048,532		7,528,000
MedQuist Inc. et al., 13.00%, 10/15/16	Medical Transcription		43,000,000		41,756,471		41,756,471
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15	Financial Services		15,366,867		15,237,076		15,390,745
PGA Holdings, Inc., 12.50%, 3/12/16	Healthcare Services		5,000,000		4,935,425		5,000,000
Sarnova HC, LLC et al., 14.00% (12.00% cash, 2.00% PIK), 4/6/16	Healthcare Products		25,375,474		24,729,156		24,729,156
Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12	Security Services		11,056,053		10,997,828		10,997,828
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(d)	Security Services		7,000,000		7,000,000		7,000,000
Wastequip, Inc., 13.00% (10.00% cash, 3.00% PIK), 2/5/15	Waste Management Equipment		8,510,274		8,163,533		2,153,099

Total Subordinated Debt					230,083,014		221,369,811

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

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Senior Secured Loans—63.7%(f)
Advantage Sales & Marketing Inc., Second Lien, 9.25% (LIBOR + 7.75%), 6/17/18	Marketing Services	$	10,000,000	$	9,850,494	$	10,000,000
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13	Publishing		4,468,967		3,325,429		1,625,395
Al Solutions, Inc., First Lien, 10.00%, 6/28/13(g)	Metals		115,000		115,000		115,000
American SportWorks LLC, Second Lien, 13.00%, 6/16/15(g)	Utility Vehicles		8,000,000		8,000,000		7,200,000
AmQuip Crane Rental LLC, Second Lien, 6.04% (LIBOR + 5.75%), 6/29/14	Construction Equipment		24,017,329		22,622,302		20,871,059
Arclin US Holdings Inc., Second Lien, 7.75% (LIBOR + 6.00%), 1/15/15(e)(h)	Chemicals		3,559,198		2,831,246		3,459,541
Ascend Learning, LLC, Second Lien, 12.25% (Base Rate + 9.00%), 12/6/17	Education		20,000,000		19,402,126		19,402,126
Ashton Woods USA L.L.C., Second Lien, 11.75%, 7/6/15	Homebuilding		37,500,000		37,161,761		37,161,761
Bankruptcy Management Solutions, Inc., Term Loan A, First Lien, 7.50% (LIBOR + 6.00%), 8/20/14(g)	Financial Services		2,000,000		1,427,700		1,427,700
Bankruptcy Management Solutions, Inc., Second Lien, 8.26% (LIBOR + 1.00% cash, 7.00% PIK), 8/20/15(g)	Financial Services		27,221,976		18,515,769		21,342,029
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 16.00%, 6/29/12(h)	Discount Stores		12,381,187(i)		12,084,951		12,460,310
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 16.00%, 7/1/12(h)	Discount Stores		17,018,813(i)		15,971,842		17,127,573
Berlin Packaging L.L.C., Second Lien, 6.78% (LIBOR + 6.50%), 8/17/15	Rigid Packaging		24,000,000		23,582,963		23,400,000
Electrical Components International, Inc., Tranche B, First Lien, 9.50% (LIBOR + 6.50%), 5/14/15(g)	Electronics		1,641,718		1,641,718		1,641,718
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13	Party Rentals		3,123,427		3,123,427		2,529,976
Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12	Medical Devices		40,828,460		36,865,344		—
Facet Technologies, LLC, Guaranty(j)	Medical Devices		—		—		—
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g)(k)	Personal Fitness		7,166,047		7,166,047		6,119,804

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

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14	Automobile Repair	$	3,263,070	$	3,262,020	$	3,073,812
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14	Automobile Repair		2,305,090		2,304,957		2,076,887
Henniges Automotive Holdings, Inc., First Lien, 12.00% (LIBOR + 10.00%), 11/30/16	Automotive		40,000,000		38,817,518		38,817,518
Hoffmaster Group, Inc., First Lien, 7.00% (LIBOR + 5.00%), 6/2/16	Consumer Products		4,791,367		4,617,622		4,617,622
Hoffmaster Group, Inc., Second Lien, 13.50%, 6/2/17	Consumer Products		33,000,000		32,243,723		32,243,723
InterMedia Outdoors, Inc., Second Lien, 7.05% (LIBOR + 6.75%), 1/31/14	Printing/ Publishing		10,000,000		10,000,000		8,630,000
MCCI Group Holdings, LLC, Second Lien, 7.51% (LIBOR + 7.25%), 6/21/13	Healthcare Services		29,000,000		28,972,454		29,000,000
Navilyst Medical, Inc., Second Lien, 13.00%, 8/14/15	Healthcare Services		15,000,000		14,838,003		14,865,000
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13	Rehabilitation Centers		17,000,000		17,000,000		17,000,000
Total Safety U.S., Inc., Second Lien, 6.79% (LIBOR + 6.50%), 12/8/13	Industrial Safety Equipment		9,000,000		9,000,000		8,829,000
United Subcontractors, Inc., First Lien, 1.80% (LIBOR + 1.50%), 6/30/15(e)	Building and Construction		1,842,354		1,780,989		1,589,952
Volume Services America, Inc. et al., Term Loan B, First Lien, 10.50% (LIBOR + 8.50%), 9/16/16	Concession Services		44,887,500		43,173,389		43,173,389
Water Pik, Inc., Second Lien, 5.76% (LIBOR + 5.50%), 6/15/14	Consumer Products		30,000,000		30,000,000		30,000,000
WBS Group LLC et al., Second Lien, 10.50% (LIBOR + 9.00%), 6/7/13	Software		20,000,000		19,827,750		17,827,750
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.31% (LIBOR + 4.00%), 3/30/11	Restaurants		6,850,000		6,843,398		2,822,448
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.31% (LIBOR + 7.00%), 3/30/11(k)	Restaurants		8,334,656		8,326,946		4,372,183

Total Senior Secured Loans					494,696,888		444,823,276

Preferred Stock—0.9%
Alpha Media Group Holdings Inc., Series A-2(l)	Publishing		5,000		—		—

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

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010


Portfolio Company	Industry(a)		Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Facet Holdings Corp., Class A, 12.00% PIK(k)		Medical Devices	$	900	$	900,000	$	—
Fitness Together Holdings, Inc., Series A(g)(l)		Personal Fitness		187,500		173,326		—
Fitness Together Holdings, Inc., Series A-1(g)(l)		Personal Fitness		49,056		49,056		—
Fitness Together Holdings, Inc., Series B Convertible(g)(l)		Personal Fitness		15,881,325		9,100,000		1,478,000
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(e)		Sheet Metal Fabrication		4,968		4,968,000		5,117,040

Total Preferred Stock						15,190,382		6,595,040

Common Stock—11.9%(l)
Alpha Media Group Holdings Inc., Class B		Publishing		12,500		—		—
Arclin Cayman Holdings Ltd.(e)(h)		Chemicals		572,553		11,399,992		8,370,000
Bankruptcy Management Solutions, Inc.(g)		Financial Services		259,229		9,539,238		4,516,560
BKC ARS Blocker, Inc. (American Residential)(m)		HVAC/ Plumbing Services		1,000		20,798		1,118,000
BKC ASW Blocker, Inc. (American SportWorks)(g)(n)		Utility Vehicles		1,000		7,428,827		—
BKC CSP Blocker, Inc. (Conney Safety)(e)(o)		Safety Products		100		888,910		1,062,247
BKC DVSH Blocker, Inc. (DynaVox Systems)(p)		Augmentative Communication Products		100		758,068		723,813
BKC MTCH Blocker, Inc. (Marquette Transportation)(q)		Transportation		1,000		5,000,000		3,511,963
ECI Holdco, Inc., Class A-1 (Electrical Components)(g)		Electronics		18,848,836		18,848,836		51,480,000
Facet Holdings Corp		Medical Devices		10,000		100,000		—
Fitness Together Holdings, Inc.(g)		Personal Fitness		173,547		118,500		—
M & M Tradition Holdings Corp.(e)		Sheet Metal Fabrication		500,000		5,000,000		5,000,000
MGHC Holding Corporation (Mattress Giant)(e)		Bedding—Retail		2,285,815		2,285,815		—
USI Senior Holdings, Inc. (United Subcontractors)(e)		Building and Construction		97,519		7,309,066		7,379,489

