James F. Volk Age: 56 | | Chief Compliance Officer | | Since 2015 | | James F. Volkhas served as the Company’s chief compliance officer since April 2015. Mr. Volk also serves as the chief compliance officer of the other BDCs in the Fund Complex and the other funds sponsored by FS Investments. He is responsible for all compliance and regulatory issues affecting us and the foregoing companies. Before joining FS Investments and its affiliated investment advisers in October 2014, Mr. Volk was the chief compliance officer, chief accounting officer and head of traditional fund operations at SEI’s Investment Manager Services market unit. Mr. Volk was also formerly the assistant chief accountant at the SEC’s Division of Investment Management and a MAcc in Accountingsenior manager for PricewaterhouseCoopers. Mr. Volk graduated from the University of Waterloo. He also isDelaware with a CFA charterholder, Chartered Professional Accountant and a Chartered Accountant.In performing their duties under the InvestmentCo-Advisory Agreements, the FS Advisor Entities and KKR Credit will provide the Company with services to facilitate the conduct of its business, including but not limited to: (a) sourcing, structuring, underwriting, performing diligence, executing and monitoring investments; (b) researching, selecting, trading and underwriting new investment opportunities; (c) investor account management; (d) legal, compliance, finance, accounting, operations and human resources services; and (e) risk management functions. The FS Advisor Entities and KKR Credit are collectively responsible for providing appropriate assets, resources, time and personnelB.S. in order to provide to the Company the services required under the InvestmentCo-Advisory Agreements. The FS Advisor Entities and KKR Credit have agreed to coordinate their activities during the period in which the InvestmentCo-Advisory Agreements would be in effect to avoid duplication of efforts and ensure a balanced and effective allocation of responsibilities and net fee revenue earned by the FS Advisor Entities and KKR Credit, and efficiency in the provision of the required services to the Company thereunder.
Terms of the FB Income Advisor InvestmentCo-Advisory Agreement
The terms of the FB Income Advisor InvestmentCo-Advisory Agreement are substantially similar to those of the Current Investment Advisory Agreement, except for, among other things, the fees payable thereunder and the date of effectiveness. Furthermore, the terms of the FB Income Advisor InvestmentCo-Advisory Agreement are substantially similar to those of the KKR InvestmentCo-Advisory Agreement. The description of the FB Income Advisor InvestmentCo-Advisory Agreement that follows is a summary only and is qualified by reference to the more complete information contained in the copy of the form of the FB Income Advisor InvestmentCo-Advisory Agreement included in Exhibit A hereto.
Duties.Subject to the overall supervision of the Board, FB Income Advisor, in coordination with KKR Credit, will oversee the Company’sday-to-day operations and provide the Company with investment advisory services. Under the terms of the FB Income Advisor InvestmentCo-Advisory Agreement, FB Income Advisor will, in coordination with KKR Credit:
| (i) | determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes;Accounting. |
(1) | 18The address for each officer is c/o FS KKR Capital Corp., 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112.
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Code of Ethics The Company has adopted a code of business conduct and ethics (as amended and restated, the “Code of Business Conduct and Ethics”) pursuant to Rule17j-1 promulgated under the 1940 Act, which applies to, among others, its officers, including its Chief Executive Officer and its Chief Financial Officer, as well as the members of the Board. The Company’s Code of Business Conduct and Ethics can be accessed via the Investor Relations portion of the Company’s website at www.fskkrcapitalcorp.com. In addition, the Code of Business Conduct and Ethics is available on the EDGAR Database on the SEC’s Internet site at www.sec.gov. Company intends to disclose any amendments to or waivers of required provisions of the Code of Business Conduct and Ethics on Form8-K, as required by the Exchange Act and the rules and regulations promulgated thereunder. Practice and Policies Regarding Personal Trading and Hedging of Company Equity The Company has also established a policy designed to prohibit our officers, directors, and certain employees of the Advisor from purchasing or selling shares of the Company while in possession of material nonpublic information, or otherwise using such information for their personal benefit or in any manner that would violate applicable laws and regulations. The policy also prohibits all directors and officers from engaging in hedging or monetization transactions or similar arrangements with respect to the Company’s securities without prior approval of the Company’s chief compliance officer. Corporate Governance Guidelines The Company has adopted corporate governance guidelines pursuant to Section 303A.09 of the NYSE Listed Company Manual, which can be accessed via the Investor Relations portion of the Company’s website atwww.fskkrcapitalcorp.com. Compensation Discussion and Analysis The Company’s executive officers do not receive any direct compensation from the Company. The Company does not currently have any employees and does not expect to have any employees. As an externally managed BDC, services necessary for the Company’s business are provided by individuals who are employees of the Advisor or its affiliates or by individuals who are contracted by the Advisor, the Company or their respective affiliates to work on behalf of the Company pursuant to the terms of the Investment Advisory Agreement and the Administration Agreement. Each of the Company’s executive officers is an employee of the Advisor or its affiliates and theday-to-day investment operations and administration of the Company’s portfolio are managed 22
| (ii) | identify, evaluate and negotiate the structure of the investments made by the Company;by the Advisor. In addition, the Company will reimburse the Advisor for its allocable portion of expenses incurred by the Advisor in performing its obligations under the Investment Advisory Agreement and the Administration Agreement. The Investment Advisory Agreement and the Administration Agreement provide that the Advisor (and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of, the Advisor) shall be entitled to indemnification (including reasonable attorneys’ fees and amounts reasonably paid in settlement) for any liability or loss suffered by the Advisor, and the Advisor shall be held harmless for any loss or liability suffered by the Company, arising out of the performance of any of its duties or obligations under the Investment Advisory Agreement or the Administration Agreement, respectively, or otherwise as the Company’s investment adviser or administrator, respectively; provided, however, that the Advisor cannot be indemnified for any liability arising out of willful misfeasance, bad faith, or negligence in the performance of the Advisor’s duties or by reason of the reckless disregard of the Advisor’s duties and obligations under the Investment Advisory Agreement or the Administration Agreement, as applicable. Director Compensation The Company does not pay compensation to its directors who also serve in an executive officer capacity for the Company or the Advisor. The Company’s directors who do not also serve in an executive officer capacity for the Company or the Advisor are entitled to receive annual cash retainer fees, fees for participating in quarterly Board and Board committee meetings and certain other Board and Board committee meetings and annual fees for serving as a committee chairperson. These directors are Ms. Adams and Messrs. Arnold, Ford, Goldstein, Hopkins, Hagan, Harrow and Kropp. Mr. Hagan also receives an annual retainer for his service as lead independent director. Amounts payable under the director fees arrangement are determined and paid quarterly in arrears as follows: | | | | | | | Amount(1) | | Annual Board Retainer | | $ | 100,000 | | Annual Lead Independent Director Retainer | | $ | 25,000 | | Board Meeting Fees | | $ | 2,500 | | Annual Committee Chair Retainers | | | | | Audit Committee | | $ | 20,000 | | Valuation Committee | | $ | 20,000 | | Nominating and Corporate Governance Committee | | $ | 15,000 | | Committee Meeting Fees | | $ | 1,000 | |
(1) | The Company does not pay compensation to directors for their service as compensation committee members. |
The Company will also reimburse each of the above directors for all reasonable and authorized business expenses in accordance with its policies as in effect from time to time, including reimbursement of reasonableout-of-pocket expenses incurred in connection with attending eachin-person Board meeting and eachin-person Board committee meeting not held concurrently with a Board meeting. 23
The table below sets forth the compensation received by each current and former director from (i) the Company and (ii) all of the companies in the Fund Complex, including the Company, in the aggregate, in each case, for service during the fiscal year ended December 31, 2018. Our directors do not receive any retirement benefits from us. | | | | | | | | | | | | | Name of Director | | Fees Earned or Paid in Cash by the Company | | | Total Compensation from the Company | | | Total Compensation from the Fund Complex | | Barbara Adams(1) | | | — | | | | — | | | $ | 139,000 | | Frederick Arnold(1) | | | — | | | | — | | | | — | | Todd Builione | | | — | | | | — | | | | — | | Michael C. Forman | | | — | | | | — | | | | — | | Brian R. Ford(1) | | | — | | | | — | | | $ | 158,589 | | Richard Goldstein(1) | | | — | | | | — | | | $ | 139,000 | | Michael J. Hagan | | $ | 166,000 | | | $ | 166,000 | | | $ | 166,000 | | Jeffrey K. Harrow | | $ | 156,000 | | | $ | 156,000 | | | $ | 337,500 | | Jerel A. Hopkins(1) | | | — | | | | — | | | $ | 135,000 | | James H. Kropp(1) | | | — | | | | — | | | $ | 93,138 | | Joseph P. Ujobai(2) | | $ | 144,000 | | | $ | 144,000 | | | $ | 144,000 | | | | | | Former Directors: | | | | | | | | | | | | | David J. Adelman(3) | | | — | | | | — | | | | — | | Gregory P. Chandler(4) | | $ | 169,000 | | | $ | 169,000 | | | $ | 169,000 | | Barry H. Frank(4) | | $ | 169,000 | | | $ | 169,000 | | | $ | 169,000 | | Thomas J. Gravina(3) | | $ | 52,500 | | | $ | 52,500 | | | $ | 92,250 | | Michael J. Heller(3) | | $ | 53,500 | | | $ | 53,500 | | | $ | 165,250 | | Philip E. Hughes, Jr.(4) | | $ | 147,000 | | | $ | 147,000 | | | $ | 147,000 | | Pedro A. Ramos(4) | | $ | 145,000 | | | $ | 145,000 | | | $ | 145,000 | |
(1) | Messrs. Arnold, Ford, Goldstein, Hopkins, Kropp and Ms. Adams joined the Board on December 19, 2018. |
(2) | Mr. Ujobai resigned from the Board, effective as of March 14, 2019. |
(3) | Messrs. Adelman, Gravina and Heller each resigned from the Board, effective as of April 9, 2018. |
(4) | Messrs. Chandler, Frank, Hughes and Ramos each resigned from the Board, effective as of December 19, 2018. |
Certain Relationships and Related Party Transactions The Company has procedures in place for the review, approval and monitoring of transactions involving the Company and certain persons related to the Company. For example, the Company’s Code of Business Conduct and Ethics generally prohibits any employee, officer or director from engaging in any transaction where there is a conflict between such individual’s personal interest and the interests of the Company. Waivers to the Company’s Code of Business Conduct and Ethics for any executive officer or member of the Board must be approved by the Board and are publicly disclosed as required by applicable law and regulations. In addition, the Audit Committee is required to review and approve all transactions with related persons (as defined in Item 404 of RegulationS-K promulgated under the Exchange Act). All future transactions with affiliates of the Company will be on terms no less favorable than could be obtained from an unaffiliated third party and must be approved by a majority of the Board, including a majority of the independent directors. Investment Advisory Agreement and Administration Agreement Pursuant to the Investment Advisory Agreement, the Advisor is entitled to a base management fee calculated at an annual rate of 1.50% of the average weekly value of the Company’s gross assets excluding cash 24
and cash equivalents (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. The base management fee is payable quarterly in arrears. All or any part of the base management fee not taken as to any quarter shall be deferred without interest and may be taken in such other quarter as the Advisor shall determine. Pursuant to the terms of the Investment Advisory Agreement, the Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the Investment Advisory Agreement, which is calculated and payable quarterly in arrears, equals 20.0% of theCompany’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the value of the Company’s net assets, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, the Advisor will not earn this incentive fee for any quarter until theCompany’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once theCompany’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled toa “catch-up” fee equal to the amount ofthe pre-incentive fee net investment income in excess of the hurdle rate, until theCompany’s pre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of net assets. Thereafter, the Advisor will be entitled to receive 20.0%of pre-incentive fee net investment income. The subordinated incentive fee on income is subject to a cap equal to (i) 20.0% of the “pershare pre-incentive fee return” for the then-current and eleven preceding calendar quarters minus the cumulative “per share incentive fees” accrued and/or payable for the eleven preceding calendar quarters multiplied by (ii) the weighted average number of shares outstanding during the calendar quarter (or any portion thereof) for which the subordinated incentive fee on income is being calculated. The definitions of “pershare pre-incentive fee return” and “per share incentive fees” under the Investment Advisory Agreement take into account the historic pershare pre-incentive fee return of both the Company and CCT, together with the historic per share incentive fees paid by both the Company and CCT. For the purpose of calculating the “pershare pre-incentive fee return,” any unrealized appreciation or depreciation recognized as a result of the purchase accounting for the Merger is excluded. Pursuant to the terms of the Investment Advisory Agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which shall equal both CCT’s and the Company’s realized capital gains (without duplication) on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation (without duplication) on a cumulative basis, less the aggregate amount of any capital gain incentive fees previously paid by CCT and the Company. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period. The Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to the Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. On April 9, 2018, GSO / Blackstone Debt Funds Management LLC (“GDFM”) resigned as the investmentsub-adviser to the Company and terminated the investmentsub-advisory agreement (the “InvestmentSub-Advisory Agreement”) between FB Income Advisor, LLC (“FB Advisor”) and GDFM, effective April 9, 2018. In connection with GDFM’s resignation as the investmentsub-adviser to the Company, on April 9, 2018, the Company entered into an investment advisory agreement (the “Prior Investment Advisory Agreement”) with the Advisor. The Prior Investment Advisory Agreement replaced the amended and restated investment advisory agreement, dated July 17, 2014 (“the FB Advisor Investment Advisory Agreement”), by and between the Company and FB Advisor. The Prior Investment Advisory Agreement had substantially similar terms to the Investment Advisory Agreement, except that the Investment Advisory Agreement amended the Prior Investment Advisory Agreement to (i) exclude cash and cash equivalents from the gross assets, (ii) revise the calculation of 25
the cap on the subordinated incentive fee on income to take into account the historic per sharepre-incentive fee return of both the Company and CCT, together with the historic per share incentive fees paid by both Company and CCT and (iii) revise the calculation of incentive fees on capital gains to include historical net realized losses and unrealized depreciation of both the Company and CCT. Pursuant to the FB Advisor Investment Advisory Agreement, which was in effect until April 9, 2018, FB Advisor was entitled to an annual base management fee equal to 1.75% of the average value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. FB Advisor had agreed, effective October 1, 2017, to (a) waive a portion of the base management fee to which it was entitled under the FB Advisor Investment Advisory Agreement so that the fee received equaled 1.50% of the average value of the Company’s gross assets and (b) continue to calculate the subordinated incentive fee on income to which it was entitled under the FB Advisor Investment Advisory Agreement as if the base management fee was 1.75% of the average value of the Company’s gross assets. Pursuant to theInvestment Sub-Advisory Agreement, GDFM was entitled to receive 50% of all management and incentive fees payable to FB Advisor under the FB Advisor Investment Advisory Agreement with respect to each year. Pursuant to the Administration Agreement, the Advisor oversees theCompany’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. The Advisor also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which includes being responsible for the financial records that the Company is required to maintain and preparing reports for the Company’s stockholders and reports filed with the SEC. In addition, the Advisor assists the Company in calculating its net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Pursuant to the Administration Agreement, the Company reimburses the Advisor for expenses necessary to perform services related to its administration and operations, including the Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit Advisors (US), LLC (“KKR Credit”) providing administrative services to the Company on behalf of the Advisor. The Company reimburses the Advisor no less than quarterly for all costs and expenses incurred by the Advisor in performing its obligations and providing personnel and facilities under the Administration Agreement. The Advisor allocates the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors reviews the methodology employed in determining how the expenses are allocated to the Company and the proposed allocation of administrative expenses among the Company and certain affiliates of the Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to it based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to the Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs. The Administration Agreement replaced an administration agreement with FB Advisor (the “FB Advisor Administration Agreement”), which was substantially similar to the Administration Agreement. 26
The following table describes the fees and expenses accrued under the Investment Advisory Agreement, the Prior Investment Advisory Agreement, the FB Advisor Investment Advisory Agreement, the Administration Agreement and the Investment Advisory Agreement, the FB Advisor Administration Agreement, as applicable, during the year ended December 31, 2018 (dollars in millions): | | | | | | | | | Related Party | | Source Agreement | | Description | | Year Ended December 31, 2018 | | FB Advisor and the Advisor | | Investment Advisory Agreement, Prior Investment Advisory Agreement and FB Advisor Investment Advisory Agreement | | Base Management Fee(1) | | $ | 60 | | FB Advisor and the Advisor | | Investment Advisory Agreement, Prior Investment Advisory Agreement and FB Advisor Investment Advisory Agreement | | Subordinated Incentive Fee on Income(2) | | $ | 26 | | FB Advisor and the Advisor | | Administration Agreement and FB Advisor Administration Agreement | | Administrative Services Expenses(3) | | $ | 4 | |