Total Common Stock						68,698,050		83,162,072

Limited Partnership/Limited Liability Company Interests—3.3%
Big Dumpster Coinvestment, LLC(l)		Waste Management Equipment		—		5,333,333		—
Marsico Holdings, LLC, acquired 11/12/10(d)(l)		Financial Services		91,445		1,848,077		424,305

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

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010


Portfolio Company	Industry(a)	Principal Amount or Number of Shares/Units		Cost(b)		Fair Value(c)
Penton Business Media Holdings LLC(e)(l)	Information Services		—	$	9,050,000	$	9,050,000
PG Holdco, LLC (Press Ganey), 15.00% PIK	Healthcare Services		333		280,739		280,739
PG Holdco, LLC (Press Ganey), Class A(l)	Healthcare Services		16,667		166,667		300,000
Sentry Security Systems Holdings, LLC(l)	Security Services		147,271		147,271		3,830
Sentry Security Systems Holdings, LLC, 8.00% PIK	Security Services		602,729		602,729		602,729
VSS-AHC Holdings LLC (Advanstar)(l)	Printing/ Publishing		352,941		4,199,161		6,390,228
WBS Group Holdings, LLC, Class B-1, 16.00% PIK	Software		8,000		8,000,000		6,336,096

Total Limited Partnership/Limited Liability Company Interests					29,627,977		23,387,927

Equity Warrants/Options—0.8%(l)
Arclin Cayman Holdings Ltd., Tranche 1, expire 1/15/14(e)(h)	Chemicals		230,159		403,815		1,378,850
Arclin Cayman Holdings Ltd., Tranche 2, expire 1/15/15(e)(h)	Chemicals		230,159		323,052		1,553,288
Arclin Cayman Holdings Ltd., Tranche 3, expire 1/15/14(e)(h)	Chemicals		230,159		484,578		1,164,424
Arclin Cayman Holdings Ltd., Tranche 4, expire 1/15/15(e)(h)	Chemicals		230,159		403,815		1,356,461
Bankruptcy Management Solutions, Inc., expire 10/1/17(g)	Financial Services		22,544		365,583		125,880
BLB Worldwide Holdings, Inc., Contingent Value Rights, expire 11/5/17	Gaming		1,000		5,000		5,000
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(d)	Financial Services		455		444,450		—

Total Equity Warrants/Options					2,430,293		5,583,903

TOTAL INVESTMENTS—126.0%				$	985,677,505		880,085,666

OTHER ASSETS & LIABILITIES (NET)— (26.0)%							(181,605,742	)

NET ASSETS—100.0%						$	698,479,924

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

BlackRock Kelso Capital Corporation

Schedules of Investments—(Continued)

December 31, 2010

Note regarding change in presentation: The Company revised the Schedules of Investments from the presentation in its Annual Report on Form 10-K for the year ended December 31, 2010 to incorporate the unearned income into the cost and fair value of the associated portfolio company investments. The previously reported Schedules of Investments included a separate line item reporting total unearned income. The amount of total unearned income is $9,392,954 at December 31, 2010. This change in presentation did not impact total investment cost or fair value as reported on the Company’s Statements of Assets and Liabilities.

(a)

Unaudited

(b)

Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.

(c)

Fair value is determined by or under the direction of the Company’s Board of Directors (see Note 2).

(d)

Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 7.9% of the Company’s net assets at December 31, 2010.

(e)

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


Non-controlled, Affiliated Investments	Fair Value at December 31, 2009		Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at December 31, 2010			Net Realized Gain (Loss)***			Interest Income***			Dividend Income***
Arclin Cayman Holdings Ltd.:
Common Stock	$	—	$	7,087,791	$	—		$	1,282,209		$	8,370,000		$	—		$	—		$	—
Warrants		—		3,955,050		—			1,497,973			5,453,023			—			—			—
Arclin US Holdings Inc.
Senior Secured Loan		—		3,437,181		(8,298	)		30,658			3,459,541			667			39,137			—
BKC CSP Blocker, Inc.
Common Stock		—		888,910		—			173,337			1,062,247			—			—			—
Conney Safety Products, LLC
Subordinated Debt		—		25,366,592		—			4,298,660			29,665,252			—			4,966,138			—
M&M Tradition Holdings Corp.:
Preferred Stock		5,117,040		—		—			—			5,117,040			—			—			1,284,148
Common Stock		5,000,000		—		—			—			5,000,000			—			—			—
Mattress Giant Corporation
Subordinated Debt		3,521,162		1,390,692		—			(3,682,197	)		1,229,657			—			1,390,894			—
MGHC Holding Corporation
Common Stock		—		—		—			—			—			—			—			—
Penton Business Media Holdings LLC
Limited Liability Co. Interest		515,870		9,050,000		(14,943,201	)		14,427,331			9,050,000			(14,426,995	)		—			—
Penton Media, Inc.
Senior Secured Loan		4,290,000		14,571		(25,694,870	)		21,390,299			—	†		(21,794,870	)		(25,073	)		—
United Subcontractors, Inc.
Senior Secured Loan		1,447,864		163,319		—			(21,231	)		1,589,952			—			32,096			—
USI Senior Holdings, Inc.
Common Stock		6,902,053		383,057		—			94,379			7,379,489			—			—			—


Totals	$	26,793,989	$	51,737,163	$	(40,646,369	)	$	39,491,418		$	77,376,201		$	(36,221,198	)	$	6,403,192		$	1,284,148

***

For the year ended December 31, 2010.

†

Investment no longer held at December 31, 2010.

The aggregate fair value of non-controlled, affiliated investments at December 31, 2010 represents 11.1% of the Company’s net assets.

(f)

Approximately 71% of the senior secured loans to the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 35% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2010 of all contracts within the specified loan facility.

(g)

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


Controlled Investments	Fair Value at December 31, 2009		Gross Additions (Cost)*		Gross Reductions (Cost)**			Net Unrealized Gain (Loss)			Fair Value at December 31, 2010			Net Realized Gain (Loss)***		Interest/ Other Income***
Al Solutions, Inc.
Senior Secured Loan	$	150,000	$	221	$	(32,638	)	$	(2,583	)	$	115,000		$	2,362	$	14,207
American SportWorks LLC
Senior Secured Loan		3,012,331		1,726,037		(6,879,382	)		9,341,014			7,200,000			153		650,218
Bankruptcy Management Solutions, Inc.:
Senior Secured Loan		—		3,368,715		(1,941,015	)		—			1,427,700			—		148,011
Senior Secured Loan		—		18,515,769		—			2,826,260			21,342,029			—		675,666
Common Stock		—		9,539,238		—			(5,022,678	)		4,516,560			—		—
Warrant		—		365,583		—			(239,703	)		125,880			—		—
BKC ASW Blocker, Inc.
Common Stock		163,289		7,353,826		(175,000	)		(7,342,115	)		—			—		—
ECI Holdco, Inc.
Common Stock		—		18,848,836		—			32,631,164			51,480,000			—		—
Electrical Components International, Inc.:
Senior Secured Loan		—		1,649,968		(8,250	)		—			1,641,718			—		100,913
Senior Secured Loan		—		12,000,000		(12,000,000	)		—			—	†		—		218,183
Senior Secured Loan		—		12,000,000		(12,000,000	)		—			—	†		—		218,168
Fitness Together Franchise Corporation
Senior Secured Loan		5,807,656		143,488		—			168,660			6,119,804			—		825,104
Fitness Together Holdings, Inc.:
Preferred Stock Series A		—		—		—			—			—			—		—
Preferred Stock Series A-1		—		—		—			—			—			—		—
Preferred Stock Series B Convertible		779,000		2,600,000		—			(1,901,000	)		1,478,000			—		—
Common Stock		—		—		—			—			—			—		—

Totals	$	9,912,276	$	88,111,681	$	(33,036,285	)	$	30,459,019		$	95,446,691		$	2,515	$	2,850,470

***

For the year ended December 31, 2010. There was no dividend income from these securities during the period.

†

Investment no longer held at December 31, 2010.

The aggregate fair value of controlled investments at December 31, 2010 represents 13.7% of the Company’s net assets.

(h)

Non-U.S. company or principal place of business outside the U.S.

(i)

Principal amount is denominated in Canadian dollars.

(j)

Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. This guaranty was terminated on January 17, 2011 with no payments having been made thereunder.

(k)

Non-accrual status (in default) at December 31, 2010 and therefore non-income producing. At December 31, 2010, the aggregate fair value and amortized cost of the Company’s debt investments on non-accrual status represents 1.4% and 1.8% of total debt investments at fair value and amortized cost, respectively.