(1) | FB Advisor agreed, effective October 1, 2017, to waive a portion of the base management fee to which it was entitled under the FB Advisor Investment Advisory Agreement so that the fee received equaled 1.50% of the average value of the Company’s gross assets. For the year ended December 31, 2018, the amount shown is net of waivers of $3 million. During the year ended December 31, 2018, $59 million in base management fees were paid to the Advisor and/or FB Advisor. As of December 31, 2018, $20 million in base management fees were payable to the Advisor, a portion of which were fees payable by CCT at the time of the Merger. |
(2) | During the year ended December 31, 2018, $36 million of subordinated incentive fees on income were paid to the Advisor and/or FB Advisor. As of December 31, 2018, a subordinated incentive fee on income of $14 million was payable to the Advisor, a portion of which were fees payable by CCT at the time of the Merger. |
(3) | During the year ended December 31, 2018, $3 million of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FB Advisor and the Advisor and the remainder related to other reimbursable expenses, including reimbursement of fees related to transactional expenses for prospective investments, including fees and expenses associated with performing due diligence reviews of investments that do not close, often referred to as “broken deal” costs. Broken deal costs were less than $1 million for the year ended December 31, 2018. The Company paid $3 million in administrative services expenses to the Advisor and/or FB Advisor during the year ended December 31, 2018. |
Allocation of the Advisor’s Time The Company relies on the Advisor to manage the Company’sday-to-day activities and to implement its investment strategies. The Advisor, FS Investments, KKR Credit and certain of their affiliates are presently, and plan in the future to continue to be, involved with activities that are unrelated to the Company. As a result of these activities, the Advisor, FS Investments, KKR Credit and certain of their affiliates will have conflicts of interest in allocating their time between the Company and other activities in which they are or may become involved, including the management of the other BDCs in the Fund Complex. The Advisor, FS Investments, KKR Credit and their employees will devote only as much of its or their time to the Company’s business as the Advisor, FS Investments and KKR Credit, in their judgment, determine is reasonably required, which will be substantially less than their full time. Therefore, the Advisor, its personnel and certain affiliates may experience conflicts of interest in allocating management time, services and functions among the Company and any other 27
business ventures in which they or any of their key personnel, as applicable, are or may become involved. This could result in actions that are more favorable to other affiliated entities than to the Company. However, the Company believes that the members of the Advisor’s management and the other key debt finance professionals have sufficient time to fully discharge their responsibilities to the Company and to the other businesses in which they are involved. The Company believes that its affiliates and executive officers will devote the time required to manage the Company’s business and expect that the amount of time a particular executive officer or affiliate devotes to the Company will vary during the course of the year and depend on the Company’s business activities at the given time. Because many of the operational aspects involved with managing the Company and the other BDCs in the Fund Complex are similar, there are significant efficiencies created by the Advisor providing services to such entities. For example, the Advisor has streamlined the structure for financial reporting, internal controls and investment approval processes for the Company and the other BDCs in the Fund Complex. Competition and Allocation of Investment Opportunities The Advisor and its affiliates are simultaneously providing investment advisory services to other affiliated entities, including the other BDCs in the Fund Complex. The Advisor may determine that it is appropriate for the Company and one or more other investment accounts managed by the Advisor or any of its affiliates to participate in an investment opportunity. To the extent the Company makesco-investments with investment accounts managed by the Advisor or its affiliates, theseco-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among the Company and the other participating accounts. In addition, conflicts of interest or perceived conflicts of interest may also arise in determining which investment opportunities should be presented to the Company and other participating accounts. To mitigate these conflicts, the Advisor will seek to execute such transactions on a fair and equitable basis and in accordance with its allocation policies, taking into account various factors, which may include: the source of origination of the investment opportunity; investment objectives and strategies; tax considerations; risk, diversification or investment concentration parameters; characteristics of the security; size of available investment; available liquidity and liquidity requirements; regulatory restrictions; and/or such other factors as may be relevant to a particular transaction. As the Advisor and affiliates of FS Investments and KKR Credit currently serve as the investment adviser to other entities and accounts, it is possible that some investment opportunities will be provided to such other entities and accounts rather than the Company. Investments As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted toco-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneouslyco-invest in transactions where price is the only negotiated term. In an order dated June 4, 2013 (“the FS Order”), the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, toco-invest in certain privately negotiated investment transactions with certain affiliates of FB Advisor, including FS Energy and Power Fund, FSIC II, FSIC III, FSIC IV and any future BDCs that are advised by FB Advisor or its affiliated investment advisers. However, in connection with the investment advisory relationship with the Advisor, and in an effort to mitigate potential future conflicts of interest, the Board authorized and directed that the Company (i) withdraw from the FS Order, except with respect to any transaction in which the Company participated in reliance on the FS Order prior to April 9, 2018, and (ii) rely on an exemptive relief order, dated April 3, 2018, that permits the Company, subject to the satisfaction of certain conditions, toco-invest in certain privately negotiated investment transactions, 28
including investments originated and directly negotiated by the Advisor or KKR Credit, with certain affiliates of the Advisor. Independent Registered Public Accounting Firm RSM US LLP acted as the Company’s independent registered public accounting firm for each of the fiscal years ended December 31, 2008 through 2018. The Company knows of no direct financial or material indirect financial interest of RSM US LLP in the Company. A representative of RSM US LLP is expected to be available by telephone to answer questions during the Annual Meeting and will have an opportunity to make a statement if he or she desires to do so. On March 22, 2019, the Company notified RSM US LLP that RSM US LLP had been dismissed as the Company’s independent public accounting firm. The Audit Committee approved the dismissal of RSM US LLP. The reports of RSM US LLP on the audited consolidated financial statements of the Company for the years ended December 31, 2018 and 2017 and did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended December 31, 2018 and 2017, and the subsequent interim period through March 22, 2019, there were: (i) no disagreements within the meaning of Item 304(a)(1)(iv) ofRegulation S-K and the related instructions between the Company and RSM US LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to RSM US LLP’s satisfaction, would have caused RSM US LLP to make reference thereto in their reports; and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) ofRegulation S-K. On March 26, 2019, the Company appointed Deloitte & Touche LLP to act as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2019. The appointment of Deloitte & Touche LLP was previously recommended by the Audit Committee. During the years ended December 31, 2018 and 2017, and the subsequent interim period through March 26, 2019, neither the Company nor anyone on its behalf has consulted with Deloitte & Touche LLP regarding: (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided to the Company that Deloitte & Touche LLP concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue; (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) ofRegulation S-K and the related instructions; or (iii) any reportable event within the meaning of Item 304(a)(1)(v) ofRegulation S-K. A representative of Deloitte & Touche LLP is expected to be available to answer questions during the Annual Meeting and will have an opportunity to make a statement if he or she desires to do. Fees Set forth in the table below are audit fees, audit related fees, tax fees and all other fees billed to the Company by RSM US LLP for professional services performed for the fiscal years ended December 31, 2018 and 2017: | | | | | | | | | | | | | | | | | Fiscal Year | | Audit Fees | | | Audit-Related Fees(1) | | | Tax Fees | | | All Other Fees(2) | | 2018 | | $ | 574,700 | | | $ | 74,125 | | | | — | | | | — | | 2017 | | $ | 400,000 | | | $ | 7,170 | | | | — | | | $ | 30,900 | |
(1) | “Audit-Related Fees” are those fees billed to the Company by RSM US LLP for services provided by RSM US LLP or fees billed for expenses relating to the review by RSM US LLP of the Company’s registration statements filed with the SEC pursuant to the Securities Act of 1933, as amended (the “Securities Act”). |
(2) | “All Other Fees” are those fees, if any, billed to the Company by RSM US LLP in connection withpermitted non-audit services. |
| (iii) | execute, monitor and service the Company’s investments;29
Pre-Approval Policies and Procedures The Company’s Audit Committee reviews, negotiates and approves in advance the scope of work, any related engagement letter and the fees to be charged by the Company’s independent registered public accounting firm for audit services and permittednon-audit services for the Company and for permittednon-audit services for the Advisor and any affiliates thereof that provide services to the Company if suchnon-audit services have a direct impact on the operations or financial reporting of the Company. Any requests for audit, audit-related, tax and other services that have not received generalpre-approval must be submitted to the Audit Committee for specificpre-approval in accordance with itspre-approval policy, irrespective of the amount of fees associated with such services, and cannot commence until such approval has been granted. Normally,pre-approval is considered at regularly scheduled meetings of the Audit Committee. However, the Audit Committee may delegatepre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report anypre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee does not delegate its responsibilities topre-approve services performed by the Company’s independent registered public accounting firm to management. All of the audit and permittednon-audit services described above for which RSM US LLP billed the Company for the fiscal years ended December 31, 2018 and 2017 werepre-approved by the Audit Committee. Audit Committee Report As part of its oversight of the Company’s financial statements, the Audit Committee reviewed and discussed with both management and RSM US LLP, the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2018, the Company’s consolidated financial statements filed with the SEC for the fiscal year ended December 31, 2018. Management advised the Audit Committee that all financial statements were prepared in accordance with U.S. generally accepted accounting principles, and reviewed significant accounting issues with the Audit Committee. The Audit Committee also discussed with RSM US LLP the matters required to be discussed by Public Company Accounting Oversight Board Auditing Standard No. 16,Communications with Audit Committees,as amended, and by the Auditing Standards Board of the American Institute of Certified Public Accountants. The Audit Committee has established apre-approval policy that describes the permitted audit, audit-related, tax, and other services to be provided by the Company’s independent registered public accounting firm. Pursuant to the policy, the Audit Committeepre-approves the audit andnon-audit services performed by the Company’s independent registered public accounting firm in order to assure that the provision of such service does not impair the firm’s independence. Any requests for audit, audit-related, tax, and other services that have not received generalpre-approval must be submitted to the Audit Committee for specificpre-approval in accordance with itspre-approval policy, irrespective of the amount, and cannot commence until such approval has been granted. Normally,pre-approval is provided at regularly scheduled meetings of the Audit Committee. However, the Audit Committee may delegatepre-approval authority to one or more of its members. The member or members to whom such authority is delegated must report anypre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee does not delegate its responsibilities topre-approve services performed by RSM US LLP to management. The Audit Committee received and reviewed the written disclosures and the letter from RSM US LLP required by applicable requirements of the Public Company Accounting Oversight Board regarding RSM US LLP’s communications with the Audit Committee concerning independence and has discussed with RSM US LLP its independence. The Audit Committee has reviewed the audit fees paid by the Company to RSM US LLP. It has also reviewednon-audit services and fees to assure compliance with the Company’s and the Audit Committee’s policies restricting RSM US LLP from performing services that might impair its independence. Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board that the audited consolidated financial statements of the Company as of and for the year ended December 31, 30
2018 be included in the Company’s annual report on Form10-K for the fiscal year ended December 31, 2018 for filing with the SEC. The Audit Committee also recommended the appointment of Deloitte & Touche LLP to serve as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2019. Audit Committee Brian R. Ford James H. Kropp Joseph P. Ujobai* * | Mr. Ujobai resigned from the Audit Committee, effective as of March 14, 2019. Effective as of March 14, 2019, Mr. Richard Goldstein was appointed to serve on the Audit Committee. |
The material in this Audit Committee report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of the Company under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” EACH OF THE DIRECTOR NOMINEES 31
PROPOSAL 2: APPROVAL OF APPLICATION OF REDUCED ASSET COVERAGE REQUIREMENTS TO THE COMPANY TO ALLOW THE COMPANY TO DOUBLE THE MAXIMUM AMOUNT OF ITS PERMITTED BORROWINGS Background and 1940 Act Requirements The Company isa closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Section 61(a) of the 1940 Act applies asset coverage requirements which limit the ability of BDCs to incur leverage. Prior to the passage of the Small Business Credit Availability Act (the “SBCA Act”) on March 23, 2018, these asset coverage requirements prohibited a BDC from issuing debt securities or preferred stock (collectively referred to as “senior securities”) unless, immediately after such issuance, the BDC had “asset coverage” of at least 200%. For purposes of the 1940 Act, “asset coverage” means the ratio of (1) the total assets of a BDC, less all liabilities and indebtedness not represented by senior securities, to (2) the aggregate amount of senior securities representing indebtedness (plus, in the case of senior securities represented by preferred stock, the aggregate involuntary liquidation preference of such BDC’s preferred stock). As a result of these historical asset coverage requirements (which limited BDCs to a 1:1debt-to-equity ratio), the Company believes that BDCs generally operate at lower levels of leverage than many private investment funds focused on similar asset classes, collateralized loan obligations, specialty finance companies and other operating companies. The SBCA Act, among other things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) which reduces the asset coverage requirements applicable to BDCs from 200% to 150% (a 2:1debt-to-equity ratio), so long as the BDC meets certain disclosure and approval requirements. Section 61(a)(2) provides that before the reduced asset coverage requirements are effective with respect to a BDC, the application of that section of the 1940 Act to such BDC must be approved by either (1) a “required majority,” as defined in the Section 57(o) of the 1940 Act, of such BDC’s board of directors or (2) a majority of votes cast at a special or annual meeting of such BDC’s stockholders at which a quorum is present. For the reasons set forth below under the header “Recommendation and Rationale,” the Board has determined to recommend that stockholders approve the Leverage Proposal because it believes that it is advisable and in the best interests of the Company and its stockholders for the reduced asset coverage ratio to apply to the Company to increase the Company’s flexibility to incur additional leverage to pursue attractive investment opportunities. Therefore, the Company is seeking the approval of stockholders at the Annual Meeting to reduce the Company’s asset coverage requirements so that the reduced asset coverage requirements for senior securities in Section 61(a)(2) of the 1940 Act will apply to the Company and the Company may double the maximum amount of its permitted borrowings. Any section headers and sub-headers below “Recommendation and Rationale” are for convenience only and do not denote that the Board afforded greater or less consideration to any particular matter. If the Leverage Proposal is approved by the stockholders at the Annual Meeting, commencing on the first date after such approval, the Company will be required to maintain asset coverage for its senior securities of 150% (i.e. $2 of debt for investment purposes outstanding for each $1 of investor equity) rather than 200% (i.e. $1 of debt for investment purposes outstanding for each $1 of investor equity), which would permit the Company to increase the maximum amount of leverage that it is permitted to incur. The Company will then be able to double the maximum amount of its permitted borrowings. If the Leverage Proposal is approved, the Company currently expects that it would incrementally increase leverage from 210% to 180% (0.9x to 1.25xdebt-to-equity), with an initial target of 205% (0.95xdebt-to-equity). Recommendation and Rationale On February 19, 2019, the Board unanimously recommended that the stockholders vote in favor of the application of the reduced asset coverage requirements in Section 61(a)(2) of the 1940 Act to the Company. The Board concluded that the Leverage Proposal is in the best interests of the Company and the stockholders. In doing so, the Board considered and evaluated various factors, including the following (each, as discussed more fully below): the additional flexibility to manage capital to take advantage of attractive investment opportunities and the current composition of the Company’s portfolio; 32
the potential impact (both positive and negative) on net investment income, return to stockholders and net asset value; the increased cushion to the asset coverage requirement at the initial target leverage to be utilized by the Company; the additional risks to stockholders in light of increased leverage relative to benefits of the use of increased leverage; and the impact on the Company’s expenses, including the increased interest payments on borrowed funds and advisory fees payable by the Company to the Advisor and the related conflicts of interest. The Company’s investment strategy, including its strategy for selecting investments, will not change if the Leverage Proposal is approved. Flexibility to manage capital to take advantage of attractive investment opportunities and the current composition of the Company’s portfolio The Company cannot predict when attractive investment opportunities will present themselves, and attractive opportunities may arise at a time when market conditions are not favorable to raising additional equity capital. If the Company is not able to access additional capital (either at all or on favorable terms) when attractive investment opportunities arise, the Company’s ability to grow over time and to continue to pay distributions to stockholders could be adversely affected. Based on the Company’s balance sheet as of December 31, 2018, reducing the asset coverage requirements applicable to the Company from 200% (i.e. $1 of debt for investment purposes outstanding for each $1 of investor equity) to 150% (i.e. $2 of debt for investment purposes outstanding for each $1 of investor equity) would allow the Company to borrow approximately $4.2 billion in additional capital. This amount would provide additional flexibility to pursue attractive investment opportunities. The Board believes that the greater deal flow that may be achieved with this additional capital could enable the Company to participate more meaningfully in the private debt markets and to make larger loans to its portfolio companies with no loss of diversification of the overall portfolio, which would be in the best interest of stockholders. With more capital, the Company expects that it would, over time, likely be an even more meaningful capital provider to the middle market and be able to better compete for high-quality investment opportunities with its competitors, including other BDCs and investment funds, alternative investment vehicles (such as hedge funds) and traditional financial services companies (such as commercial banks), many of which have greater resources than the Company currently has. Approximately 74% of the Company’s total investments at fair value were invested in senior secured debt (with approximately 54% in first lien senior secured debt) as of December 31, 2018. The Board noted that the Company believes that a portfolio comprised of such assets is well suited to take advantage of additional leverage. The Board further noted that the increase in total assets available for investment as a result of incurring additional leverage would increase the assets available for investment in assetsconsidered “non-qualifying assets” for purposes of Section 55 of the 1940 Act, which will also give the Company greater flexibility when evaluating investment opportunities. The following table sets forth the following information: the Company’s total assets, total debt outstanding (in dollars and as a percentage of total assets), net assets and asset coverage ratio as of December 31, 2018; | • | | assuming that as of December 31, 2018 the Company had incurred the maximum amount of borrowings that could be incurred by the Company under the currently applicable 200% asset coverage ratio, the Company’spro forma total assets, total debt outstanding (with the maximum amount of additional borrowings that would be permitted to incur in dollars and as a percentage of total assets), net assets and asset coverage ratio; and |
| (iv) | place orders with respect to, and arrange for, any investment by the Company;33
| • | | assuming that as of December 31, 2018 the Company had incurred the maximum amount of borrowings that could be incurred by the Company under the proposed 150% asset coverage ratio, the Company’spro forma total assets, total debt outstanding (with the maximum amount of additional borrowings that would be permitted to incur in dollars and as a percentage of total assets), net assets and asset coverage ratio. |
In evaluating the information presented below, it is important to recognize that the maximum amount of borrowings that could be incurred by the Company is presented for comparative and informational purposes only and such information is not a representation of the amount of borrowings that the Company intends to incur or that would be available to the Company to be incurred. | | | | | | | | | | | | | | | | | | Pro Forma Amounts as of December 31, 2018 Assuming That the Company Had Incurred the Maximum Amount of Borrowings That Could Be Incurred by the Company | | Selected Consolidated Financial Statement Data (dollar amounts in millions) | | Actual Amounts as of December 31, 2018(1) | | | Under the Currently Applicable 200% Minimum Asset Coverage Ratio(2) | | | Under the Proposed 150% Minimum Asset Coverage Ratio(3) | | Total Assets | | $ | 7,705 | | | $ | 8,474 | | | $ | 12,640 | | Total Debt Outstanding | | $ | 3,397 | | | $ | 4,166 | | | $ | 8,332 | | Net Assets | | $ | 4,166 | | | $ | 4,166 | | | $ | 4,166 | | Asset Coverage Ratio | | | 223 | % | | | 200 | % | | | 150 | % |
(1) | As of December 31, 2018, the Company’s total outstanding indebtedness represented 44.09% of the Company’s total assets. |
(2) | Based on the Company’s total outstanding indebtedness of $3.4 billion as of December 31, 2018 and applying the currently applicable 200% minimum asset coverage ratio, the Company could have incurred up to an additional $769 million of borrowings. The maximum amount of additional borrowings of $769 million would have represented 9.07% of total assets. |
(3) | Based on the Company’s total outstanding indebtedness of $3.4 billion as of December 31, 2018 and applying a 150% minimum asset coverage ratio, the Company could have incurred up to an additional $4,935 million of borrowings. The maximum amount of additional borrowings of $4,935 million would have represented 39.04% of total assets. |
Potential impact on net investment income, return to stockholders and net asset value The Board also considered the potential impact of additional leverage on the Company’s net investment income, noting that any increases would be magnified if the Company employed additional leverage. Similarly, the Board considered that, if the value of the Company’s assets increases, additional leverage could cause net asset value to increase more rapidly than it otherwise would have if the Company did not employ such additional leverage. However, the Board noted that the converse was also true and, if the Company’s net investment income or the value of the Company’s assets decreased, additional leverage would cause the Company’s net investment income and/or net asset value to decline more sharply than it otherwise would have if the Company did not employ such additional leverage, increasing the risk of investing in the Company’s common stock. In addition, the Company would have to service any additional debt that it incurs, including interest expense on debt and dividends on preferred stock, that the Company may issue, as well as the fees and costs related to the entry into or amendments to debt facilities. These expenses (which may be higher than the expenses on the Company’s current borrowings due to the rising interest rate environment) would decrease net investment income, and the Company’s ability to pay such expenses will depend largely on the Company’s financial performance and will be subject to prevailing economic conditions and competitive pressures. Additionally, certain of the Company’s financing arrangements, including the Company’s senior revolving credit facility, currently contain a covenant limiting the Company’s asset coverage to 200% and may need to be amended if stockholders approve the | (v) | determine the securities and other assets34
Leverage Proposal. The Company may not be able to amend such financing arrangements to change this covenant and if the Company is successful in amending its financing arrangements, it may incur costs to do so and the other terms of such amended financing arrangements, such as the interest rate, may not be as favorable to the Company as the current terms. Effect of Leverage on Return to Stockholders The following table illustrates the effect of leverage on returns from an investment in the Company’s common stock assuming that the Company employs (1) its actual asset coverage ratio as of December 31, 2018, (2) a hypothetical asset coverage ratio of 200% and (3) a hypothetical asset coverage ratio of 150%, each at various annual returns on the Company’s portfolio as of December 31, 2018, net of expenses.The calculations in the table below are hypothetical, and actual returns may be significantly higher or lower than those appearing in the table below. | | | | | | | | | | | | | | | | | | | | | Assumed Return on the Company’s Portfolio (Net of Expenses) | | | (10.00 | )% | | | (5.00 | )% | | | 0.00 | % | | | 5.00 | % | | | 10.00 | % | | | | | | | | | | | | | | | | | | | | | | Corresponding return to common stockholder assuming actual asset coverage as of December 31, 2018 (223%)(1) | | | (21.95 | )% | | | (12.79 | )% | | | (3.62 | )% | | | 5.55 | % | | | 14.71 | % | Corresponding return to common stockholder assuming 200% asset coverage(2) | | | (24.71 | )% | | | (14.59 | )% | | | (4.47 | )% | | | 5.65 | % | | | 15.77 | % | Corresponding return to common stockholder assuming 150% asset coverage(3) | | | (38.83 | )% | | | (23.83 | )% | | | (8.83 | )% | | | 6.17 | % | | | 21.17 | % |
(1) | Based on (i) $7.7 billion in total assets including debt issuance costs as of December 31, 2018, (ii) $3.4 billion in outstanding indebtedness as of December 31, 2018, (iii) $4.2 billion in net assets as of December 31, 2018 and (iv) a weighted average interest rate on the Company’s indebtedness, as of December 31, 2018, excluding fees (such as fees on undrawn amounts and amortization of financing costs), of 4.47%. |
(2) | Based on (i) $8.5 billion in total assets including debt issuance costs on a pro forma basis as of December 31, 2018, after giving effect of a hypothetical asset coverage ratio of 200%, (ii) $4.2 billion in outstanding indebtedness on a pro forma basis as of December 31, 2018, after giving effect of a hypothetical asset coverage ratio of 200%, (iii) $4.2 billion in net assets as of December 31, 2018 and (iv) a weighted average interest rate on the Company’s indebtedness, as of December 31, 2018, excluding fees (such as fees on undrawn amounts and amortization of financing costs), of 4.47%. |
(3) | Based on (i) $12.6 billion in total assets including debt issuance costs on a pro forma basis as of December 31, 2018, after giving effect of a hypothetical asset coverage ratio of 150%, (ii) $8.3 billion in outstanding indebtedness on a pro forma basis as of December 31, 2018, after giving effect of a hypothetical asset coverage ratio of 150%, (iii) 4.2 billion in net assets as of December 31, 2018 and (iv) a weighted average interest rate on the Company’s indebtedness, as of December 31, 2018, excluding fees (such as fees on undrawn amounts and amortization of financing costs), of 4.47%. |
Effect of Leverage on Expenses The following table is intended to assist stockholders in understanding the fees and expenses that an investor in the Company’s common stock will bear, directly or indirectly, assuming that the Company employs (1) its actual asset coverage ratio and actual annual base management fee rate as of December 31, 2018, (2) a hypothetical asset coverage ratio of 200% and the actual annual base management fee rate as of December 31, 2018 and (3) a hypothetical asset coverage ratio of 150% and the expected reduction in the annual base management fee payable to the Advisor from 1.5% to 1.0% on all assets financed using leverage over 1.0xdebt-to-equity. 35
The Company cautions that some of the percentages indicated in the table below are estimates and may vary. The expenses shown in the table are based on estimated amounts for the current fiscal year.The following table should not be considered a representation of the Company’s future expenses. Actual expenses may be significantly greater or less than shown. | | | | | | | | | | | | | Estimated Annual Expenses (as percentage of net assets attributable to common stock) | | Actual asset coverage as of December 31, 2018 (223%)(1) | | | 200% asset coverage(2) | | | 150% asset coverage(3) | | Base management fees(4) | | | 2.76 | % | | | 3.03 | % | | | 4.04 | % | Incentive fees(5) | | | 2.13 | % | | | 2.34 | % | | | 3.44 | % | Interest payments on borrowed funds(6) | | | 4.47 | % | | | 5.30 | % | | | 9.77 | % | Other expenses(7) | | | 0.85 | % | | | 0.85 | % | | | 0.85 | % | Acquired fund fees and expenses(8) | | | 0.28 | % | | | 0.28 | % | | | 0.28 | % | Total annual expenses | | | 10.49 | % | | | 11.80 | % | | | 18.38 | % |
(1) | Expenses for the “Actual asset coverage as of December 31, 2018 (223%)” column are based on actual expenses incurred for the period subsequent to the Merger through December 31, 2018. |
(2) | Expenses for the “200% asset coverage” column are based on pro forma expenses for the period subsequent to the Merger through December 31, 2018, which assume a hypothetical asset coverage ratio of 200%. The maximum amount of borrowings that could be incurred by the Company is presented for comparative and informational purposes only and such information is not a representation of the amount of borrowings that the Company intends to incur or that would be available to the Company shall purchase, retain, or sell; |
| (vi) | perform due diligence on prospective portfolio companies; and |
| (vii) | provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably request or require for the investment of its funds. |
Notwithstanding the foregoing, FB Income Advisor and KKR Credit may, from time to time, designate one or the other as being primarily responsible for certain investments. The duties to be provided underincurred
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(3) | Expenses for the FB Income Advisor InvestmentCo-Advisory Agreement“150% asset coverage” column are substantiallybased on pro forma expenses for the same as those underperiod subsequent to the Current Investment Advisory Agreement. FB Income Advisor has no obligation to supervise KKR Credit’s provisionMerger through December 31, 2018, which assume a hypothetical asset coverage ratio of services under150% and the KKR InvestmentCo-Advisory Agreement. Fees and Expenses.The Company will pay FB Income Advisor a fee for its services underexpected reduction in the FB Income Advisor InvestmentCo-Advisory Agreement consisting of two components—an annual base management fee basedfrom 1.5% to 1.0% on all assets financed using leverage over 1.0xdebt-to-equity. The maximum amount of borrowings that could be incurred by the Company is presented for comparative and informational purposes only and such information is not a representation of the amount of borrowings that the Company intends to incur or that would be available to the Company to be incurred.
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(4) | For the “200% asset coverage” and “150% asset coverage” columns, the Company’s base management fee is calculated at an annual rate of 1.50% and 1.34%, respectively, of the average weekly value of the Company’s gross assets excluding cash or cash equivalents. For purposes of the “200% asset coverage” and an incentive fee based“150% asset coverage” columns, the table assumes average weekly gross assets (excluding cash and cash equivalents) of $8.4 billion and $12.6 billion, respectively. See “Impact on the Company’s performance. The cost of both the base management fee payable to FB Income Advisor and any incentiveadvisory fees it earns will ultimately be bornepaid by the Company’s stockholders.Company” below. |
(5) | The base management fee will be calculated at an annual rate of 0.75%For purposes of the “200% asset coverage” column, the table above assumes average weekly value of the Company’s gross assets. The base management fee will be payable quarterly in arrears and will be calculated based on the average weekly value of the Company’s gross assets during(excluding cash and cash equivalents) of $8.4 billion, total debt of $4.2 billion, interest income calculated by applying the most recently completed calendar quarter. The base management fee may or may not be taken in whole or in part at the discretionratio of FB Income Advisor. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as FB Income Advisor shall determine. The base management fee for any partial month or quarter will be appropriately prorated. The other terms of the base management fee are the same as those under the Current Investment Advisory Agreement.
The incentive fee will consist of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 10.0% of the Company’s“pre-incentive fee netannualized “total investment income” for the immediately preceding quarterperiod subsequent to the Merger through December 31, 2018 to the “investments, at fair value” as of December 31, 2018 to the pro forma assets as of December 31, 2018 and will be subject to a hurdle rate, expressed as a rate(iv) interest expense on incremental pro forma leverage of return on the value of the Company’s net assets at the end of the most recently completed quarter, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, FB Income Advisor will not earn this incentive fee for any quarter until the Company’spre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once the Company’spre-incentive fee net investment income in any quarter exceeds the hurdle rate, FB Income Advisor will be entitled to a“catch-up” fee equal to 50% of the amount of the Company’spre-incentive fee net investment income in excess of the hurdle rate, until the Company’spre-incentive fee net investment income for such quarter equals 2.1875%4.47%, or 8.75% annually, of net assets. This“catch-up” feature will allow FB Income Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FB Income Advisor will be entitled to receive 10.0% of the Company’spre-incentive fee net investment income.
The subordinated incentive fee on income is subject to a cap equal to 50% of (i) 20% of the per sharepre-incentive fee return for the current quarter and the immediately preceding eleven quarters minus the cumulative per share incentive fees accrued and/or payable for the immediately preceding eleven quarters multiplied by (ii)which was the weighted average number of Shares outstanding during the calendar quarter for which the subordinated incentive fee on income is being calculated. For the purposes of this calculation, the “per sharepre-incentive fee return” for any calendar quarter is equal to (i) the sum of thepre-incentive fee net investment income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation
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and depreciation of the Company’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, base management fees for the calendar quarter, divided by (ii) the weighted average number of Shares outstanding during such calendar quarter. In addition, the “per share incentive fee” for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter divided by (ii) the weighted average number of Shares outstanding during such calendar quarter.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, will be determined and payable in arrears as of the end of each calendar year (or upon termination of the InvestmentCo-Advisory Agreements). This fee will equal (i) 10.0% of the Company’s “incentive fee capital gains” (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less (ii) 50.0% of the aggregate amount of any previously paid incentive fees on capital gains. The Company will accrue for the incentive fee on capital gains, which, if earned, will be paid annually. The Company will accrue the incentive fee on capital gains based on net realized and unrealized gains; however, under the terms of the FB Income Advisor InvestmentCo-Advisory Agreement, the fee payable to FB Income Advisor will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. The other terms of the incentive fee are the same as those under the Current Investment Advisory Agreement.
All personnel of FB Income Advisor, when and to the extent engaged in providing advisory services under the FB Income Advisor InvestmentCo-Advisory Agreement, and the compensation of such personnel allocable to such advisory services, shall be provided and paid for by FB Income Advisor or its affiliates and not by the Company. The treatment of expenses is the same under the Current Investment Advisory Agreement.
Term. The FB Income Advisor InvestmentCo-Advisory Agreement will remain in effect initially for two years, and thereafter will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Independent Directors in accordance with the requirements of the 1940 Act. The FB Income Advisor InvestmentCo-Advisory Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice (a) by the Company to FB Income Advisor, (i) upon the vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the 1940 Act), or (ii) by the vote of the Independent Directors, or (b) by FB Income Advisor to the Company. The FB Income Advisor InvestmentCo-Advisory Agreement will automatically terminate in the event of (x) its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the 1940 Act), or (y) the effectiveness of the Joint Advisor Investment Advisory Agreement.