(l)

Non-income producing equity securities at December 31, 2010.

(m)

(n)

The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC and thus a controlled investment.

(o)

(p)

(q)

PIK

Payment-in-kind.

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

BlackRock Kelso Capital Corporation

Notes to Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

On July 25, 2005, the Company completed a private placement of 35,366,589 shares of its common stock at a price of $15.00 per share receiving net proceeds of approximately $529 million. On July 2, 2007, the Company completed an initial public offering through which it sold an additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market. The Company received net proceeds of approximately $150 million from this offering.

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not indicative of results to be expected for the full year.

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2011.

2. Significant accounting policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.

The significant accounting policies consistently followed by the Company are:

(a)

Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and may utilize the average of the range of bid and ask quotations as a practical expedient for fair value. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors. Because the Company expects that there will not be a readily available market value for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the

direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC (the “Advisor”), the Company’s investment advisor, believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors has approved a multi-step valuation process each quarter, as described below:

(i)

The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

(ii)

The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

(iii)

The audit committee of the Board of Directors reviews the preliminary valuations prepared by the independent valuation firms; and

(iv)

The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Company’s principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is valued at cost, which the Advisor believes approximates fair value under the circumstances. As of that date, an independent valuation firm may conduct an initial independent appraisal of the investment.

Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the Financial Accounting Standards Board (“FASB”), defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

ASC 820-10 establishes a hierarchy that classifies these inputs into the three broad levels listed below:

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.

The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value and categorizes each investment within the fair value hierarchy pursuant to and consistent with ASC 820-10.

(b)	Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase.

(c)	Gains or losses on the disposition of investments are calculated using the specific identification method.

(d)

Interest income is recorded on an accrual basis and includes amortization of premiums and accretion of discounts. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security. Premiums and discounts are determined based on the cash flows expected to be collected for a particular investment.

Dividend income is recorded on an accrual basis to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, PIK income is accrued only to the extent that the portfolio company valuation indicates that the PIK income is likely to be collected.

Structuring service fees, origination, closing, commitment and other upfront fees are generally non-recurring and are recognized as revenue when earned. In instances where the Company does not perform significant services in connection with the related investment, fees paid to the Company in these situations may be deferred and amortized over the estimated life of the loan.

Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as interest income.

Expenses are recorded on an accrual basis.

(e)	The Company has elected to be taxed as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains). The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated excess taxable income as required.

The Company holds 100% of the common stock of certain companies as indicated in the accompanying schedules of investments. The Company carries its investments in such wholly owned companies at fair value in the statements of assets and liabilities, net of any applicable income tax liabilities. An income tax provision has been provided at the wholly owned company level on all income of such companies, including realized and unrealized gains. Such wholly owned companies are held in connection with the Company’s election to be taxed as a RIC. In general, these wholly owned companies earn income that, if earned directly by the Company, would not be qualifying income for purposes of the Company qualifying as a RIC. Dividends from these wholly owned companies and gains from the sale of their stock are qualifying income for this purpose. The Company makes investments in securities in accordance with its investment policies through these wholly owned companies.

(f)

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

(g)

Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan or debt security has sufficient collateral value and is in the process of collection.

(h)	Recently Issued Accounting Pronouncements:

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (“ASU 2010-06”). ASU 2010-06 amends ASC 820-10 to require new disclosures with regard to transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 and January 1, 2011 of the respective additional disclosure requirements of ASU 2010-06 did not materially impact the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement : Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance within ASC 820-10. The amendments include: (1) application of the concepts of highest and best use and valuation premise only to measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities), (2) an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risks or counterparty credit risk, which allows an entity to measure the fair value of the net risk position, when several criteria are met, (3) extension of the prohibition of a blockage factor application to all fair value measurements, (4) a model for the fair value measurement of instruments classified within an entity’s shareholders’ equity which is consistent with the guidance of measuring the fair value for liabilities, (5) additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy: (i) quantitative information about unobservable inputs used, (ii) a description of the valuation processes used by the entity and (iii) a qualitative discussion about the sensitivity of the measurements, (6) disclosure of the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed and (7) disclosure of any transfers between Levels 1 and 2 of the fair value hierarchy, not just significant transfers. The provisions of ASU 2011-04 are effective for the Company on January 1, 2012. The adoption of ASU 2011-04 is not expected to materially impact the Company’s financial statements.

3. Agreements and related party transactions

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which the Advisor, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

For the three and nine months ended September 30, 2011, the Advisor earned $5,124,033 and $14,547,503, respectively, in Management Fees under the Management Agreement. For the three and nine months ended September 30, 2010, the Advisor earned $4,049,347 and $12,522,832, respectively, in such fees from the Company.

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an 8.0% annualized rate of return during the applicable fee measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three months ended September 30, 2011 and 2010 was determined by reference to the four quarter periods ended on September 30, 2011 and 2010, respectively. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Company’s net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each trailing four quarters’ period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will equal 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the period’s remaining excess income amount.

Annual Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated on an annual basis. For each annual period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

The portion of the Incentive Fee based on capital gains for each period will equal 50% of the period’s excess gain amount, until such payments equal 20% of the period’s capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s remaining excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the “period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

For the three and nine months ended September 30, 2011, the Advisor earned no incentive fees from the Company. For the three and nine months ended September 30, 2010, the Advisor earned zero and $493,951, respectively, in incentive fees from the Company.

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2011, the Company incurred $315,435 and $1,176,450, respectively, for such investment advisor expenses under the Management Agreement. Reimbursements to the Advisor for such investment advisor expenses for the three and nine months ended September 30, 2010 were $394,306 and $1,178,267, respectively.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2011 were $816,130 and $1,583,453, respectively. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2010 were $377,773 and $2,092,971, respectively.

No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staffs. For the three and nine months ended September 30, 2011, the Company incurred $268,303 and $713,528, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2010, the Company incurred $161,284 and $552,651, respectively, in such expenses.

At September 30, 2011 and December 31, 2010, cash equivalents of $30,223,195 and $1,344,159, respectively, consisted of short term liquid investments in a money market fund managed by an affiliate of the Administrator.

In March 2011, the Company’s Board of Directors authorized the purchase in a private placement of up to 1,000,000 shares of the Company’s common stock, by the Advisor in its discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, on March 16, 2011, the Company issued and sold to the Advisor in a private placement 200,000 shares of common stock for $2,000,000 or $10.00 per share, which was the closing price of the Company’s common stock on The NASDAQ Global Select Market on that date.

At September 30, 2011 and December 31, 2010, the Advisor owned and had the right to vote approximately 276,000 and 47,000 shares, respectively, of the Company’s common stock, representing less than 1.0% of the total shares outstanding. On such dates, under compensation arrangements for its officers and employees the Advisor owned of record, but did not have the right to vote, an additional 242,000 and 426,000 shares, respectively, of the Company’s common stock. At September 30, 2011 and December 31, 2010, other entities affiliated with the Administrator beneficially owned approximately 4,697,000 and 4,181,000 shares, respectively, of the Company’s common stock, representing approximately 6.4% and 5.8% of the total shares outstanding. An entity affiliated with the Administrator has ownership and financial interests in the Advisor.

4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share) for the three and nine months ended September 30, 2011 and 2010.


	Three months ended September 30, 2011		Three months ended September 30, 2010		Nine months ended September 30, 2011		Nine months ended September 30, 2010
Numerator for basic and diluted net increase in net assets per share	$	12,937,484	$	16,315,704	$	69,870,752	$	69,133,587
Denominator for basic and diluted net increase in net assets per share		73,101,398		65,509,414		72,966,076		59,898,128
Basic/diluted net increase in net assets per share from operations	$	0.18	$	0.25	$	0.96	$	1.15

Diluted net increase in net assets per share from operations equals basic net increase in net assets per share from operations for each period because there were no common stock equivalents outstanding during the above periods.

5. Investments

Purchases of investments for the three months ended September 30, 2011 and 2010 totaled $139,401,945 and $177,428,077, respectively, and for the nine months ended September 30, 2011 and 2010 totaled $260,528,598 and $321,716,307, respectively. Sales/repayments of investments for the three months ended September 30, 2011 and 2010 totaled $87,591,684 and $100,205,621, respectively, and for nine months ended September 30, 2011 and 2010 totaled $163,013,170 and $354,230,907, respectively.

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled non-affiliated, non-controlled affiliated and controlled investments is contained in the accompanying schedules of investments and other financial statements. The information in the tables below is presented on an aggregate portfolio basis, without segregating the non-controlled non-affiliated, non-controlled affiliated and controlled investment categories.

At September 30, 2011, investments consisted of the following:


	Cost		Fair Value

Senior secured notes	$	117,280,582	$	114,629,001
Unsecured debt		51,293,942		5,651,175
Subordinated debt		166,446,480		165,402,751
Senior secured loans:
First lien		200,027,366		197,032,435
Second/other priority lien		400,554,964		395,035,047

Total senior secured loans		600,582,330		592,067,482

Preferred stock		14,290,382		7,712,684
Common stock		65,831,192		71,548,910
Limited partnership/limited liability company interests		29,627,977		30,212,214
Equity warrants/options		3,319,218		5,037,686

Total investments	$	1,048,672,103	$	992,261,903

At December 31, 2010, investments consisted of the following:


	Cost*		Fair Value*

Senior secured notes	$	95,164,161	$	88,265,252
Unsecured debt		49,786,740		6,898,385
Subordinated debt		230,083,014		221,369,811
Senior secured loans:
First lien		153,982,953		143,591,287
Second/other priority lien		340,713,935		301,231,989

Total senior secured loans		494,696,888		444,823,276

Preferred stock		15,190,382		6,595,040
Common stock		68,698,050		83,162,072
Limited partnership/limited liability company interests		29,627,977		23,387,927
Equity warrants/options		2,430,293		5,583,903

Total investments	$	985,677,505	$	880,085,666

*	As indicated in the accompanying schedules of investments, the Company revised its previous presentation of its schedule of investments to incorporate the unearned income into the cost and fair value of the associated portfolio company investments.

The industry composition of the portfolio at fair value at September 30, 2011 and December 31, 2010 was as follows:


Industry	September 30, 2011			December 31, 2010
Personal and Other Services		14.2	%		13.8%
Healthcare		11.7			10.6
Business Services		11.3			11.8
Consumer Products		8.7			7.6
Financial Services		8.1			4.9
Manufacturing		6.3			7.1
Distribution		5.3			6.3
Electronics		4.7			6.1
Building and Real Estate		4.6			5.2
Chemicals		4.5			4.4
Printing, Publishing and Media		4.1			8.5
Automotive		3.9			4.5
Beverage, Food and Tobacco		3.8			0.8
Retail		2.9			4.0
Containers and Packaging		2.8			3.2
Telecommunications		2.1			—
Entertainment and Leisure		0.6			0.8
Transportation		0.4			0.4

Total		100.0	%		100.0%

The geographic composition of the portfolio at fair value at September 30, 2011 was United States 96.2% and Canada 3.8%, and at December 31, 2010 was United States 94.7% and Canada 5.3%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

In the normal course of business, the Company invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Company may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Company; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Company may be exposed to counterparty credit risk, or the risk that an entity with which the Company has unsettled or open transactions may fail to or be unable to perform on its commitments. The Company manages counterparty risk by entering into transactions only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Company to market, issuer and counterparty credit risks, consist principally of investments in portfolio companies. The extent of the Company’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the statements of assets and liabilities. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution and in short-term liquid investments in a money market fund.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Derivatives

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with only creditworthy counterparties.

At September 30, 2011, details of open forward foreign currency contracts were as follows:


Foreign Currency	Settlement Date	Amount and Transaction	US$ Value at Settlement Date		US$ Value at September 30, 2011		Unrealized Appreciation/ (Depreciation)
Canadian dollar	October 7, 2011	2,927,000 Purchased	$	(2,955,768)	$	(2,812,871)	$	(142,897)
Canadian dollar	October 7, 2011	380,000 Purchased		(381,986)		(365,183)		(16,803)
Canadian dollar	October 7, 2011	27,407,000 Sold		27,707,376		26,338,349		1,369,027
Canadian dollar	October 7, 2011	99,500 Sold		103,486		95,620		7,866

			$	24,473,108	$	23,255,915	$	1,217,193

At December 31, 2010, details of open forward foreign currency contracts were as follows:

Foreign Currency

Settlement Date

Amount and

Transaction

US$ Value at
Settlement Date

US$ Value at
December 31, 2010

Unrealized
Depreciation

Canadian dollar

January 19, 2011

29,400,000 Sold

29,166,667

29,535,112

(368,445)

All realized and unrealized gains and losses on forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations. Unrealized gains and losses on forward foreign currency contracts are also reported as separate line items within the Company’s statements of assets and liabilities.

The Company holds warrants and options in certain portfolio companies in an effort to achieve additional investment return. In purchasing warrants and options, the Company bears the risk of an unfavorable change in the value of the underlying equity interest. The aggregate fair value of warrants and options as of September 30, 2011 and December 31, 2010 represents 0.7% and 0.8%, respectively, of the Company’s net assets.

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future.

7. Debt

Under the terms of the Company’s amended and restated Senior Secured, Multi-Currency Credit Agreement (the “Credit Facility”), as amended on April 20, 2010, certain lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $375,000,000 outstanding, at any one time, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. The Credit Facility is secured by substantially all of the assets in the Company’s portfolio, including cash and cash equivalents. Subject to certain exceptions, pricing for outstanding borrowings is at LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid using the Company’s credit rating, and LIBOR plus 3.00% for term loans. The Credit Facility does not contain a LIBOR floor requirement. At September 30, 2011, the effective LIBOR spread under the Credit Facility was 2.80%. Term loan commitments under the Credit Facility have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Credit Facility by up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The Credit Facility is used to supplement the Company’s equity capital to make additional portfolio investments and for other general corporate purposes.

At September 30, 2011, the Company had $142,450,000 drawn on the Credit Facility versus $170,000,000 at December 31, 2010. Subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available under the Credit Facility was $232,550,000 at September 30, 2011.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The Senior Secured Notes were sold to certain institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011.

The Company’s average outstanding debt balance during the three and nine months ended September 30, 2011 was $294,000,543 and $276,577,106, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2011 were $320,000,000 and $363,000,000, respectively, and during the three and nine months ended September 30, 2010 were $205,500,000 and $314,000,000. The weighted average annual interest cost for the three and nine months ended September 30, 2011 was 5.21% and 5.25%, respectively, and for the three and nine months ended September 30, 2010 was 2.96% and 2.25%, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility and the Senior Secured Notes. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.50%. Commitment fees incurred for the three and nine months ended September 30, 2011 were $329,677 and $995,649, respectively, and for the three and nine months ended September 30, 2010 were $417,243 and $843,784.

At September 30, 2011, the Company was in compliance with all covenants required under the Credit Facility and the Senior Secured Notes.

8. Capital stock

As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common stock at a price below the current net asset value of the stock, or NAV, unless the Company’s stockholders approve such a sale and its Board of Directors makes certain determinations. On May 26, 2011, subject to certain Board of Director determinations, the Company’s stockholders approved the ability to sell or otherwise issue shares of the Company’s common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which the Company’s common stock would be issued and sold may not be less than a price that, in the determination of the Company’s Board of Directors, closely approximates the market value of such common stock. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on NAV.

In 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock. In May 2011, the repurchase plan was further extended through the earlier of June 30, 2012 or until the approved number of shares has been repurchased. During the nine months ended September 30, 2011, the Company purchased a total of 400,000 shares of its common stock on the open market for $3,540,397, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2010. Since inception of the repurchase plan through September 30, 2011, the Company has purchased 1,361,679 shares of its common stock on the open market for $8,966,297, including brokerage commissions. At September 30, 2011, the total number of remaining shares authorized for repurchase was 1,394,971. The Company currently holds the shares it repurchased in treasury.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2011. The Company’s only such guarantee outstanding at December 31, 2010 was terminated on January 17, 2011 with no payments having been made thereunder.

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

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its financial statements.

10. Fair value of financial instruments

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying and fair values of the Company’s Credit Facility borrowings were $142,450,000 and $131,054,000 at September 30, 2011 and $170,000,000 and $169,150,000 at December 31, 2010, respectively. The carrying and fair values of the Company’s Secured Senior Notes were $175,000,000 and $174,830,000 at September 30, 2011. The carrying and fair values of the Company’s total debt outstanding were therefore $317,450,000 and $305,884,000 at September 30, 2011 and $170,000,000 and $169,150,000 at December 31, 2010, respectively.