Indemnification.The FB Income Advisor InvestmentCo-Advisory Agreement provides that FB Income Advisor and anysub-adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the 1940 Act) and any other person or entity affiliated with, or acting on behalf of, FB Income Advisor or any suchsub-adviser) (collectively, the “FB Income Advisor Indemnified Parties”), will not be liable to the Company for any action taken or omitted to be taken by any such FB Income Advisor Indemnified Party in connection with the performance of any of its duties or obligations under the FB Income Advisor InvestmentCo-Advisory Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company will indemnify, defend and protect the FB Income Advisor Indemnified Parties (each of whom shall be deemed a third party beneficiary thereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) (“Losses”) incurred by the FB Income Advisor Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of FB Income Advisor’s duties or obligations under the FB Income Advisor Investment
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Co-Advisory Agreement or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Company’s Second Articles of Amendment and Restatement, the laws of the State of Maryland, the 1940 Act or other applicable law. Notwithstanding the preceding sentence, nothing contained in the FB Income Advisor InvestmentCo-Advisory Agreement will protect or be deemed to protect the FB Income Advisor Indemnified Parties against or entitle or be deemed to entitle the FB Income Advisor Indemnified Parties to indemnification in respect of any Losses to the Company or its stockholders to which the FB Income Advisor Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of FB Income Advisor’s duties or by reason of the reckless disregard of FB Income Advisor’s duties and obligations under the FB Income Advisor InvestmentCo-Advisory Agreement.
Brand Usage. The FB Income Advisor InvestmentCo-Advisory Agreement provides, subject to certain limitations, that FB Income Advisor grants anon-exclusive,non-transferrable, non-sublicensable and royalty-free license to the Company for use of the trademark “FB Income Advisor” and the “FB Income Advisor” design in connection with the Company’s public filings, requests for information from state and federal regulators, offering materials and advertising materials and investor communications.
Third Party Beneficiaries.The FB Income Advisor InvestmentCo-Advisory Agreement provides that except for any FB Income Advisor Indemnified Party, the FB Income Advisor InvestmentCo-Advisory Agreement is for the sole benefit of the parties thereto and their permitted assigns.
Insurance. The FB Income Advisor InvestmentCo-Advisory Agreement provides that, subject to the requirements of Rule17d-1(d)(7) under the 1940 Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar policy with reasonable coverage from a reputable insurer.
Terms of the KKR InvestmentCo-Advisory Agreement
The terms of the KKR InvestmentCo-Advisory Agreement are substantially similar to those of the Current Investment Advisory Agreement, except for, among other things, the fees payable thereunder, the name of the investment adviser and the date of effectiveness. Furthermore, the terms of the KKR InvestmentCo-Advisory Agreement are substantially similar to those of the FB Income Advisor InvestmentCo-Advisory Agreement. The description of the KKR InvestmentCo-Advisory Agreement that follows is a summary only and is qualified by reference to the more complete information contained in the copy of the form of the KKR InvestmentCo-Advisory Agreement included in Exhibit B hereto.
Duties.Subject to the overall supervision of the Board, KKR Credit, in coordination with FB Income Advisor, will oversee the Company’sday-to-day operations and provide the Company with investment advisory services. Under the terms of the KKR InvestmentCo-Advisory Agreement, KKR Credit will, in coordination with FB Income Advisor:
| (i) | determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes; |
| (ii) | identify, evaluate and negotiate the structure of the investments made by the Company; |
| (iii) | execute, monitor and service the Company’s investments; |
| (iv) | place orders with respect to, and arrange for, any investment by the Company; |
| (v) | determine the securities and other assets that the Company shall purchase, retain, or sell; |
| (vi) | perform due diligence on prospective portfolio companies; and |
| (vii) | provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably request or require for the investment of its funds. |
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Notwithstanding the foregoing, FB Income Advisor and KKR Credit may, from time to time, designate one or the other as being primarily responsible for certain investments. The duties to be provided under the KKR InvestmentCo-Advisory Agreement are substantially the same as those under the Current Investment Advisory Agreement. KKR Credit has no obligation to supervise FB Income Advisor’s provision of services under the FB Income Advisor InvestmentCo-Advisory Agreement.
Fees and Expenses.The Company will pay KKR Credit a fee for its services under the KKR InvestmentCo-Advisory Agreement consisting of two components—an annual base management fee based on the average weekly value of the Company’s gross assets and an incentive fee basedinterest rate on the Company’s performance. The costindebtedness as of both the base management fee payable to KKR Credit and any incentive fees it earns will ultimately be borne by the Company’s stockholders.
The base management fee will be calculated at an annual rate of 0.75%December 31, 2018. For purposes of the average weekly value of“150% asset coverage” column, the Company’s gross assets. The base management fee will be payable quarterly in arrears and will be calculated based on thetable above assumes average weekly value of the Company’s gross assets during(excluding cash and cash equivalents) of $12.6 billion, total debt of $8.3 billion, interest income calculated by applying the most recently completed calendar quarter. The base management fee may or may not be taken in whole or in part at the discretionratio of KKR Credit. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as KKR Credit shall determine. The base management fee for any partial month or quarter will be appropriately prorated. The other terms of the base management fee are the same as those under the Current Investment Advisory Agreement.
The incentive fee will consist of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 10.0% of the Company’s“pre-incentive fee netannualized “total investment income” for the immediately preceding quarterperiod subsequent to the Merger through December 31, 2018 to the “investments, at fair value” as of December 31, 2018 to the pro forma assets as of December 31, 2018 and will be subject to a hurdle rate, expressed as a rate of return(iv) interest expense on the value of the Company’s net assets at the end of the most recently completed quarter, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, KKR Credit will not earn this incentive fee for any quarter until the Company’spre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once the Company’spre-incentive fee net investment income in any quarter exceeds the hurdle rate, KKR Credit will be entitled to a“catch-up” fee equal to 50% of the amount of the Company’spre-incentive fee net investment income in excess of the hurdle rate, until the Company’spre-incentive fee net investment income for such quarter equals 2.1875%incremental pro forma leverage is 4.47%, or 8.75% annually, of net assets. This“catch-up” feature will allow KKR Credit to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, KKR Credit will be entitled to receive 10.0% of the Company’spre-incentive fee net investment income.
The subordinated incentive fee on income is subject to a cap equal to 50% of (i) 20% of the per sharepre-incentive fee return for the current quarter and the immediately preceding eleven quarters minus the cumulative per share incentive fees accrued and/or payable for the immediately preceding eleven quarters multiplied by (ii)which was the weighted average numberinterest rate on the Company’s indebtedness as of Shares outstanding duringDecember 31, 2018. See “Impact on advisory fees paid by the calendar quarter for whichCompany” below.
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(6) | As of December 31, 2018, the subordinated incentive fee on income is being calculated.Company’s indebtedness bore a weighted average interest rate of 4.47%. For the purposes of this calculation, the “per sharepre-incentive fee return” for any calendar quarter is equal to (i)“200% asset coverage” column, the sumtable above assumes total debt outstanding of thepre-incentive fee net investment income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, base management fees for the calendar quarter, divided by (ii) the weighted average number of Shares outstanding during such calendar quarter. In addition, the “per share incentive fee” for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter divided by (ii) the weighted average number of Shares outstanding during such calendar quarter. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, will be determined and payable in arrears as of the end of each calendar year (or upon termination of the InvestmentCo-Advisory Agreements). This fee will equal (i) 10.0% of the Company’s “incentive fee capital gains” (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less
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(ii) 50.0% of the aggregate$4.2 billion (the maximum amount of any previously paid incentive fees on capital gains. The Company will accrue for the incentive fee on capital gains, which, if earned, willborrowings that could be paid annually. The Company will accrue the incentive fee on capital gains based on net realized and unrealized gains; however, under the terms of the KKR InvestmentCo-Advisory Agreement, the fee payable to KKR Credit will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. The other terms of the incentive fee are the same as those under the Current Investment Advisory Agreement.
All personnel of KKR Credit, when and to the extent engaged in providing services under the KKR InvestmentCo-Advisory Agreement, and the compensation and routine overhead expenses of such personnel allocable to such services, shall be provided and paid for by KKR Credit or its affiliates and not by the Company. The treatment of expenses is the same under the Current Investment Advisory Agreement.
Term. The KKR InvestmentCo-Advisory Agreement will remain in effect initially for two years, and thereafter will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Independent Directors in accordance with the requirements of the 1940 Act. The KKR InvestmentCo-Advisory Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice (a) by the Company to KKR Credit, (i) upon the vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the 1940 Act), or (ii) by the vote of the Independent Directors, or (b) by KKR Credit to the Company. The KKR InvestmentCo-Advisory Agreement will automatically terminate in the event of (x) its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the 1940 Act), or (y) the effectiveness of the Joint Advisor Investment Advisory Agreement.
Indemnification.The KKR InvestmentCo-Advisory Agreement provides that KKR Credit and anysub-adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the 1940 Act) and any other person or entity affiliated with, or acting on behalf of, KKR Credit or any suchsub-adviser) (collectively, the “KKR Indemnified Parties”), will not be liable to the Company for any action taken or omitted to be taken by any such KKR Indemnified Party in connection with the performance of any of its duties or obligations under the KKR InvestmentCo-Advisory Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company will indemnify, defend and protect the KKR Indemnified Parties (each of whom shall be deemed a third party beneficiary thereof) and hold them harmless from and against all Losses incurred by the KKR Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of KKR Credit’s duties or obligations under the KKR InvestmentCo-Advisory Agreement or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Company’s Second Articles of Amendment and Restatement, the laws of the State of Maryland, the 1940 Act or other applicable law. Notwithstanding the preceding sentence, nothing contained in the KKR InvestmentCo-Advisory Agreement will protect or be deemed to protect the KKR Indemnified Parties against or entitle or be deemed to entitle the KKR Indemnified Parties to indemnification in respect of any Losses to the Company or its stockholders to which the KKR Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of KKR Credit’s duties or by reason of the reckless disregard of KKR Credit’s duties and obligations under the KKR InvestmentCo-Advisory Agreement.
Brand Usage. The KKR InvestmentCo-Advisory Agreement provides, subject to certain limitations, that KKR Credit grants anon-exclusive,non-transferrable, non-sublicensable and royalty-free license to the Company for use of the trademark “KKR” and the “KKR” design in connection with the Company’s public filings, requests for information from state and federal regulators, offering materials and advertising materials and investor communications.
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Third Party Beneficiaries.The KKR InvestmentCo-Advisory Agreement provides that except for KKR Indemnified Party, the KKR InvestmentCo-Advisory Agreement is for the sole benefit of the parties thereto and their permitted assigns.
Insurance. The KKR Advisor InvestmentCo-Advisory Agreement provides that, subject to the requirements of Rule17d-1(d)(7) under the 1940 Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar policy with reasonable coverage from a reputable insurer.
Board Consideration
At a meeting of the Board held on November 28, 2017, the Board, including a majority of the Independent Directors, approved each of the InvestmentCo-Advisory Agreements as being in the best interests of the Company and its stockholders. The Board then directed that both InvestmentCo-Advisory Agreements be submitted to the Company’s stockholders for approval with the Board’s recommendation that the stockholders of the Company vote to approve the InvestmentCo-Advisory Agreements.
The InvestmentCo-Advisory Agreements Proposal and the Joint Advisor Investment Advisory Agreement Proposal are not contingent on one another. However, if the stockholders of the Company do not approve both the InvestmentCo-Advisory Agreements Proposal and the Joint Advisor Investment Advisory Agreement Proposal, then the Board will consider and evaluate its options to determine what alternatives are in the Company’s best interests and that of the Company’s stockholders, such as resubmitting the InvestmentCo-Advisory Agreements Proposal and/or the Joint Advisor Investment Advisory Agreement Proposal for approval by the Company’s stockholders or entering into an Interim Investment Advisory Agreement. GDFM intends to resign as the Company’s investmentsub-adviser effective as of the GDFM End Date regardless of whether the InvestmentCo-Advisory Agreements Proposal or the Joint Advisor Investment Advisory Agreement Proposal is approved, and the Company would continue to receive its investment advisory services from FB Income Advisor pursuant to the Current Investment Advisory Agreement and/or from KKR Credit pursuant to an Interim Investment Advisory Agreement. FB Income Advisor intends to obtain services from KKR Credit’s broker-dealer affiliate pursuant to the Sourcing Agreement, such as identifying new investment opportunities for FB Income Advisor, prior to the Company’s entry into any advisory agreement with KKR Credit or one of its affiliates, including the Joint Advisor.
Factors Considered by the Board
The Board, in approving and recommending stockholder approval of each InvestmentCo-Advisory Agreement, considered information furnished and discussed throughout the year at Board meetings and executive sessions with management and counsel and provided specifically in relation to the consideration of the approval of the InvestmentCo-Advisory Agreements in response to requests of the Independent Directors and their independent legal counsel, including information regarding GDFM’s willingness to enter into the Transition Agreement, which would result in its resignation as investmentsub-adviser to the Company.
In its deliberations, the Board considered (i) a range of materials and information regarding the nature and quality of services to be provided by FB Income Advisor and KKR Credit, (ii) the past performance of FB Income Advisor and performance of the Company compared to relevant indices and peer funds, (iii) the performance of funds advised by KKR Credit that are comparable in strategy to the Company, (iv) the proposed fees and expenses of the Company under the InvestmentCo-Advisory Agreements compared to the Company’s current fees and those of peer funds with investment objectives and strategies similar to the Company, (v) the estimated profitability of FB Income Advisor and KKR Credit under the InvestmentCo-Advisory Agreements, and (vi) the potential short-term disruption to the Company due to the resignation of GDFM as investmentsub-adviser and the importance of a seamless transition of the Company’s advisory services. The Board also considered information related to potential “fall out” or ancillary benefits enjoyed by FB Income Advisor and to be enjoyed by KKR Credit (and their affiliates) as a result of their relationships with the Company. In addition, the Board noted alternative options, including other investment advisory arrangements, that were considered and
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explored. In addition to evaluating, among other things, the written information provided by FB Income Advisor and KKR Credit, the Board considered the answers to questions posed by the Board to representatives of FB Income Advisor and KKR Credit at various meetings. The Independent Directors met separately in executive sessions with their independent legal counsel to review and consider the information provided regarding the InvestmentCo-Advisory Agreements.
Based on their review, the Independent Directors and the full Board concluded that it was in the best interests of the Company to approve the InvestmentCo-Advisory Agreements. In its deliberations, the Board did not identify any single factor or group of factors asall-important or controlling, but considered all factors together. The material factors and conclusions that formed the basis for the Board’s determinations are discussed below.
Nature, Extent and Quality of Services. In evaluating the nature, extent and quality of the services to be provided by FB Income Advisor and KKR Credit, the Board reviewed information describing the financial strength, experience, resources, compliance programs, and key personnel of FB Income Advisor and KKR Credit, including the personnel who will provide investment management services to the Company, and the proposed strategies to seek favorable investment results for the Company’s portfolio going forward. With respect to FB Income Advisor, the Board considered (i) its overall experience overseeing the activities of FB Income Advisor with regard to the operation of the Company to date, including FB Income Advisor’s provision of investment advisory services that have contributed to the successful operation of the Company, (ii) FB Income Advisor’s role in, among other things, setting investment guidelines for the Company’s portfolio, determining the composition and allocation of the Company’s portfolio, and identifying, evaluating, and negotiating the structure of, the Company’s investments, and (iii) FB Income Advisor’s investment of time and capital to develop additional management resources to benefit the Company. The Board also considered the administrative services FB Income Advisor provides to the Company, including general ledger accounting, fund accounting, legal services, investor relations and other administrative services. With respect to KKR Credit, the Board considered (i) the leading reputation and past performance of the KKR organization and the potential benefits to the Company from the scale, capabilities andco-investment opportunities provided by the proposed relationship between FB Income Advisor and KKR Credit, (ii) KKR Credit’s ability to, among other things, identify and conduct due diligence on prospective investment opportunities for the Company, make and execute investments for the Company, implement the Company’s investment strategies, and provide ongoing monitoring of the Company’s investments, and (iii) KKR Credit’s capabilities and commitment to work with FB Income Advisor toward a seamless transition of advisory services for the Company in view of GDFM’s resignation assub-adviser. The Board also considered the anticipated strong level of proposed collaboration and coordination between FB Income Advisor and KKR Credit in managing the Company’s assets.
The Board and the Independent Directors determined that they were satisfied with the nature, quality and extent of the services to be provided by FB Income Advisor and KKR Credit to the Company, the expertise and capabilities of FB Income Advisor’s and KKR Credit’s personnel, FB Income Advisor’s and KKR Credit’s financial strength and their anticipated allocation of resources necessary to manage the Company’s portfolio.