The following tables summarize the fair values of the Company’s investments, forward foreign currency contracts and cash and cash equivalents based on the inputs used at September 30, 2011 and December 31, 2010 in determining such fair values:


			Fair Value Inputs at September 30, 2011
	Fair Value at September 30, 2011		Price Quotations (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Senior secured notes	$	114,629,001	$	—	$	—	$	114,629,001
Unsecured debt		5,651,175		—		—		5,651,175
Subordinated debt		165,402,751		—		—		165,402,751
Senior secured loans		592,067,482		—		—		592,067,482
Preferred stock		7,712,684		—		—		7,712,684
Common stock		71,548,910		—		—		71,548,910
Limited partnership/limited liability company interests		30,212,214		—		—		30,212,214
Equity warrants/options		5,037,686		—		—		5,037,686

Total investments		992,261,903		—		—		992,261,903
Forward foreign currency contracts		1,217,193		—		1,217,193		—
Cash and cash equivalents		30,227,012		30,227,012		—		—

Total	$	1,023,706,108	$	30,227,012	$	1,217,193	$	992,261,903


			Fair Value Inputs at December 31, 2010
	Fair Value at December 31, 2010		Price Quotations (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Senior secured notes	$	88,265,252	$	—	$	—	$	88,265,252
Unsecured debt		6,898,385		—		—		6,898,385
Subordinated debt		221,369,811		—		—		221,369,811
Senior secured loans		444,823,276		—		—		444,823,276
Preferred stock		6,595,040		—		—		6,595,040
Common stock		83,162,072		—		—		83,162,072
Limited partnership/limited liability company interests		23,387,927		—		—		23,387,927
Equity warrants/options		5,583,903		—		—		5,583,903

Total investments		880,085,666		—		—		880,085,666
Forward foreign currency contracts		(368,445)		—		(368,445)		—
Cash and cash equivalents		2,160,871		2,160,871		—		—

Total	$	881,878,092	$	2,160,871	$	(368,445)	$	880,085,666

In determining the fair values of the Company’s forward foreign currency contracts at September 30, 2011 and at December 31, 2010, the Company used unadjusted indicative price quotations for similar assets (Level 2). The following tables summarize the valuation techniques used at September 30, 2011 and December 31, 2010 in determining the fair values of the Company’s investments for which significant unobservable inputs (Level 3) were used:


			Valuation Techniques at September 30, 2011
	Fair Value at September 30, 2011		Broker Quote(s) for Identical or Similar Assets		Market Approach, Income Approach or Both, Utilizing Third-Party Valuation Firms
Senior secured notes	$	114,629,001	$	—	$	114,629,001
Unsecured debt		5,651,175		—		5,651,175
Subordinated debt		165,402,751		—		165,402,751
Senior secured loans		592,067,482		7,345,318		584,722,164
Preferred stock		7,712,684		—		7,712,684
Common stock		71,548,910		888,502		70,660,408
Limited partnership/limited liability company interests		30,212,214		—		30,212,214
Equity warrants/options		5,037,686		4,000		5,033,686

Total investments	$	992,261,903	$	8,237,820	$	984,024,083


			Valuation Techniques at December 31, 2010
	Fair Value at December 31, 2010		Broker Quote(s) for Identical or Similar Assets		Market Approach, Income Approach or Both, Utilizing Third-Party Valuation Firms
Senior secured notes	$	88,265,252	$	—	$	88,265,252
Unsecured debt		6,898,385		—		6,898,385
Subordinated debt		221,369,811		—		221,369,811
Senior secured loans		444,823,276		2,529,976		442,293,300
Preferred stock		6,595,040		—		6,595,040
Common stock		83,162,072		—		83,162,072
Limited partnership/limited liability company interests		23,387,927		—		23,387,927
Equity warrants/options		5,583,903		5,000		5,578,903

Total investments	$	880,085,666	$	2,534,976	$	877,550,690

The following is a reconciliation for the three months ended September 30, 2011 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at June 30, 2011		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation or Depreciation		Purchases		Sales or Redemptions		Net Transfers in and/ or out of Level 3		Fair Value at September 30, 2011
Senior secured notes	$	112,640,527	$	78,217	$	—	$	1,910,257	$	—	$	—	$	—	$	114,629,001
Unsecured debt		7,046,484		533,581		—		(2,005,889)		76,999		—		—		5,651,175
Subordinated debt		177,102,396		233,729		206,435		126,823		10,900,878		(23,167,510)		—		165,402,751
Senior secured loans		532,635,156		1,916,575		242,333		(6,228,848)		127,921,440		(64,419,174)		—		592,067,482
Preferred stock		6,060,073		—		—		1,652,611		—		—		—		7,712,684
Common stock		78,192,892		—		—		(6,643,982)		—		—		—		71,548,910
Limited partnership /limited liability company interests		29,523,080		—		—		689,134		—		—		—		30,212,214
Equity warrants/ options		4,454,931		—		5,000		80,127		502,628		(5,000)		—		5,037,686

Total investments	$	947,655,539	$	2,762,102	$	453,768	$	(10,419,767)	$	139,401,945	$	(87,591,684)	$	—	$	992,261,903

The following is a reconciliation for the nine months ended September 30, 2011 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at December 31, 2010		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation or Depreciation		Purchases		Sales or Redemptions		Net Transfers in and/or out of Level 3		Fair Value at September 30, 2011
Senior secured notes	$	88,265,252	$	166,358	$	(237,750)	$	4,247,329	$	29,250,062	$	(7,062,250)	$	—	$	114,629,001
Unsecured debt		6,898,385		1,276,828		—		(2,754,412)		230,374		—		—		5,651,175
Subordinated debt		221,369,811		1,949,924		(2,578,239)		7,669,476		11,388,943		(74,397,164)		—		165,402,751
Senior secured loans		444,823,276		4,018,298		(35,710,100)		41,358,760		220,710,197		(83,132,949)		—		592,067,482
Preferred stock		6,595,040		—		(899,995)		2,017,644		—		(5)		—		7,712,684
Common stock		83,162,072		—		(2,385,754)		(8,746,303)		(460,246)		(20,859)		—		71,548,910
Limited partnership /limited liability company interest		23,387,927		—		—		6,824,287		—		—		—		30,212,214
Equity warrants/ options		5,583,903		—		5,000		(1,435,142)		888,925		(5,000)		—		5,037,686

Total investments	$	880,085,666	$	7,411,408	$	(41,806,838)	$	49,181,639	$	262,008,255	$	(164,618,227)	$	—	$	992,261,903

The following are reconciliations for the three months ended September 30, 2010 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at June 30, 2010		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation or Depreciation		Net Purchases, Sales or Redemptions		Net Transfers in and/or out of Level 3		Fair Value at September 30, 2010
Senior secured notes	$	86,944,431	$	22,203	$	—	$	(473,473)	$	—	$	—	$	86,493,161
Unsecured debt		8,260,675		149,082		—		(4,262,668)		138,125		—		4,285,214
Subordinated debt		122,465,964		458,612		—		(960,325)		91,090,144		—		213,054,395
Senior secured loans		441,466,981		1,929,519		382,107		(5,823,079)		(14,005,813)		—		423,949,715
Preferred stock		5,314,040		—		—		41,000		—		—		5,355,040
Common stock		62,672,266		—		—		8,986,348		—		—		71,658,614
Limited partnership/limited liability company interests		21,901,394		—		—		1,813,753		—		—		23,715,147
Equity warrants/options		4,565,206		—		—		670,602		—		—		5,235,808

Total investments	$	753,590,957	$	2,559,416	$	382,107	$	(7,842)	$	77,222,456	$	—	$	833,747,094

The following are reconciliations for the nine months ended September 30, 2010 of investments for which Level 3 inputs were used in determining fair value:


	Fair Value at December 31, 2009		Amortization of Premium/ Discount - Net		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation or Depreciation		Net Purchases, Sales or Redemptions		Net Transfers in and/or out of Level 3		Fair Value at September 30, 2010
Senior secured notes	$	48,407,746	$	56,789	$	111,657	$	(2,102,804)	$	40,019,773	$	—	$	86,493,161
Unsecured debt		126,312,042		717,070		—		(15,651,628)		(107,092,270)		—		4,285,214
Subordinated debt		131,337,094		2,101,268		358		3,066,297		76,549,378		—		213,054,395
Senior secured loans		501,811,506		4,555,527		(49,661,903)		55,915,017		(88,670,432)		—		423,949,715
Preferred stock		5,896,040		—		—		(1,641,000)		1,100,000		—		5,355,040
Common stock		18,870,342		—		1,061,929		16,290,260		35,436,083		—		71,658,614
Limited partnership/limited liability company interests		13,082,528		—		(14,426,995)		16,525,820		8,533,794		—		23,715,147
Equity warrants/options		1,024,747		—		—		2,595,801		1,615,260		—		5,235,808

Total investments	$	846,742,045	$	7,430,654	$	(62,914,954)	$	74,997,763	$	(32,508,414)	$	—	$	833,747,094

There were no transfers between Levels during the three and nine months ended September 30, 2011 and 2010. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s statements of operations.