Review of Performance. The Board and the Independent Directors considered the Company’s historical investment performance as compared to the performance of comparable funds in terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria, and compared to certain indices spanning the spectrum of primary200% asset classes in which the Company invests. The Independent Directors noted FB Income Advisor’s explanation regarding the Company’s performance and the relevance of the various indices and benchmarks. The Board also considered the performance of funds managed by KKR Credit that are comparable to the Company. The Board determined that it was generally satisfied with the Company’s and KKR Credit’s performance and would continue to monitor the Company’s performance results.
Costs of Services Provided and Profits Realized. The Board considered the proposed management and incentive fees (together, the “Advisory Fees”) and the Company’s anticipated expense ratios as compared to a group of investment companies that FB Income Advisor believed to be relatively comparable to the Company in
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terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria. The Independent Directors considered that the base management fee portion of the Advisory Fees would be reduced under the proposed arrangements, which would cause stockholders to pay a decreased Advisory Fee, but that the income incentive fee hurdle would be lowered (as described above), potentially causing the Company to reach the hurdle at a lower performance rate (and consequently, stockholders would pay the income incentive fee at a lower performance rate) than it would have under the current fee structure. The Independent Directors considered the reasons for the changes in Advisory Fees provided by FB Income Advisor, the comparison of the Company’s proposed Advisory Fees to its peers, including that the reduced hurdle rate would substantially align with the hurdle rates of the Company’s peers.
With respect to the Company’s expense ratios, the Board considered the expense ratios compared to a group of investment companies that FB Income Advisor believed to be relatively comparable to the Company in terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria. The Board reviewed the profitability information provided by FB Income Advisor for the past three years, the estimated profitability after the proposed approval of the InvestmentCo-Advisory Agreements and FB Income Advisor’s methodology for determining profitability. The Independent Directors also noted KKR Credit’s expected profitability and methodology with respect to the Company. The Board determined that the Advisory Fees, proposed expense ratios and profitability were reasonable in relation to the services to be rendered to the Company by FB Income Advisor and KKR Credit.
Economies of Scale. The Board considered the extent to which economies of scale might be realized as the Company grows and whether the Company’s fee levels reflect these economies of scale for the benefit of Company stockholders. The Board considered the fact that such economies are less likely to be significant given the Company’s structure and focus on loans to private middle-market U.S. companies which generally require loan by loan negotiation and monitoring, as well as FB Income Advisor’s commitment to monitor economies of scale on an ongoing basis.
Other Benefits. The Board considered other benefits that may accrue to FB Income Advisor, KKR Credit and their affiliates from their relationships with the Company, including that FB Income Advisor and KKR Credit may potentially benefit from the success of the Company, which could attract other business to FB Income Advisor and KKR Credit.
Overall Conclusions. Based on all of the information considered and the conclusions reached, the Board determined that the terms of the InvestmentCo-Advisory Agreements are fair and reasonable and that the approval of each InvestmentCo-Advisory Agreement is in the best interests of the Company. The Board, including a majority of the Independent Directors, unanimously approved the InvestmentCo-Advisory Agreements and determined to submit the InvestmentCo-Advisory Agreements to stockholders for approval.
Vote Required
The affirmative vote by the stockholders of the Company holding a majority of the outstanding voting securities is necessary for approval of each InvestmentCo-Advisory Agreement. The 1940 Act defines “a majority of outstanding voting securities” of the Company as the lesser of: (1) 67% or more of the voting securities present at the Special Meeting if the holders of more than 50% of the outstanding voting securities of the Company are present or represented by proxy; or (2) more than 50% of the outstanding voting securities of the Company. Abstentions and brokernon-votes will not count as affirmative votes cast and will therefore have the same effect as votes “AGAINST” the InvestmentCo-Advisory Agreements Proposal. Proxies received will be voted “FOR” the InvestmentCo-Advisory Agreements Proposal unless stockholders designate otherwise.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE INVESTMENTCO-ADVISORY AGREEMENTS PROPOSAL.
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PROPOSAL 2: APPROVAL OF JOINT ADVISOR INVESTMENT ADVISORY AGREEMENT PROPOSAL
Background
The information set forth under the heading “Background” in “Proposal 1: Approval of InvestmentCo-Advisory Agreements Proposal” is incorporated herein by reference.
About the Joint Advisor
The Joint Advisor will be a newly-formed Delaware limited liability company, located at 201 Rouse Boulevard, Philadelphia, PA 19112. Prior to the effectiveness of the Joint Advisor Investment Advisory Agreement, the Joint Advisor will register as an investment adviser with the SEC under the Advisers Act. The Joint Advisor will be formed by FS Investments or one of its affiliates to serve as the Company’s investment adviser. Upon receipt of Exemptive Relief, stockholder approval of the Joint Advisor Investment Advisory Agreement and, unless otherwise waived by KKR Credit and the FS Advisor Entities, stockholder approval of each investment advisory agreement between the Joint Advisor and each of FSIC II, FSIC III, FSIC IV, CCT and CCT II, KKR Credit will become a member of the Joint Advisor, which will be jointly controlled by FS Investments or one of its affiliates and KKR Credit.
The Company’s chairman and chief executive officer, Michael C. Forman, will serve as the Joint Advisor’s chairman and chief executive officer, and Todd C. Builione, the president of KKR Credit, will serve as the Joint Advisor’s president.
The Joint Advisor’s senior management team will have significant experience in private lending and private equity investing, and will have developed an expertise in using all levels of a firm’s capital structure to produce income-generating investments, while focusing on risk management. The team will also have extensive knowledge of the managerial, operational and regulatory requirements of publicly registered alternative asset entities, such as BDCs. The Company believes that the active and ongoing participation by FS Investments, KKR Credit and their respective affiliates in the credit markets, and the depth of experience and disciplined investment approach of the Joint Advisor’s management team, will allow the Joint Advisor to successfully execute the Company’s investment strategies.
The Joint Advisor’s investment committee will initially be comprised of Todd Builione, Sean Coleman, Brian Gerson, Michael Kelly, Daniel Pietrzak and Ryan Wilson. See “Proposal 1: Approval of InvestmentCo-Advisory Agreements Proposal—Management of the InvestmentCo-Advisors” in this proxy statement for additional information. The Board, including a majority of the Independent Directors, will oversee and monitor the Company’s investment performance and will review the Joint Advisor Investment Advisory Agreement as required by the 1940 Act, to determine, among other things, whether the fees payable under such agreement are reasonable in light of the services provided.
About FS Investments
FS Investments is a leading asset manager dedicated to helping individuals, financial professionals and institutions design better portfolios. The firm provides access to alternative sources of income and growth and focuses on setting the industry standards for investor education and transparency.
FS Investments is headquartered in Philadelphia with offices in Orlando, FL and Washington, D.C. The firm had more than $20 billion in assets under managementcoverage requirement as of September 30, 2017.
About KKR Credit
The information set forth under the heading “About KKR Credit” in “Proposal 1: Approval of InvestmentCo-Advisory Agreements Proposal” is incorporated herein by reference.
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Management of the Joint Advisor
The management of the Company’s investment portfolio will be the responsibility of the Joint Advisor’s investment committee which will be comprised of three appointees of FS Investments or one of its affiliates (initially Sean Coleman, Brian Gerson and Michael Kelly) and three appointees of KKR Credit (initially Todd Builione, Daniel Pietrzak and Ryan Wilson)December 31, 2018). A team of dedicated investment professionals consisting of personnel from FS Investments and KKR Credit will provide services to the Company on behalf of the Joint Advisor. The investment committee will be responsible for establishing and monitoring the Company’s investment program, developing the portfolio, setting the risk parameters for the Company and approving all Company investments. In all matters in which a vote of the investment committee is required, the unanimous vote of all members of the investment committee present at a meeting where a quorum is present (which requires the presence of one designee of FS Investments or one of its affiliates and one designee of KKR Credit) is required to authorize or approve such matters.
In performing its duties under the Joint Advisor Investment Advisory Agreement, the Joint Advisor will provide the Company with services to facilitate the conduct of its business, including but not limited to: (a) sourcing, structuring, underwriting, performing diligence, executing and monitoring investments; (b) researching, selecting, trading and underwriting new investment opportunities; (c) investor account management; (d) legal, compliance, finance, accounting, operations and human resources services; and (e) risk management functions. KKR Credit and FS Investments or one of its affiliates will be collectively responsible for providing appropriate assets, resources, time and personnel to allow the Joint Advisor to provide to the Company the services required under the Joint Advisor Investment Advisory Agreement. KKR Credit and FS Investments or one of its affiliates will coordinate their activities during the period in which the Joint Advisory Agreement would be in effect to avoid duplication of efforts and ensure a balanced and effective allocation of responsibilities and net fee revenue earned by the Joint Advisor and efficiency in the provision of the required services to the Company thereunder.
FS Investments or one of its affiliates, subject to the reasonable consent of KKR Credit and appointment by the board of the Joint Advisor, will designate the Joint Advisor’s chairman and chief executive officer and chief compliance officer. KKR Credit, subject to the reasonable consent of FS Investments or one of its affiliates and appointment by the board of the Joint Advisor, will designate the Joint Advisor’s president and chief credit officer.
The biographical information set forth under the heading “Management of the InvestmentCo-Advisors” in “Proposal 1: Approval of InvestmentCo-Advisory Agreements Proposal” is incorporated herein by reference.
Terms of the Joint Advisor Investment Advisory Agreement
The terms of the Joint Advisor Investment Advisory Agreement are substantially similar to those of the Current Investment Advisory Agreement, except for, among other things, the fees payable thereunder, the name of the investment adviser and the date of effectiveness. The description of the Joint Advisor Investment Advisory Agreement that follows is a summary only and is qualified by reference to the more complete information contained in the copy of the form of the Joint Advisor Investment Advisory Agreement included in Exhibit C hereto.
Duties.Subject to the overall supervision of the Board, the Joint Advisor will oversee the Company’sday-to-day operations and provide the Company with investment advisory services. Under the terms of the Joint Advisor Investment Advisory Agreement, the Joint Advisor will:
| (i) | determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes; |
| (ii) | identify, evaluate and negotiate the structure of the investments made by the Company; |
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| (iii) | execute, monitor and service the Company’s investments; |
| (iv) | place orders with respect to, and arrange for, any investment by the Company; |
| (v) | determine the securities and other assets that the Company shall purchase, retain, or sell; |
| (vi) | perform due diligence on prospective portfolio companies; and |
| (vii) | provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably request or require for the investment of its funds. |
The duties to be provided under the Joint Advisor Investment Advisory Agreement are substantially the same as those under the Current Investment Advisory Agreement.
Fees and Expenses.The Company will pay the Joint Advisor a fee for its services under the Joint Advisor Investment Advisory Agreement consisting of two components—an annual base management fee based on the average weekly value of the Company’s gross assets and an incentive fee based on the Company’s performance. The cost of both the base management fee payable to the Joint Advisor and any incentive fees it earns will ultimately be borne by the Company’s stockholders.
The base management fee will be calculated at an annual rate of 1.5% of the average weekly value of the Company’s gross assets. The base management fee will be payable quarterly in arrears and will be calculated based on the average weekly value of the Company’s gross assets during the most recently completed calendar quarter. The base management fee may or may not be taken in whole or in part at the discretion of the Joint Advisor. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as the Joint Advisor shall determine. The base management fee for any partial month or quarter will be appropriately prorated. The other terms of the base management fee are the same as those under the Current Investment Advisory Agreement.
The incentive fee will consist of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears, will equal 20.0% of the Company’s“pre-incentive fee net investment income” for the immediately preceding quarter and will be subject to a hurdle rate, expressed as a rate of return on the value of the Company’s net assets at the end of the most recently completed quarter, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, the Joint Advisor will not earn this incentive fee for any quarter until the Company’spre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once the Company’spre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Joint Advisor will be entitled to a“catch-up” fee equal to the amount of the Company’spre-incentive fee net investment income in excess of the hurdle rate, until the Company’spre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of net assets. This“catch-up” feature will allow the Joint Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, the Joint Advisor will be entitled to receive 20.0% of the Company’spre-incentive fee net investment income.
The subordinated incentive fee on income is subject to a cap equal to (i) 20% of the per sharepre-incentive fee return for the current quarter and the immediately preceding eleven quarters minus the cumulative per share incentive fees accrued and/or payable for the immediately preceding eleven quarters multiplied by (ii) the weighted average number of Shares outstanding during the calendar quarter for which the subordinated incentive fee on income is being calculated. For the purposes of this calculation, the “per sharepre-incentive fee return” for any calendar quarter is equal to (i) the sum of thepre-incentive fee net investment income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, base management fees for the calendar quarter, divided by (ii) the weighted average number of Shares outstanding during such calendar quarter. In addition, the “per share incentive fee” for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter divided by (ii) the weighted average number of Shares outstanding during such calendar quarter.
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The second part of the incentive fee, which is referred to as the incentive fee on capital gains, will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Joint Advisor Investment Advisory Agreement). This fee will equal 20.0% of the Company’s “incentive fee capital gains” (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid incentive fees on capital gains under the Joint Advisor Investment Advisory Agreement. The Company will accrue for the incentive fee on capital gains, which, if earned, will be paid annually. The Company will accrue the incentive fee on capital gains based on net realized and unrealized gains; however, under the terms of the Joint Advisor Investment Advisory Agreement, the fee payable to the Joint Advisor will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. The other terms of the incentive fee are the same as those under the Current Investment Advisory Agreement.
All personnel of the Joint Advisor, when and to the extent engaged in providing services under the Joint Advisor Investment Advisory Agreement, and the compensation and routine overhead expenses of such personnel allocable to such services, shall be provided and paid for by the Joint Advisor or its affiliates and not by the Company. The treatment of expenses is the same under the Current Investment Advisory Agreement.
Term. The Joint Advisor Investment Advisory Agreement will remain in effect initially for two years, and thereafter will continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Independent Directors in accordance with the requirements of the 1940 Act. The Joint Advisor Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, upon 60 days’ written notice (a) by the Company to the Joint Advisor, (i) upon the vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the 1940 Act), or (ii) by the vote of the Independent Directors, or (b) by the Joint Advisor to the Company. The Joint Advisor Investment Advisory Agreement will automatically terminate in the event of its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the 1940 Act).
Indemnification.The Joint Advisor Investment Advisory Agreement provides that the Joint Advisor and anysub-adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the 1940 Act) and any other person or entity affiliated with, or acting on behalf of, the Joint Advisor or any suchsub-adviser) (collectively, the “Joint Advisor Indemnified Parties”), will not be liable to the Company for any action taken or omitted to be taken by any such Joint Advisor Indemnified Party in connection with the performance of any of its duties or obligations under the Joint Advisor Investment Advisory Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the 1940 Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company will indemnify, defend and protect the Joint Advisor Indemnified Parties (each of whom shall be deemed a third party beneficiary thereof) and hold them harmless from and against all Losses incurred by the Joint Advisor Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Joint Advisor’s duties or obligations under the Joint Advisor Investment Advisory Agreement or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Company’s Second Articles of Amendment and Restatement, the laws of the State of Maryland, the 1940 Act or other applicable law. Notwithstanding the preceding sentence, nothing contained in the Joint Advisor Investment Advisory Agreement will protect or be deemed to protect the Joint Advisor Indemnified Parties against or entitle or be deemed to entitle the Joint Advisor Indemnified Parties to indemnification in respect of any Losses to the Company or its stockholders to which the Joint Advisor Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Joint Advisor’s duties or by reason of the reckless disregard of the Joint Advisor’s duties and obligations under the Joint Advisor Investment Advisory Agreement.
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Brand Usage. The Joint Advisor Investment Advisory Agreement provides, subject to certain limitations, that the Joint Advisor grants anon-exclusive,non-transferrable, non-sublicensable and royalty-free license to the Company for use of the trademark “FS/KKR Advisor” in connection with the Company’s public filings, requests for information from state and federal regulators, offering materials and advertising materials and investor communications.
Third Party Beneficiaries.The Joint Advisor Investment Advisory Agreement provides that except for any Joint Advisor Indemnified Party, the Joint Advisor Investment Advisory Agreement is for the sole benefit of the parties thereto and their permitted assigns.
Insurance. The Joint Advisor Investment Advisory Agreement provides that, subject to the requirements of Rule17d-1(d)(7) under the 1940 Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar policy with reasonable coverage from a reputable insurer.
Board Consideration
At a meeting of the Board held on November 28, 2017, the Board, including a majority of the Independent Directors, approved the Joint Advisor Investment Advisory Agreement as being in the best interests of the Company and its stockholders. The Board then directed that the Joint Advisor Investment Advisory Agreement be submitted to the Company’s stockholders for approval with the Board’s recommendation that the stockholders of the Company vote to approve the Joint Advisor Investment Advisory Agreement.