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that are still held by the Company at September 30, 2011.


	Net Change in Unrealized Appreciation or Depreciation for the Nine Months Ended September 30, 2011 on Investments Held at September 30, 2011		Net Unrealized Appreciation or Depreciation on Investments Held at September 30, 2011
Senior secured notes	$	3,686,228	$	(2,651,581)
Unsecured debt		(2,754,412)		(45,642,767)
Subordinated debt		4,987,238		(1,043,729)
Senior secured loans		4,710,265		(8,514,848)
Preferred stock		1,117,643		(6,577,698)
Common stock		(11,026,113)		5,717,718
Limited partnership/limited liability company interests		6,824,284		584,237
Equity warrants/options		(1,435,142)		1,718,468

Total investments	$	6,109,991	$	(56,410,200)

The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that were still held by the Company at September 30, 2010.


	Net Change in Unrealized Appreciation or Depreciation for the Nine Months Ended September 30, 2010 on Investments Held at September 30, 2010		Net Unrealized Appreciation or Depreciation on Investments Held at September 30, 2010
Senior secured notes	$	(2,102,804)	$	(8,330,012)
Unsecured debt		(17,802,778)		(59,974,931)
Subordinated debt		4,016,295		(10,217,740)
Senior secured loans		5,881,653		(57,309,776)
Preferred stock		(1,641,000)		(8,335,342)
Common stock		16,667,673		14,287,860
Limited partnership/limited liability company interests		2,098,825		(5,767,352)
Equity warrants/options		2,595,801		2,567,098

Total investments	$	9,713,665	$	(133,080,195)

11. Financial highlights

The following per share data and ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2011 and 2010.


	Nine months ended September 30, 2011		Nine months ended September 30, 2010
Per Share Data:
Net asset value, beginning of period	$	9.62	$	9.55

Net investment income		0.84		0.96
Net realized and unrealized gain		0.12		0.19

Total from investment operations		0.96		1.15
Dividend distributions to stockholders from net investment income		(0.84)		(0.96)
Issuance of stock at prices above net asset value		0.01		0.09
Offering costs		—		(0.07)

Net increase in net assets		0.13		0.21

Net asset value, end of period	$	9.75	$	9.76

Market price, end of period	$	7.30	$	11.50

Total return(1)(2)		(27.69)%		49.95%
Ratios / Supplemental Data:
Ratio of operating expenses to average net assets(3)		3.78%		3.92%
Ratio of interest and other debt related expenses to average net assets(3)		2.59%		1.37%

Ratio of total expenses to average net assets(3)		6.37%		5.29%
Ratio of net investment income to average net assets(3)		11.56%		13.05%
Net assets, end of period	$	711,783,939	$	639,077,694
Average debt outstanding	$	276,577,106	$	219,033,333
Weighted average shares outstanding		72,966,076		59,898,128
Average debt per share(4)	$	3.79	$	3.66
Portfolio turnover(2)		17%		45%

(1)	Total return is based on the change in market price per share during the respective periods. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.

(2)	Not annualized.

(3)	Annualized.

(4)	Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.

12. Subsequent events

On November 2, 2011, the Company’s Board of Directors declared a dividend of $0.26 per share, payable on January 4, 2012 to stockholders of record at the close of business on December 21, 2011.

In addition to the subsequent events included in these notes to the financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.

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

The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

As a BDC, 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 certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating,

negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are further described in the notes to the financial statements and in Note 2 to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the SEC on March 8, 2011. See Note 2 to the financial statements in this Quarterly Report for a description of recently issued accounting pronouncements.

Financial and operating highlights

At September 30, 2011:

Investment Portfolio: $1,022.5 million

Net Assets: $711.8 million

Indebtedness (borrowings under Credit Facility and Senior Secured Notes): $317.5 million

Net Asset Value per share: $9.75

Portfolio Activity for the Three Months Ended September 30, 2011:

Cost of investments during period: $139.4 million

Sales, repayments and other exits during period: $87.6 million

Number of portfolio companies at end of period: 54

Operating Results for the Three Months Ended September 30, 2011:

Net investment income before Incentive Fees per share: $0.29

Net investment income per share: $0.29

Dividends declared per share: $0.26

Earnings per share: $0.18

Net investment income before Incentive Fees: $21.0 million

Net investment income: $21.0 million

Net realized and unrealized losses: $8.0 million

Net increase in net assets from operations: $12.9 million

Portfolio and investment activity

During the three months ended September 30, 2011, we invested approximately $139.4 million across three new and several existing portfolio companies. The new investments consisted primarily of senior loans secured by first liens ($8.8 million, or 6% of the total invested) or second liens ($119.2 million, or 85%), senior secured notes ($10.9 million, or 8%) and unsecured or subordinated debt securities and equity securities ($0.5 million, or 1%). Additionally, we received proceeds from sales/repayments and other exits of approximately $87.6 million during the three months ended September 30, 2011.

At September 30, 2011, our net portfolio of $1,022.5 million (at fair value) consisted of 54 portfolio companies and was invested 57.9% in senior secured loans, 16.7% in unsecured or subordinated debt securities,

11.2% in equity investments, 11.2% in senior secured notes and 3% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $19.4 million at September 30, 2011. Our largest portfolio company investment by value was approximately $50.0 million and our five largest portfolio company investments by value comprised approximately 22% of our portfolio at September 30, 2011. At December 31, 2010, our net portfolio of $882 million (at fair value) consisted of 50 portfolio companies and was invested 50% in senior secured loans, 26% in unsecured or subordinated debt securities, 14% in equity investments, 10% in senior secured notes and less than 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $19.7 million at December 31, 2010. Our largest portfolio company investment by value was approximately $53.1 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at December 31, 2010.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 12.7% at September 30, 2011 and 12.4% at December 31, 2010. The weighted average yields on our senior secured loans and other debt securities at fair value were 11.9% and 14.1%, respectively, at September 30, 2011, versus 11.3% and 14.3%, respectively at December 31, 2010. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.9% at September 30, 2011 and 10.9% at December 31, 2010. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 11.7% and 12.1%, respectively, at September 30, 2011, versus 10.1% and 12.1%, respectively at December 31, 2010. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount based in the expected cash flows of the respective portfolio investment. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash and cash equivalents.

At September 30, 2011, 48% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 52% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 38% at September 30, 2011. At December 31, 2010, 45% of our debt investments bore interest based on floating rates and 55% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 25% at December 31, 2010.

The Advisor employs a grading system for our portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.26 at September 30, 2011 versus 1.32 at December 31, 2010. The following is a distribution of the investment ratings of our portfolio companies at September 30, 2011 and December 31, 2010:


	September 30, 2011		December 31, 2010
Grade 1	$	782,966,019	$	640,463,981
Grade 2		177,586,154		211,899,165
Grade 3		10,337,186		9,631,767
Grade 4		21,271,938		18,090,753
Not rated		100,606		—

Total investments	$	992,261,903	$	880,085,666

Results of operations

Results comparisons for the three months ended September 30, 2011 and 2010.

Investment income

Investment income totaled $33,247,245 and $24,818,170, respectively, for the three months ended September 30, 2011 and 2010, of which $20,969,719 and $14,846,614 were attributable to interest and fees on senior secured loans, $11,282,828 and $9,098,750 to interest earned on other debt securities, $993,689 and $870,182 to dividends from preferred equity securities and $1,009 and $2,624 to interest on cash equivalents, respectively. The increase in investment income for the three months reflects the growth of our portfolio as a result of the deployment of debt capital under our Credit Facility.