The InvestmentCo-Advisory Agreements Proposal and the Joint Advisor Investment Advisory Agreement Proposal are not contingent on one another. However, if the stockholders of the Company do not approve both the InvestmentCo-Advisory Agreements Proposal and the Joint Advisor Investment Advisory Agreement Proposal, then the Board will consider and evaluate its options to determine what alternatives are in the Company’s best interests and that of the Company’s stockholders, such as resubmitting the InvestmentCo-Advisory Agreements Proposal and/or the Joint Advisor Investment Advisory Agreement Proposal for approval by the Company’s stockholders or entering into an Interim Investment Advisory Agreement. GDFM intends to resign as the Company’s investmentsub-adviser effective as of the GDFM End Date regardless of whether the InvestmentCo-Advisory Agreements Proposal or the Joint Advisor Investment Advisory Agreement Proposal is approved, and the Company would continue to receive its investment advisory services from FB Income Advisor pursuant to the Current Investment Advisory Agreement and/or from KKR Credit pursuant to an Interim Investment Advisory Agreement. FB Income Advisor intends to obtain services from KKR Credit’s broker-dealer affiliate pursuant to the Sourcing Agreement, such as identifying new investment opportunities for FB Income Advisor, prior to the Company’s entry into any advisory agreement with KKR Credit or one of its affiliates, including the Joint Advisor.
Factors Considered by the Board
The Board, in approving and recommending stockholder approval of the Joint Advisor Investment Advisory Agreement, considered information furnished and discussed at Board meetings and executive sessions with management and counsel and provided specifically in relation to the consideration of the approval of the Joint Advisor Investment Advisory Agreement in response to requests of the Independent Directors and their independent legal counsel, including information regarding GDFM’s willingness to enter into the Transition Agreement, which would result in its resignation as investmentsub-adviser to the Company.
In its deliberations, the Board considered (i) a range of materials and information regarding the nature and quality of services to be provided by the Joint Advisor, (ii) the performance of the Company compared to relevant indices and peer funds, (iii) the performance of funds advised by KKR Credit that are comparable in strategy to the Company, (iv) the proposed fees and expenses of the Company under the Joint Advisor Investment Advisory Agreement compared to those of peer funds with investment objectives and strategies
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similar to the Company, (v) the estimated profitability of the Joint Advisor under the Joint Advisor Investment Advisory Agreement, and (vi) the potential short-term disruption to the Company due to the resignation of GDFM as investmentsub-adviser and the importance of a seamless transition of the Company’s advisory services. The Board also considered information related to potential “fall out” or ancillary benefits that may be enjoyed by the Joint Advisor (and its affiliates) as a result of its relationship with the Company. In addition, the Board noted alternative options, including other investment advisory arrangements, that were considered and explored. In addition to evaluating, among other things, the written information provided by FB Income Advisor and KKR Credit regarding the Joint Advisor, the Board considered the answers to questions posed by the Board to representatives of FB Income Advisor and KKR Credit at various meetings. The Independent Directors met separately in executive sessions with their independent legal counsel to review and consider the information provided regarding the Joint Advisor Investment Advisory Agreement.
Based on their review, the Independent Directors and the full Board concluded that it was in the best interests of the Company to approve the Joint Advisor Investment Advisory Agreement. In its deliberations, the Board did not identify any single factor or group of factors asall-important or controlling, but considered all factors together. The material factors and conclusions that formed the basis for the Board’s determinations are discussed below.
Nature, Extent and Quality of Services. In evaluating the nature, extent and quality of the services to be provided by the Joint Advisor, the Board reviewed information describing the projected financial strength of the Joint Advisor and the financial strength of its future owners and the experience, resources, proposed compliance programs, and key personnel of the Joint Advisor, including the personnel who will provide investment management services to the Company, and the proposed strategies to seek favorable investment results for the Company’s portfolio going forward. The Board considered the roles and responsibilities of the Joint Advisor including, among other things, (i) setting investment guidelines for the Company’s portfolio, (ii) determining the composition and allocation of the Company’s portfolio, (iii) identifying and conducting due diligence on prospective investment opportunities for the Company, (iv) evaluating, negotiating and implementing the structure of the Company’s investments, (v) providing ongoing monitoring of the Company’s investments, and (vi) providing administrative services, including general ledger accounting, fund accounting, legal services, investor relations and other administrative services to the Company.
The Board and the Independent Directors determined that they were satisfied with the nature, quality and extent of the services to be provided by the Joint Advisor to the Company, the expertise and capabilities of the Joint Advisor’s future personnel and FB Income Advisor’s and KKR Credit’s financial strength.
Review of Performance. With respect to the Company’s investment performance, the Board and the Independent Directors noted that the Joint Advisor does not have performance history. The Board noted, however, that the Company’s performance was reasonable as compared to the performance of comparable funds in terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria, and compared to certain indices spanning the spectrum of primary asset classes in which the Company invests. The Independent Directors noted FB Income Advisor’s explanation regarding the Company’s performance and the relevance of the various indices and benchmarks. The Board also considered the performance of funds managed by KKR Credit that are comparable to the Company.
The Board determined that it was generally satisfied with the Company’s and KKR Credit’s performance and would monitor the Company’s performance results under the Joint Advisor Investment Advisory Agreement.
Costs of Services Provided and Profits Realized. The Board then considered the Advisory Fees and the Company’s expense ratios as compared to a group of investment companies that FB Income Advisor believed to be relatively comparable to the Company in terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria. The Independent Directors considered that the base management fee portion of the Advisory Fees would be reduced under the proposed arrangements, which would cause stockholders to pay
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a decreased Advisory Fee, but that the income incentive fee hurdle would be lowered (as described above), potentially causing the Company to reach the hurdle at a lower performance rate (and consequently, stockholders would pay the income incentive fee at a lower performance rate) than it would have under the current fee structure. The Independent Directors considered the reasons for the changes in Advisory Fees provided by FB Income Advisor and the comparison of the Company’s proposed Advisory Fees to its peers, including that the reduced hurdle rate would substantially align with the hurdle rates of the Company’s peers.
With respect to the Company’s expense ratios, the Board considered the expense ratios compared to a group of investment companies that FB Income Advisor believed to be relatively comparable to the Company in terms of structure, investment objectives, assets under management, portfolio mix and/or similar criteria. The Board considered FB Income Advisor’s explanations as to the comparability of the expenses.
The Board then reviewed the estimated profitability information provided by FB Income Advisor for the Joint Advisor and the methodology for determining profitability.
The Board determined that the Advisory Fees, proposed expense ratio and profitability are reasonable in relation to the services to be rendered to the Company by the Joint Advisor.
Economies of Scale. The Board considered the extent to which economies of scale would be realized as the Company grows and whether the Company’s fee levels reflect these economies of scale for the benefit of Company stockholders. The Board considered the fact that such economies are less likely to be significant given the Company’s structure and focus on loans to private middle-market U.S. companies which generally require negotiation of the terms of the loans.
Other Benefits. The Board considered other benefits that may accrue to the Joint Advisor and its affiliates from its relationships with the Company, including that the Joint Advisor may potentially benefit from the success of the Company, which could attract other business to the Joint Advisor.
Overall Conclusions. Based on all of the information considered and the conclusions reached, the Board determined that the terms of the Joint Advisor Investment Advisory Agreement are fair and reasonable and that the approval of the Joint Advisor Investment Advisory Agreement is in the best interests of the Company. The Board, including a majority of the Independent Directors, unanimously approved the Joint Advisor Investment Advisory Agreement and determined to submit the Joint Advisor Investment Advisory Agreement to stockholders for approval.
Vote Required
The affirmative vote by stockholders of the Company holding a majority of the outstanding voting securities is necessary for approval of the Joint Advisor Investment Advisory Agreement. For purposes of the Joint Advisor Investment Advisory Agreement Proposal, the 1940 Act defines “a majority of outstanding voting securities” of the Company as the lesser of: (1) 67% or more of the voting securities present at the Special Meeting if the holders of more than 50% of the outstanding voting securities of the Company are present or represented by proxy; or (2) more than 50% of the outstanding voting securities of the Company. You may vote for or against or abstain on the Joint Advisor Investment Advisory Agreement Proposal. Abstentions and brokernon-votes will have the same effect as votes “AGAINST” the Joint Advisor Investment Advisory Agreement Proposal. Proxies received will be voted “FOR” the Joint Advisor Investment Advisory Agreement Proposal unless stockholders designate otherwise.“150% asset coverage”
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE JOINT ADVISOR INVESTMENT ADVISORY AGREEMENT PROPOSAL.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of the Record Date, the beneficial ownership of the Company’s current directors, executive officers, each person known to the Company to beneficially own 5% or more of the outstanding Shares, and all of the Company’s executive officers and directors as a group.
Beneficial ownership is determined in accordance with Rule13d-3 promulgated under the Exchange Act and includes voting or investment power with respect to the Shares. There are no Shares subject to options that are currently exercisable or exercisable within 60 days of January 18, 2018. Ownership information for those persons who beneficially own 5% or more of the Shares is based upon information furnished by the Company’s transfer agent and other information provided by such persons, if available.
| | | | | | | | | | | Shares Beneficially Owned as of
January 18, 2018 | | Name and Address of Beneficial Owner(1)
| | Number of
Shares | | | Percentage
(%)(2) | | Interested Directors
| | | | | | | | | David J. Adelman(3)
| | | 1,130,900 | | | | * | | Michael C. Forman(4)
| | | 1,066,237 | | | | * | | Thomas J. Gravina(5)
| | | 100,000 | | | | * | | Michael Heller
| | | 37,801 | | | | * | | | | | Independent Directors
| | | | | | | | | Gregory P. Chandler(6)
| | | 17,647 | | | | * | | Barry H. Frank(7)
| | | 83,862 | | | | * | | Michael J. Hagan
| | | 70,000 | | | | * | | Jeffrey K. Harrow
| | | 23,441 | | | | * | | Philip E. Hughes, Jr.
| | | 5,260 | | | | * | | Pedro A. Ramos(8)
| | | 1,490 | | | | * | | Joseph P. Ujobai
| | | — | | | | — | | | | | Executive Officers
| | | | | | | | | Sean Coleman
| | | 32,546 | | | | * | | Brian Gerson
| | | — | | | | — | | William Goebel
| | | 5,000 | | | | * | | Zachary Klehr
| | | 17,682 | | | | * | | Brad Marshall(9)
| | | 36,288 | | | | * | | Stephen S. Sypherd
| | | 178 | | | | * | | James F. Volk
| | | 560 | | | | * | | | | | All directors and executive officers as a group (18 persons)
| | | 2,650,726 | | | | * | |
(1) | The address of each of the beneficial owners set forth above is c/o FS Investment Corporation, 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112. |
(2) | Based on a total of 245,725,416 Shares issued and outstanding on January 18, 2018. |
(3) | Includes 150,000 Shares held by Darco Capital, LP, a limited partnership controlled by Mr. Adelman; 924,609 Shares held by FS Investments; and 22,228 Shares held by Darco Investments, LLC, a limited liability company controlled by Mr. Adelman. |
(4) | Includes 106,917 Shares held in trust; 924,609 Shares held by FS Investments; 12,640 Shares held by spouse in trust; 3,177 Shares held for the benefit of minor children in trust; 11,214 Shares held in a 401(k) account; and 7,681 Shares held in an IRA account. |
(5) | Includes 35,000 Shares held by Cobble Court Holdings LP, a limited partnership controlled by Mr. Gravina; and 17,500 Shares held in trust. |
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(6) | Includes 14,473 Shares held in a 401(k) account; 2,208 Shares held by spouse; 483 Shares held by spouse as UTMA custodian for minorchild-1; and 483 Shares held by spouse as UTMA custodian for minorchild-2. |
(7) | Includes 32,996 Shares held in an Individual Retirement Account and 45,811 Shares held by spouse. |
(8) | All Shares held in an Individual Retirement Account. |
(9) | Includes 6,040 Shares held by spouse. |
Dollar Range of Equity Securities Beneficially Owned by Directors
The table below shows the dollar range of equity securities of the Company and the aggregate dollar range of equity securities of the Fund Complex that were beneficially owned by each director as of the Record Date stated as one of the following dollar ranges: None;$1-$10,000;$10,001-$50,000;$50,001-$100,000; or Over $100,000. For purposes of this proxy statement, the term “Fund Complex” is defined to include the Company, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV, FS Energy and Power Fund, FS Global Credit Opportunities Fund, FS Global Credit Opportunities Fund—A, FS Global Credit Opportunities Fund—D, FS Global Credit Opportunities Fund—ADV, FS Global Credit Opportunities Fund—T, FS Global Credit Opportunities Fund—T2, FS Energy Total Return Fund, FS Credit Real Estate Income Trust, Inc., FS Credit Income Fund and FS Multi-Strategy Alternatives Fund.
| | | | | | | | | Name of Director
| | Dollar Range of
Equity Securities
Beneficially
Owned in the
Company(1)(2) | | | Aggregate
Dollar Range of
Equity Securities
in the Fund
Complex(1)(2) | | Interested Directors:
| | | | | | | | | Michael C. Forman
| | | Over $100,000 | | | | Over $100,000 | | David J. Adelman
| | | Over $100,000 | | | | Over $100,000 | | Michael J. Heller
| | | Over $100,000 | | | | Over $100,000 | | Thomas J. Gravina
| | | Over $100,000 | | | | Over $100,000 | | | | | Independent Directors:
| | | | | | | | | Gregory P. Chandler
| | | Over $100,000 | | | | Over $100,000 | | Barry H. Frank
| | | Over $100,000 | | | | Over $100,000 | | Michael J. Hagan
| | | Over $100,000 | | | | Over $100,000 | | Jeffrey K. Harrow
| | | Over $100,000 | | | | Over $100,000 | | Philip E. Hughes, Jr.
| | | $10,001-$50,000 | | | | Over $100,000 | | Pedro A. Ramos
| | | $10,001-$50,000 | | | | $10,001-$50,000 | | Joseph P. Ujobai
| | | None | | | | Over $100,000 | |
(1) | Beneficial ownership determined in accordance with Rule16a-1(a)(2) promulgated under the Exchange Act. |
(2) | The dollar range of equity securities of FSIC beneficially owned by directors of the Company, if applicable, is calculated by multiplying the closing price of its shares as reported on the New York Stock Exchange, LLC on January 18, 2018, times the number of shares beneficially owned. The dollar range of equity securities of the other funds in the Fund Complex, including the Company, is calculated in accordance with the applicable account statement rules of The Financial Industry Regulatory Authority, Inc. |
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HOUSEHOLDING
The Company combines mailings for multiple accounts going to a single household by delivering to that address, in a single envelope, a copy of the documents (annual reports, prospectuses, proxy statements, etc.) or other communications for all accounts who have consented or are deemed to have consented to receiving such communications in such manner in accordance with the rules promulgated by the SEC. If you do not want the Company to continue consolidating your Company mailings and would prefer to receive separate mailings of Company communications, please contact the Company’s transfer agent, DST Systems, Inc. at (877)628-8575 or by mail to FS Investment Corporation, c/o DST Systems, Inc., 430 W. 7th Street, Kansas City, Missouri 64105-1594.
INFORMATION INCORPORATED BY REFERENCE
Statements contained in this proxy statement, or in any document incorporated by reference into this proxy statement, regarding the contents of any contract or other document, are not necessarily complete and each such statement is qualified by reference to the more complete information contained in that contract or other document filed as an exhibit with the SEC. The SEC allows the Company to “incorporate by reference” into this proxy statement documents the Company files with the SEC. This means that the Company can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that the Company files with the SEC will update and supersede that information. The Company incorporates by reference the documents listed below and any documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement and before the date of the Special Meeting.
Annual Report on Form10-K for the fiscal year ended December 31, 2016 (filed on March 1, 2017);
Quarterly Reports on Form10-Q for the fiscal quarters ended March 31, 2017 (filed on May 10, 2017), June 30, 2017 (filed on August 9, 2017) and September 30, 2017 (filed on November 9, 2017);
Current Reports on Form8-K filed with the SEC on January 1, 2017, March 1, 2017, March 21, 2017, April 12, 2017, May 10, 2017, June 14, 2017, July 12, 2017, July 24, 2017, July 27, 2017, August 9, 2017, October 31, 2017, November 9, 2017 and December 11, 2017;
Definitive Proxy Statement on Schedule 14A for the Company’s 2017 Annual Meeting (filed on April 28, 2017);
Definitive Additional Materials on Schedule 14A (filed on December 11, 2017);
Definitive Additional Materials on Schedule 14A (filed on December 12, 2017); and
Definitive Additional Materials on Schedule 14A (filed on January 10, 2018).