Expenses

Expenses for the three months ended September 30, 2011 and 2010 were $12,282,632 and $8,006,918, respectively, which consisted of $5,124,033 and $4,049,347 in base management fees, $4,208,359 and $1,748,712 in interest expense and fees related to the Credit Facility, $683,095 and $394,589 in professional fees, $634,678 and $713,305 in amortization of debt issuance costs, $319,500 and $203,182 in administrative services, $315,435 and $394,306 in Advisor expenses, $108,186 and $123,409 in insurance expenses, $97,000 and $93,500 in director fees and $792,346 and $286,568 in other expenses, respectively. The increase in base management fees reflects the overall growth of our portfolio. The increase in interest expense and fees related to the Credit Facility primarily reflect the issuance of our Senior Secured Notes in January 2011. The increase in professional fees is due to nonrecurring legal and other professional expenditures incurred.

Net investment income

Net investment income was $20,964,613 and $16,811,252 for the three months ended September 30, 2011 and 2010, respectively. The increase is primarily a result of an increase in interest and capital structuring fees, partially offset by an increase in interest and Credit Facility related expenses.

Net realized gain or loss

Net realized gain of $1,135,851 for the three months ended September 30, 2011 was the result of $453,768 in net gains realized from the disposition of our investments and $682,083 in net gains realized on foreign currency transactions. Foreign currency gains mainly represent net gains on forward currency contracts used to mitigate the impact that changes in foreign exchange rates would have on our investments denominated in foreign currencies. For the three months ended September 30, 2010, net realized gain was $1,275,938, which was comprised of $400,317 in net gains realized from the disposition or restructuring of our investments and $875,621 in net gains realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended September 30, 2011 and 2010, the change in net unrealized appreciation or depreciation was an increase in net unrealized depreciation of $(9,162,980) and $(1,771,486), respectively. The increase in net unrealized depreciation for the three months ended September 30, 2011 was comprised of an increase in net unrealized depreciation on investments of $(10,419,767) and a net unrealized foreign currency translation gain of $1,256,787. The valuations of our investments were impacted by the underperformance of certain portfolio companies, as well as a reduction in the multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The increase in net unrealized depreciation for the three months ended September 30, 2010 was comprised of an increase in net unrealized depreciation on investments of ($7,842) and a net unrealized foreign currency translation loss of ($1,763,644).

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the three months ended September 30, 2011 and 2010 was an increase of $12,937,484 and $16,315,704, respectively. As compared to the prior period, the lower net increase in net assets from operations primarily reflects the increase in net investment income as well as the increase in net unrealized depreciation on investments, net of realized gains, for the three months ended September 30, 2011.

Results of operations

Results comparisons for the nine months ended September 30, 2011 and 2010.

Investment income

Investment income totaled $95,513,943 and $80,828,224, respectively, for the nine months ended September 30, 2011 and 2010, of which $47,411,616 and $45,417,080 were attributable to interest and fees on senior secured loans, $44,655,342 and $32,835,665 to interest earned on other debt securities, $3,385,077 and $2,532,011 to dividends from preferred equity securities, $24,408 and $5,968 to interest on cash equivalents, and $37,500 and $37,500 to other income, respectively. The increase in investment income for the nine months ended September 30, 2011 is primarily attributable to an increase in interest, capital structuring fees and one-time fees collected from the early repayment of one of our largest portfolio companies.

Expenses

Expenses for the nine months ended September 30, 2011 and 2010 were $33,933,462 and $23,331,070, respectively, which consisted of $14,547,503 and $12,522,832 in base management fees, zero and $493,951 in incentive management fees, $11,902,630 and $4,570,476 in interest expense and fees related to the Credit Facility, $1,871,184 and $1,469,481 in amortization of debt issuance costs, $1,345,608 and $790,820 In professional fees, $1,176,450, and $1,178,267 in Advisor expenses, $866,121 and $681,892 in administrative services, $350,606 and $458,020 in insurance expenses, $309,269 and $281,169 in director fees and $1,564,091 and $884,162 in other expenses, respectively. The increase in base management fees reflects the overall growth of our portfolio. The increase in interest expense and fees related to the Credit Facility primarily reflect the issuance of our Senior Secured Notes in January 2011. The increase in professional fees is due to nonrecurring legal and other professional expenditures incurred during the current period.

Net investment income

Net investment income was $61,580,481 and $57,497,154 for the nine months ended September 30, 2011 and 2010, respectively. The increase is primarily a result of an increase in interest, capital structuring fees, and one time fees collected from the early repayment of one of our largest portfolio companies, partially offset by an increase in interest and Credit Facility related expenses.

Net realized gain or loss

Net realized loss of $(42,439,614) for the nine months ended September 30, 2011 was the result of $(41,943,434) in net losses realized from the disposition of our investments and $(496,180) in net losses realized on foreign currency transactions. Foreign currency losses mainly represent net losses on forward currency contracts used to mitigate the impact that changes in foreign exchange rates would have on our investments denominated in foreign currencies. For the nine months ended September 30, 2010, net realized loss was $(62,738,253), which was comprised of $(62,905,251) in net losses realized from the disposition or restructuring of our investments and $166,998 in net gains realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the nine months ended September 30, 2011 and 2010, the change in net unrealized appreciation or depreciation was a decrease in net unrealized depreciation of $50,729,885 and $74,374,686, respectively. The decrease in net unrealized depreciation for the nine months ended September 30, 2011 was comprised of a decrease in net unrealized depreciation on investments of $49,181,639 and a net unrealized foreign currency translation gain of $1,548,246. The valuations of our investments were favorably impacted by the performance in certain portfolio companies, as well as increased multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The decrease in net unrealized depreciation for the nine months ended September 30, 2010 was comprised of a decrease in net unrealized depreciation on investments of $74,997,763 and a net unrealized foreign currency translation loss of $(623,077).

Net increase or decrease in net assets resulting from operations

The net increase or decrease in net assets resulting from operations for the nine months ended September 30, 2011 and 2010 was an increase of $69,870,752 and $69,133,587, respectively. As compared to the prior period, the net increase in net assets from operations primarily reflects the increase in net investment income as well as the decrease in net unrealized depreciation on investments, net of realized losses, for the nine months ended September 30, 2011.

Supplemental information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, and currently is expected to be, concentrated in the fourth quarter of each year.

Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay. However, amounts calculated on a cumulative basis may yield amounts higher than the prior quarterly periods as presented. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

Computations for all periods are derived from our financial statements as follows:


	Three months ended September 30, 2011			Three months ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
GAAP Basis:
Net Investment Income	$	20,964,613		$	16,811,252		$	61,580,481		$	57,497,154
Net Increase in Net Assets from Operations		12,937,484			16,315,704			69,870,752			69,133,587
Net Asset Value at end of period		711,783,939			639,077,694			711,783,939			639,077,694
Less: Incremental Incentive Fee expense using existing formula as applied to current period operating results		(2,956,399	)		(3,791,636	)		(8,070,524	)		(11,423,444	)
As Adjusted:
Net Investment Income	$	18,008,214		$	13,019,616		$	53,509,957		$	46,073,710
Net Increase in Net Assets from Operations		9,981,085			12,524,068			61,800,228			57,710,143
Net Asset Value at end of period		703,713,415			627,654,250			703,713,415			627,654,250

Per Share Amounts, GAAP Basis:
Net Investment Income	$	0.29		$	0.26		$	0.84		$	0.96
Net Increase in Net Assets from Operations		0.18			0.25			0.96			1.15
Net Asset Value at end of period		9.75			9.76			9.75			9.76

Per Share Amounts, As Adjusted:
Net Investment Income	$	0.25		$	0.20		$	0.73		$	0.77
Net Increase in Net Assets from Operations		0.14			0.19			0.85			0.96
Net Asset Value at end of period		9.64			9.58			9.64			9.58

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2011, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, as well as from sales and unsettled purchases of selected portfolio company investments or repayments of principal.

Net cash used in operating activities during the nine months ended September 30, 2011 was $56,870,018. Our primary use of cash in operating activities during the period was purchases of investments in portfolio companies (net of sales and repayments) of $97,515,428.