Notwithstanding the foregoing, information furnished under Item 2.02 or 7.01 of any Current Report on Form8-K, including the related exhibits, is not incorporated by reference into this proxy statement.
Shareholders may obtain a free copy of this proxy statement, as well as any filing incorporated by reference herein, without charge, at the SEC’s website (www.sec.gov). The Company will also furnish, without charge, a copy of this proxy statement, as well as any filing incorporated by reference herein, to any shareholder upon request. Requests should be directed to the Company at (844)358-7276 and select Option 1 or by mail to FS Investment Corporation, 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112.
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SUBMISSION OF STOCKHOLDER PROPOSALS
The Company expects
| column, the table above assumes total debt outstanding of $8.3 billion (the maximum amount of borrowings that the 2018 annual meeting of stockholders (the “2018 Annual Meeting”) willcould be held in June 2018, but the exact date, time, and location of such meeting have yet to be determined. A stockholder who intends to present a proposal at the 2018 Annual Meeting, including nomination of a director, must have submitted the proposal in writing to the Secretary of the Company at FS Investment Corporation, 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, and the Company must have received the proposal no later than December 29, 2017, in order for the proposal to have been considered for inclusion in the Company’s proxy statement for that meeting.Notices of intention to present proposals, including nomination of a director, at the 2018 Annual Meeting should have been addressed to the Secretary of the Company and should have been receivedincurred by the Company between November 29, 2017,under the proposed 150% asset coverage requirement as of December 31, 2018).
|
(7) | “Other Expenses” include accounting, legal and 5:00 p.m., Eastern Time, on December 29, 2017. Inauditing fees and excise and state taxes, as well as the event that the datereimbursement of the 2018 Annual Meeting is advanced or delayed by more than 30 days from the first anniversarycompensation of administrative personnel and fees payable to the Company’s 2017 annual meeting of stockholders, which was held on June 14, 2017, a notice by the stockholder to be timely must be so delivereddirectors who do not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such annual meeting is first made. The submission of a proposal does not guarantee its inclusionalso serve in the Company’s proxy statement or presentation at a meeting unless certain securities law requirements are met. The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with the foregoing or other applicable requirements. 37
INVESTMENT ADVISER AND ADMINISTRATOR ANDSUB-ADMINISTRATOR
Set forth below are the names and addresses of the Company’s investment adviser and administrator andsub-administrator:
| | | | | INVESTMENT ADVISER
AND ADMINISTRATOR
| | INVESTMENT
SUB-ADVISER
| | SUB-ADMINISTRATOR
| FB Income Advisor, LLC
201 Rouse Boulevard
Philadelphia, PA 19112
| | GSO / Blackstone Debt Funds Management LLC
345 Park Avenue
New York, NY 10154
| | State Street Bank and
Trust Company
One Lincoln Street, Mailstop SUM 0703
Boston, MA 02111
|
PLEASE VOTE PROMPTLY BY SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ACCOMPANYING POSTAGE PAID RETURN ENVELOPE OR BY FOLLOWING THE INSTRUCTIONS PRINTED ON THE PROXY CARD, WHICH PROVIDES INSTRUCTIONS FOR AUTHORIZING A PROXY BY TELEPHONE OR THROUGH THE INTERNET. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
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EXHIBIT A
INVESTMENT ADVISORY
AGREEMENT
BETWEEN
FS INVESTMENT CORPORATION
AND
FB INCOME ADVISOR, LLC
This Investment Advisory Agreement (this “Agreement”) made this [●] day of [●], 2018, by and between FS INVESTMENT CORPORATION, a Maryland corporation (the “Company”), and FB INCOME ADVISOR, LLC, a Delaware limited liability company (the “Adviser”).
WHEREAS, the Company is anon-diversified,closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
WHEREAS, the Adviser is an investment adviser that has registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”);
WHEREAS, the Company desires to retain the Adviser to furnish investment advisory services (the “Investment Advisory Services”) to the Company on the terms and conditions hereinafter set forth, and the Adviser wishes to be retained to provide such services; and
WHEREAS, the Company is simultaneously entering into an Investment Advisory Agreement with KKR CREDIT ADVISORS (US) LLC (the “Co-Adviser”), dated as of the date hereof (the “InvestmentCo-Advisory Agreement”), pursuant to which theCo-Adviser will, as aco-adviser with the Adviser, furnish investment advisory services to the Corporation on the terms and conditions identical to those set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereby agree as follows:
(a)Retention of the Adviser. The Company hereby appoints the Adviser to act asco-adviser to the Company and to manage, in coordination with theCo-Adviser, the investment and reinvestment of the assets of the Company, subject to the supervision of the Board of Directors of the Company (the “Board”), for the period and upon the terms herein set forth, in accordance with:
(i) the investment objectives, policies and restrictions that are set forth in the Company’s filings with the Securities and Exchange Commission (the “SEC”), as supplemented, amended or superseded from time to time;
(ii) all other applicable federal and state laws, rules and regulations, and the Company’s articles of amendment and restatement (as may be amended from time to time, the “Articles”) and bylaws (as may be amended from time to time); and
(iii) such investment policies, directives and regulatory restrictions as the Company may from time to time establish or issue and communicate to the Adviser in writing.
(b)Responsibilities of the Adviser. Without limiting the generality of the foregoing, the Adviser shall, in coordination with theCo-Adviser, during the term and subject to the provisions of this Agreement:
(i) determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes;
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(ii) identify, evaluate and negotiate the structure of the investments made by the Company;
(iii) execute, monitor and service the Company’s investments;
(iv) place orders with respect to, and arrange for, any investment by the Company;
(v) determine the securities and other assets that the Company shall purchase, retain, or sell;
(vi) perform due diligence on prospective portfolio companies; and
(vii) provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.
The Company acknowledges that the Adviser andCo-Adviser, may from time to time, designate one or the other as being primarily responsible for certain investments. The Adviser shall have no obligation hereunder to supervise theCo-Adviser’s provision of services under the InvestmentCo-Advisory Agreement.
(c)Power and Authority. To facilitate the Adviser’s performance of these undertakings, but subject to the restrictions contained herein, the Company hereby delegates to the Adviser (which power and authority may be delegated by the Adviser to one or moreSub-Advisers (as defined below)), and the Adviser hereby accepts, the power and authority to act on behalf of the Company, in coordination with theCo-Adviser, to effectuate investment decisionsexecutive officer capacity for the Company includingor the negotiation, execution and deliveryAdvisor. The amount presented in the table reflects actual amounts incurred during the year ended December 31, 2018.
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(8) | Stockholders indirectly bear the expenses of all documents relating tounderlying funds or other investment vehicles in which the Company’s investments and the placing of orders for other purchaseCompany invests that (1) are investment companies or sale transactions on behalf(2) would be investment companies under section 3(a) of the Company. In1940 Act but for the eventexceptions to that the Company determines to acquire debt or other financing (or to refinance existing debt or other financing), the Adviser,definition provided for in coordination with theCo-Adviser, shall seek to arrange for such financing on the Company’s behalf, subject to the oversightsections 3(c)(1) and approval3(c)(7) of the Board. If it is necessary or appropriate for the Adviser to make investments on behalf of the Company through one or more special purpose vehicles, the Adviser, in coordination with theCo-Adviser, shall have authority to create or arrange for the creation of such special purpose vehicles and to make such investments through such special purpose vehicles in accordance with applicable law. The Company also grants to the Adviser, in coordination with theCo-Adviser, power and authority to engage in all activities and transactions (and anything incidental thereto) that the Adviser, in coordination with theCo-Adviser, deems appropriate, necessary or advisable to carry out its duties pursuant to this Agreement, including the authority to provide, on behalf of the Company, significant managerial assistance to the Company’s portfolio companies to the extent required by the Investment Company Act or otherwise deemed appropriate by the Adviser, in coordination with theCo-Adviser. (d)Acceptance of Appointment. The Adviser hereby accepts such appointment and agrees during the term hereof to render the services described herein for the compensation provided herein, subject to the limitations contained herein.
(e)Sub-Advisers. The Adviser, subject to the prior written consent of theCo-Adviser, is hereby authorized to enter into one or moresub-advisory agreements (each a “Sub-Advisory Agreement”) with other investment advisers or other service providers (each, a “Sub-Adviser”) pursuant to which the Adviser may obtain the services of theSub-Adviser(s) to assist the Adviser in fulfilling its responsibilities hereunder, subject to the oversight of the Adviser and the Company. Specifically, the Adviser may retain aSub-Adviser to recommend specific securities or other investments based upon the Company’s investment objectives, policies and restrictions, and work, along with the Adviser, in sourcing, structuring, negotiating, arranging or effecting the acquisition or disposition of such investments and monitoring investments on behalf of the Company, subject to the oversight of the Adviser and the Company, with the scope of such services and oversight to be set forth in eachSub-Advisory Agreement.
(i) The Adviser and/orCo-Adviser, and not the Company, shall be responsible for any compensation payable to anySub-Adviser; provided, however, that the Adviser shall have the right to direct the Company to
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pay directly anySub-Adviser the amounts due and payable to suchSub-Adviser from1940 Act. This amount includes the fees and expenses otherwise payable toof Strategic Credit Opportunities Partners, LLC (“SCOP”), the Adviser under this Agreement.
(ii) AnySub-Advisory Agreement entered into byCompany’s joint venture. The amount shown is the Adviser shall be in accordance with the requirementsexpense ratio of the Investment Company Act, including, without limitation, the requirements relating to the Board and Company stockholder approval thereunder, and other applicable federal and state law.
(iii) AnySub-Adviser shall be subject to the same fiduciary duties imposed on the Adviser pursuant to this Agreement, the Investment Company Act and the Advisers Act, as well as other applicable federal and state law.
(f)Independent Contractor Status. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, except as expressly provided or authorized herein, shall have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company.
(g)Record Retention. Subject to review by, and the overall control of, the Board, the Adviser shall keep and preserveSCOP for the period requiredyear ended December 31, 2018 and multiplied by the Investment Company Act or the Advisers Act, as applicable, any books and records relevant to the provision of the Investment Advisory Services to the Company and shall specifically maintain all books and records with respect to the Company’s portfolio transactions and shall render to the Board such periodic and special reports as the Board may reasonably request or as may be required under applicable federal and state law, and shall make such records available for inspection by the Board and its authorized agents, at any time and from time to time during normal business hours. The Adviser agrees that all records that it maintains for the Company are the property of the Company and shall surrender promptly to the Company any such records upon the Company’s request and upon termination of this Agreement pursuant toSection 9, provided that the Adviser may retain a copy of such records. The Adviser shall have the right to retain copies, or originals where required by Rule204-2 promulgated under the Advisers Act, of such records to the extent required by applicable law.
2. | Expenses Payable by the Adviser. |
All personnel of the Adviser, when and to the extent engaged in providing the Investment Advisory Services herein, and the compensation and routine overhead expenses of such personnel allocable to such services, shall be provided and paid for by the Adviser or its affiliates and not by the Company.
3. | Compensation of the Adviser. |
The Company agrees to pay, and the Adviser agrees to accept, as compensation for the services provided by the Adviser herein, a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”) as hereinafter set forth. Any of the fees payable to the Adviser under this Agreement for any partial month or calendar quarter shall be appropriately prorated. The Adviser may agree to temporarily or permanently waive, in whole or in part, the Base Management Fee and/or the Incentive Fee. Prior to the payment of any fee to the Adviser, the Company shall obtain written instructions from the Adviser with respect to any waiver or deferral of any portion of such fees. Any portion of a deferred fee payable to the Adviser and not paid over to the Adviser with respect to any month, calendar quarter or year shall be deferred without interest and may be paid over in any such other month prior to the termination of this Agreement, as the Adviser may determine upon written notice to the Company. The base management fee and incentive fee under the InvestmentCo-Advisory Agreement are equal to the Base Management Fee and Incentive Fee payable to the Adviser hereunder.
(a)Base Management Fee. The Base Management Fee shall be calculated at an annual rate of 0.75% of the Company’s average weekly gross assets. The Base Management Fee shall be payable quarterly in arrears, and shall be calculated based on the average weekly value of the Company’s gross assets during the most recently completed calendar quarter. All or any part of the Base Management Fee not taken as to any quarter shall be deferred without interest and may be taken in such other quarter as the Adviser shall determine.
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(b)Incentive Fee. The Incentive Fee shall consist of two parts, as follows:
(i) The first part of the Incentive Fee, referred to as the “Subordinated Incentive Fee on Income,” shall be calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net InvestmentIncome” for the immediately preceding quarter. The payment of the Subordinated Incentive Fee on Income shall be subject to a quarterly hurdle rate expressed as a rate of return on the value of the Company’s holding of SCOP as of December 31, 2018, divided by the Company’s net assets as of December 31, 2018.