Net cash provided by financing activities during the nine months ended September 30, 2011 was $84,954,566. Our primary source of cash for financing activities was $175,000,000 in proceeds from the issuance of our Senior Secured Notes in January. Our primary source of cash for financing activities was a use of $59,264,457 of dividend distributions and a source of $27,550,000 of net repayments under our Credit Facility.

Our senior secured, multi-currency Credit Facility provides us with $375,000,000 in total availability, consisting of $275,000,000 of revolving loan commitments and $100,000,000 of term loan commitments. The Credit Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. The Credit Facility has a stated maturity date of December 6, 2013 and the interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Company’s credit rating, and LIBOR plus 3.00% for term loans. The Credit Facility does not contain a LIBOR floor requirement. At September 30, 2011, the effective LIBOR spread under the Credit Facility was 2.80%. Term loan commitments under the Credit Facility have been fully drawn and, once repaid, may not be reborrowed. The Credit Facility also includes an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the Credit Facility by up to an additional $275,000,000 of revolving loan commitments and $250,000,000 of term loan commitments. The Credit Facility is used to supplement the Company’s equity capital to make additional portfolio investments and for other general corporate purposes. At September 30, 2011, we had $142,450,000 drawn and outstanding under the Credit Facility, with $232,550,000 available to us, subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum stockholders’ equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities not represented by senior securities) to the aggregate amount of senior securities representing indebtedness, and restrictions on certain payments and issuance of debt. At September 30, 2011, the Company was in compliance with regulatory coverage requirements with an asset coverage ratio of approximately 323% and was in compliance with all financial covenants under our debt agreements. In addition, borrowings under the Credit Facility (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in the Company’s portfolio.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of Senior Secured Notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of Senior Secured Notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011. The proceeds from the issuance of the Senior Secured Notes were used to fund new portfolio investments, reduce outstanding borrowings under the Credit Facility and for general corporate purposes. The Senior Secured Notes contain customary affirmative and negative covenants substantially similar to those in our Credit Facility. At September 30, 2011, we were in compliance with all financial and operational covenants required by the Credit Facility and Senior Secured Notes.

At September 30, 2011, we had $30,227,012 in cash and cash equivalents.

The primary use of existing funds is expected to be purchases of investments in portfolio companies, cash distributions to our stockholders, repayment of indebtedness and other general corporate purposes.

Our shelf registration permits us to offer, from time to time, up to approximately $830 million of our common stock, preferred stock, debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights. As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations. On May 26, 2011, subject to certain Board of Director determinations, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which our common stock would be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such common stock. Any sale of the Company’s common stock at a price below NAV would have a dilutive effect on our NAV.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at September 30, 2011 is as follows:


	Payments Due By Period (dollars in millions)
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
Credit Facility(1)	$	142.5	$	—	$	142.5	$	—	$	—
Senior Secured Notes		175.0		—		—		158.0		17.0
Interest and Credit Facility Fees Payable		2.3		2.3		—		—		—

(1)	At September 30, 2011, $232.5 million remained unused under our Credit Facility.

Off-balance sheet arrangements

Dividends

Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions at all or dividends and distributions at a particular level. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:


Dividend Amount Per Share Outstanding	Record Date	Payment Date
$0.20	December 31, 2005	January 31, 2006
$0.20	March 15, 2006	March 31, 2006
$0.23	June 15, 2006	June 30, 2006
$0.30	September 15, 2006	September 29, 2006
$0.42	December 31, 2006	January 31, 2007
$0.42	March 15, 2007	March 30, 2007
$0.42	May 15, 2007	May 31, 2007
$0.42	September 14, 2007	September 28, 2007
$0.43	December 14, 2007	December 31, 2007
$0.43	March 17, 2008	March 31, 2008
$0.43	June 16, 2008	June 30, 2008
$0.43	September 15, 2008	September 30, 2008
$0.43	December 15, 2008	December 31, 2008
$0.16	March 20, 2009	April 3, 2009
$0.16	June 19, 2009	July 2, 2009
$0.16	September 18, 2009	October 2, 2009
$0.32	December 21, 2009	January 4, 2010
$0.32	March 22, 2010	April 5, 2010
$0.32	May 17, 2010	July 2, 2010
$0.32	September 17, 2010	October 1, 2010
$0.32	December 20, 2010	January 3, 2011
$0.32	March 18, 2011	April 1, 2011
$0.26	June 17, 2011	July 1, 2011
$0.26	September 19, 2011	October 3, 2011
$0.26	December 21, 2011	January 4, 2012

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

We have qualified and elected and intend to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, have made and intend to continue to make the requisite distributions to our stockholders which will relieve us from federal income taxes. Therefore, no provision has been recorded for federal income taxes. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income as required.

In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our income (both ordinary income and net capital gains).

A portion of amounts we have paid or will pay as dividends to stockholders during 2011 may consist of taxable income carried forward from the prior year. Taxable income carried forward from the prior year to 2011 totaled approximately $8,900,000 or $0.12 per share.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. With respect to our dividends and distributions paid to stockholders during the nine months ended September 30, 2011 and 2010, dividends reinvested pursuant to our dividend reinvestment plan totaled $6,294,969 and $3,722,710, respectively.

Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies are generally non-recurring and are recognized as revenue when earned. These income items are generally treated as taxable income when received and accordingly, distributed to stockholders. For the three and nine months ended September 30, 2011, these fees totaled $3,600,000. For the three and nine months ended September 30, 2010, these fees totaled $4,835,000 and $7,235,962, respectively.

In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a sufficient portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending prior to 2012) and certain requirements are met, the entire distribution would be treated as a taxable dividend for U.S. federal income tax purposes.

Recent developments

On November 2, 2011, our Board of Directors declared a dividend of $0.26 per share, payable on January 4, 2012 to stockholders of record at the close of business on December 21, 2011.

Notice is hereby given in accordance with Section 23 of the 1940 Act that from time to time we may purchase shares of our common stock in the open market at prevailing market prices.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2011, 48% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At September 30, 2011, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 38%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our September 30, 2011 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks will be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would cause a decline of approximately $9,300,000 or $0.13 per share, in the value of our net assets at September 30, 2011 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $9,700,000, or $0.13 per share, in the value of our net assets on that date.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three and nine months ended September 30, 2011 and 2010, we did not engage in any interest rate hedging activity.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.

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

Sales of unregistered securities

None.

Issuer purchases of equity securities

The following table provides information regarding our purchases of our common stock for each month in the three month period ended September 30, 2011.


Period	Average Price Paid per Share		Total Number of Shares Purchased		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
July 2011	$	—		—		—		1,394,971
August 2011		7.65		200,000		200,000		—
September 2011		—		—		—		—

Total	$	7.65		200,000		200,000		1,394,971

In 2008, our Board of Directors approved a share repurchase plan under which we may repurchase up to 2.5 percent of our outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, our Board of Directors approved an extension and increase to the share repurchase plan which authorized us to repurchase up to an additional 2.5 percent of our outstanding shares of common stock from time to time. In May 2011, the repurchase plan was further extended through the earlier of June 30, 2012 or until the approved number of shares has been repurchased. After giving effect to the Board’s most recent action, the total number of additional shares authorized for repurchase is 1,394,971. The repurchase plan does not obligate us to acquire any specific number of shares and may be discontinued at any time. We intend to fund any repurchases with available cash.

Advisor purchases of equity securities

There were no purchases of common stock by the Advisor for the three month period ended September 30, 2011.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Reserved]

Item 5. Other Information

None.

Item 6. Exhibits.

(a)

Exhibits.



	31.1			Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32			Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	BLACKROCK KELSO CAPITAL CORPORATION

Date: November 3, 2011	By:	/s/ James R. Maher
		James R. Maher
		Chief Executive Officer


Date: November 3, 2011	By:	/s/ Corinne Pankovcin
		Corinne Pankovcin
		Chief Financial Officer

TABLE OF CONTENTS

Part 1. Financial Informationprint Item 1. Financial Statementsprint Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operationsprint Item 3. Quantitative and Qualitative Disclosures About Market Riskprint Item 4. Controls and Proceduresprint Part II. Other Informationprint Item 1. Legal Proceedingsprint Item 1A. Risk Factorsprint Item 2. Unregistered Sales Of Equity Securities and Use Of Proceedsprint Item 3. Defaults Upon Senior Securitiesprint Item 4. [reserved]print Item 5. Other Informationprint Item 6. Exhibitsprint

BKCC 10-Q Quarter ended Sept. 30, 2011