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Example. The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in the Company’s common stock, assuming (1) actual asset coverage (223%) as of December 31, 2018, (2) a hypothetical asset coverage ratio of 200% and (3) a hypothetical asset coverage ratio of 150%, assuming that the Company’s annual operating expenses remain at the levels set forth in the table above for the respective asset coverage ratio, except for the incentive fee based on income. Transaction expenses are not included in the following example. An investor would pay the following expenses on a $1,000 investment in the Company’s common stock: | | | | | | | | | | | | | | | | | | | 1 year | | | 3 years | | | 5 years | | | 10 years | | Based on the Actual Asset Coverage (223%) as of December 31, 2018 | | | | | | | | | | | | | | | | | Assuming a 5% annual return (none of which is subject to the incentive fee based on capital gains) | | $ | 82 | | | $ | 238 | | | $ | 384 | | | $ | 708 | | Assuming a 5% annual return resulting entirely from net realized capital gains (all of which is subject to the incentive fee based on capital gains) | | $ | 92 | | | $ | 263 | | | $ | 419 | | | $ | 755 | | Based on 200% Asset Coverage | | | | | | | | | | | | | | | | | Assuming a 5% annual return (none of which is subject to the incentive fee based on capital gains) | | $ | 92 | | | $ | 265 | | | $ | 423 | | | $ | 760 | | Assuming a 5% annual return resulting entirely from net realized capital gains (all of which is subject to the incentive fee based on capital gains) | | $ | 102 | | | $ | 289 | | | $ | 456 | | | $ | 800 | | Based on 150% Asset Coverage | | | | | | | | | | | | | | | | | Assuming a 5% annual return (none of which is subject to the incentive fee based on capital gains) | | $ | 142 | | | $ | 385 | | | $ | 582 | | | $ | 927 | | Assuming a 5% annual return resulting entirely from net realized capital gains (all of which is subject to the incentive fee based on capital gains) | | $ | 151 | | | $ | 404 | | | $ | 606 | | | $ | 945 | |
The above table is to assist you in understanding the various costs and expenses that an investor in the Company’s common stock will bear directly or indirectly. The example assumes, as required by the SEC, no subordinated incentive fee on income would be accrued and payable in any of the indicated time periods. Performance will vary and may result in a return greater or less than 5%. If the Company were to achieve sufficient returns on its investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, its expenses, and returns to its investors, would be higher. In addition, while the example assumes reinvestment of all distributions at net asset value, reinvestment of distributions under the distribution 37
reinvestment plans may occur at a price per share that differs from the then-current net asset value per share of common stock of the respective company. While the above tables assume as indicated an asset coverage ratio of 150%, the Advisor, in consultation with the Board, will determine the appropriate level of leverage for the Company based on a variety of factors. As such, even if the Leverage Proposal is approved, the Company may continue to operate with lower levels of leverage (i.e., higher asset coverage ratios). Risks Relative to the Benefits Associated With the Use of Increased Leverage The Board considered how increased leverage could increase the risks associated with investing in the Company’s common stock. For example, if the value of the Company’s assets decreases, leverage will cause the Company’s net asset value to decline more rapidly and to a greater extent than it otherwise would have without leverage or with lower leverage, increasing the risk of investing in the Company’s common stock. Similarly, any decrease in the Company’s revenue would cause its net income to decline more rapidly and to a greater extent than it would have if the Company had not borrowed or had borrowed less. In addition, the Company would have to service any additional debt that it incurs, including interest expense on debt and dividends on preferred stock that the Company may issue, as well as the fees and costs related to the entry into or amendments to debt facilities. These expenses (which would be higher than the expenses on the Company’s current borrowings due to the rising interest rate environment) would decrease net investment income, and the Company’s ability to pay such expenses will depend largely on the Company’s financial performance and will be subject to prevailing economic conditions and competitive pressures. For additional information regarding risks relating to the Company’s use of leverage, see “Risk Factors—Risks Related to Debt Financing” in the Company’s annual report on Form 10-K, filed on February 28, 2019. Since the Company already uses leverage in optimizing its investment portfolio, there are no material new types of risk associated with the ability to increase leverage, although risks to which the Company is already subject due to its use of leverage would be increased. The Board concluded that the potential benefits of increased leverage outweigh these risks. Management also discussed with the Board its plan to continue the Company’s current investment strategy and framework and ensure that the Company maintains sound risk management processes to navigate the risks associated with expanded leverage. Impact on advisory fees paid by the Company As the base management fee payable to the Advisor pursuant to the Investment Advisory Agreement is calculated at an annual rate of 1.50% of the average weekly value of the Company’s gross assets (excluding cash and cash equivalents), incurring additional leverage would increase the management fee payable to the Advisor. As such, if the Leverage Proposal is approved by the stockholders, the Company and the Advisor intend to reduce the annual base management fee payable under the Investment Advisory Agreement from 1.5% to 1.0% on all assets financed using leverage over 1.0xdebt-to-equity. If the Leverage Proposal is not approved by the stockholders, the annual base management fee will not be reduced. After giving effect to the reduction in the annual base management fee, (i) if the Company doubled the amount of its borrowings as of December 31, 2018, the base management fee would increase by 23% and (ii) if the Company doubled the amount of its maximum permitted borrowings as of December 31, 2018, the base management fee would increase by 33%, in each case because the base management fee is based on gross assets. In addition, as additional leverage would magnify positive returns, if any, on the Company’s portfolio, the Company’s net investment income may exceed the quarterly hurdle rate for the subordinated incentive fee on income payable to the Advisor pursuant to the Investment Advisory Agreement at a lower average return on the Company’s portfolio. Thus, the Board considered that, if the Company incurs additional leverage, the Advisor may receive additional incentive fees without any corresponding increase (and potentially with a decrease) in the Company’s performance. As a result, in the event that the Leverage Proposal is approved by the stockholders, aggregate fees payable to the Advisor under the Investment Advisory Agreement may increase depending on the amount of additional leverage 38
incurred, irrespective of the return on the incremental assets. The Board also noted that sourcing additional investment opportunities to deploy any additional capital will require additional time and effort on the part of the Advisor and its investment personnel. Additional Disclosure Obligations The Board also noted that the Company must comply with the following additional disclosure requirements upon approval of the application of the 150% minimum asset coverage ratio to the Company by the stockholders as set forth herein: not later than five (5) business days after the date on which the 150% minimum asset coverage ratio is approved, the Company is required to disclose such approval, and the effective date of such approval, in (1) a filing submitted to the SEC under Section 13(a) or 15(d) of the Exchange Act; and (2) a notice on the Company’s website; the Company is required to disclose, in each periodic filing required under Section 13(a) of the Exchange Act: (1) the aggregate principal amount or liquidation preference, as applicable, of the senior securities issued by the Company and the asset coverage ratio as of the date of the Company’s most recent financial statements included in that filing; (2) that the 150% minimum asset coverage ratio was approved; and (3) the effective date of such approval; and as an issuer of common stock, the Company is also required to include in each periodic filing required under Section 13(a) of the Exchange Act disclosures that are reasonably designed to ensure that the Company’s stockholders are informed of: (1) the amount of senior securities (and the associated asset coverage ratios) of the Company, determined as of the date of the most recent financial statements of the Company included in the filing; and (2) the principal risk factors associated with the senior securities described in the preceding clause, to the extent that risk is incurred by the Company. Other Considerations In addition, the Board considered that holders of any senior securities, including any additional senior securities that Company may be able to issue as a result of the reduced asset coverage requirements, will have fixed-dollar claims on the Company’s assets that are superior to the claims of the stockholders. In the case of a liquidation event, holders of these senior securities would receive proceeds to the extent of their fixed claims before any distributions are made to the stockholders, and the issuance of additional senior securities may result in fewer proceeds remaining for distribution to the stockholders if the assets purchased with the capital raise from such issuances decline in value. Conclusion Based on its consideration of each of the above factors and such other information as the Board deemed relevant, the Board concluded that the Leverage Proposal is in the best interests of the Company and the stockholders and recommended that the stockholders approve the Leverage Proposal. THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE APPROVAL OF THE APPLICATION OF THE REDUCED ASSET COVERAGE REQUIREMENTS IN SECTION 61(A)(2) OF THE 1940 ACT TO THE COMPANY. 39
PROPOSAL 3: AUTHORIZATION TO OFFER AND SELL SHARES OF COMMON STOCK BELOW NET ASSET VALUE Background The 1940 Act generally prohibits the Company, as a BDC, from offering and selling shares at a price per share, after deducting underwriting commissions and discounts, below the then-current net asset value (“NAV”) per share unless the policy and practice of doing so is approved by the Company’s stockholders within one year immediately prior to any such sales. The Company is seeking stockholder approval of the Share Issuance Proposal, which, if approved, would allow the Company to sell its Shares below NAV per Share in order to provide flexibility for future sales, which typically are undertaken quickly in response to market conditions. The Company believes that it is important to maintain consistent access to capital through the public and private equity markets to enable the Company to raise capital for the Company’s operations, including to repay outstanding indebtedness of the Company, to continue to build the Company’s investment portfolio or for other general corporate purposes, as and when the Board believes it is in the Company’s best interests and that of stockholders. The final terms of any such sales will be determined by the Board at the time of sale. Also, because the Company does not have any immediate plans to sell any Shares at a price below NAV per Share, it is impracticable to describe the transaction or transactions in which such Shares would be sold. Instead, any transaction where the Company would sell Shares, including the nature and amount of consideration that would be received by the Company at the time of sale and the use of any such consideration, will be reviewed and approved by the Board at the time of sale. If the Share Issuance Proposal is approved, the Company will not solicit further authorization from its stockholders prior to any such sale, and the authorization would be effective for Shares sold during the next 12 months following stockholder approval. This proxy statement is not an offer to sell securities of the Company. Securities may not be offered or sold in the United States absent registration with the SEC or an applicable exemption from SEC registration requirements. The Share Issuance Proposal limits the maximum number of Shares salable at a price below NAV per Share, on an aggregate basis, including any prior offerings made pursuant to this authority, to 25% of the Company’s then outstanding Shares immediately prior to each such sale. Furthermore, pursuant to this authority, there would be no limit on the discount to NAV per Share at which Shares could be sold. See below for a discussion and an example of the dilutive effect of the sale of Shares at a price below NAV per Share. The Board, including a majority of the independent directors and a majority of directors who have no financial interest in the Share Issuance Proposal, has approved the Share Issuance Proposal as in the best interests of the Company and its stockholders and recommends it to the stockholders for their approval. The Company sought and received stockholder approval for a similar proposal at the 2018 annual meeting of stockholders. This authorization will expire on December 3, 2019, the twelve month anniversary of such stockholder approval. 1940 Act Conditions for Sales at a Price below NAV per Share The Company’s ability to issue Shares at a price below NAV per Share is governed by the 1940 Act. Specifically, Section 63(2) of the 1940 Act provides that the Company may offer and sell shares at prices below the then-current NAV per share with stockholder approval, if: it is determined that any such sales would be in the best interests of the Company and its stockholders by (1) a majority of the Company’s independent directors and (2) a majority of the Company’s directors who have no financial interest in the proposal (such approvals together, a “required majority of directors”); and 40
a required majority of directors, in consultation with the underwriter or underwriters of the offering, if it is underwritten, have determined in good faith, and as of a time immediately prior to the first solicitation by or on behalf of the Company of a firm commitment to purchase shares or immediately prior to the issuance of shares, that the price at which shares are to be sold is not less than a price which closely approximates the market value for shares, less any distributing commission or discount. Without the approval of stockholders to offer and sell Shares at prices below NAV per Share, the Company would be prohibited from selling Shares to raise capital when the market price for Shares is below the then-current NAV per Share. Board Approval The Board is recommending that stockholders vote in favor of the Share Issuance Proposal. The Board has concluded that the Share Issuance Proposal is in the best interests of the Company and its stockholders. In doing so, the Board, including the independent directors, considered and evaluated various factors, including the following, as discussed more fully below: possible long-term benefits to the Company’s stockholders; and possible dilution to the Company’s NAV per Share under various hypothetical scenarios. In determining whether or not to offer and sell the Company’s Shares at a price per Share below NAV per Share, the Board has a duty to act in the Company’s best interests and that of stockholders and must comply with the other requirements of Section 63(2) of the 1940 Act. If stockholders of the Company do not approve the Share Issuance Proposal, the Board will consider and evaluate its options to determine what alternatives are in the Company’s best interests and that of the Company’s stockholders. Reasons to Offer Shares at a Price Below NAV per Share As a BDC and a regulated investment company (“RIC”) for tax purposes, the Company may want to raise capital through the sale of Shares. RICs generally must distribute substantially all of their earnings from dividends, interest and short-term gains to stockholders in order to achieve pass-through tax treatment, which prevents the Company from using those earnings to support new investments. Further, for the same reason, the Company, in order to borrow money or issue preferred stock, must maintain “asset coverage,” as defined in the 1940 Act, of at least 200%, which generally requires it to finance its investments with at least as much common equity as debt and preferred stock in the aggregate. If the Leverage Proposal is approved by the stockholders, the minimum asset coverage ratio will be reduced from 200% to 150%. Therefore, the Company endeavors to maintain consistent access to capital through the public and private equity markets to enable the Company to raise capital for the Company’s operations, including to repay outstanding indebtedness of the Company, to continue to build the Company’s investment portfolio or for other general corporate purposes, as and when the Board believes it is in the Company’s best interests and that of stockholders. The Company believes that market conditions may from time to time provide attractive opportunities to deploy capital, including at times when the Shares may be trading at a price below NAV per Share. For example, during the global financial crisis of 2008 and for several years afterward, the global capital markets experienced a period of disruption as evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, there-pricing of credit risk in the broadly syndicated credit market and the failure of certain major domestic and international financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. During that period of time, many investors sold assets in order to repay debt or meet equity redemption requirements or other obligations. This dynamic created forced selling (which could return should global markets experience future disruption 41
similar to such disruption) that negatively impacted valuations of debt securities in most markets. This negative pressure on valuations contributed to significant unrealized write-downs of debt investments of many finance companies. However, these changes in market conditions also had beneficial effects for capital providers, including more favorable pricing of risk and more creditor-friendly contractual terms. Further, although valuations had partially recovered during that period of time, additional opportunity continued to remain in the secondary market. Accordingly, for those firms that continued to have access to capital, such an environment had the potential to provide investment opportunities on more favorable terms than would otherwise have been available. The Company’s ability to take advantage of these opportunities in the future is dependent upon its access to capital. Even though the underlying performance of a particular portfolio company may not necessarily indicate impairment or its inability to repay all principal and interest in full, the volatility in the debt capital markets may negatively impact the valuations of debt investments and result in further unrealized write-downs of those debt investments. These unrealized write-downs, as well as unrealized write-downs based on the underlying performance of the Company’s portfolio companies, if any, negatively impact stockholders’ equity and the Company’s asset coverage. Failing to maintain the asset coverage ratio required by the 1940 Act could have severe negative consequences for a BDC, including the inability to pay distributions to its stockholders, breaching debt covenants and failure to qualify for tax treatment as a RIC. Although the Company does not currently expect that it will fail to maintain asset coverage of at least 200% or, if the Leverage Proposal is approved by the stockholders, at least 150%, the markets in which it operates and the general economy remain volatile and uncertain. Continued volatility in the capital markets and the resulting negative pressure on debt investment valuations could negatively impact the Company’s asset valuations, stockholders’ equity and the Company’sdebt-to-equity ratio. As noted above, market disruption has, in the past, resulted in good opportunities to invest at attractive risk-adjusted returns. However, the extreme volatility and dislocation that the capital markets experienced also materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. If these adverse market conditions return and/or worsen in the future, the Company and other companies in the financial services sector may not have access to sufficient debt and equity capital in order to take advantage of these good investment opportunities. In addition, the debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. At times Shares may trade at a discount to NAV per Share and at times Shares may trade at a market price in excess of NAV. The possibility that Shares will trade at a discount to NAV per Share or at premiums that are unsustainable over the long term is a risk separate and distinct from the risk that the Company’s NAV will decrease. It is not possible to predict whether the Shares that may be offered pursuant to the Share Issuance Proposal, if approved, will trade at, above, or below the then-current NAV per Share. Recent dislocations in the credit markets have led to significant stock market volatility, particularly with respect to the stock of financial services companies. During times of increased price volatility, Shares may trade below the Company’s NAV per Share, which is not uncommon for BDCs. As noted above, however, these periods of market volatility and dislocation created, and may create again, favorable opportunities for the Company to make investments at attractive risk-adjusted returns, including opportunities that, all else being equal, may increase NAV over the longer-term, even if financed with the issuance of Shares at a price below NAV per Share. Stockholder approval of the Share Issuance Proposal, subject to the conditions set forth in the Share Issuance Proposal, would provide the Company with the flexibility to invest in such opportunities and would enable the Company to raise capital for the Company’s operations, including to repay outstanding indebtedness of the Company and for other general corporate purposes. The Board believes that having the flexibility to issue Shares at a price below NAV per Share in certain instances is in the best interests of the Company and its stockholders and would provide added financial 42
flexibility to comply with BDC, RIC and credit facility requirements the Company and its subsidiaries may face from time to time, including the requirement to maintain the required asset coverage ratio under the 1940 Act, and would provide access to capital markets to pursue attractive investment opportunities and/or repay any outstanding indebtedness or for other corporate purposes. The flexibility to issue Shares at a price below the then-current NAV per Share could also minimize the likelihood that the Company would be required to sell assets to raise capital at prices it believed to be less than such assets’ intrinsic values. While the Company has no immediate plans to sell its Shares at a price below NAV per Share, it is seeking stockholder approval of the Share Issuance Proposal in order to maintain access to the markets if the Company determines it should sell Shares at a price below NAV per Share, which typically must be undertaken quickly. The final terms of any such sale will be determined by the Board at the time of issuance and the Shares will not include preemptive rights. Also, because the Company has no immediate plans to issue any Shares, it is impracticable to describe the transaction or transactions in which such Shares would be issued. Instead, any transaction where the Company issues such Shares, including the nature and amount of consideration that would be received by the Company at the time of issuance and the use of any such consideration, will be reviewed and approved by the Board at the time of issuance. If the Share Issuance Proposal is approved, no further authorization from the stockholders will be solicited prior to any such issuance in accordance with the terms of the Share Issuance Proposal. If approved, the authorization would be effective for securities issued during the next 12 months following stockholder approval. Trading History The Company’s Shares have been listed on the NYSE under the ticker symbol “FSK” since December 20, 2018. From April 16, 2014 to December 20, 2018, the Company’s Shares were listed on the NYSE under the ticker symbol “FSIC.” Prior to April 16, 2014 there was no public market for the Company’s Shares. The Company’s Shares have historically traded at prices both above and below the Company’s NAV per Share. It is not possible to predict whether the Company’s Shares will trade at, above or below the Company’s NAV in the future. The following table sets forth: (i) the Company’s NAV per Share as of the applicable period end, (ii) the range of high and low closing sales prices of the Company’s Shares as reported on the NYSE during the applicable period, (iii) the closing high and low sales prices of the Company’s Shares as a premium (discount) to the Company’s NAV during the appropriate period and (iv) the distribution per Share of the Company’s common stock during the applicable period. | | | | | | | | | | | | | | | | | | | | | | | | | For the Three Months Ended (unless otherwise indicated) | | Net Asset Value per Share(1) | | | Closing Sales Price | | | Premium (Discount) of High Sales Price to Net Asset Value per Share(2) | | | Premium (Discount) of Low Sales Price to Net Asset Value per Share(2) | | | Distributions per Share | | | High | | | Low | | Fiscal 2017 | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | | $ | 9.45 | | | $ | 10.80 | | | $ | 9.55 | | | | 14.29 | % | | | 1.06 | % | | $ | 0.22275 | | June 30, 2017 | | | 9.30 | | | | 9.85 | | | | 8.80 | | | | 5.91 | % | | | (5.38 | )% | | | 0.22275 | | September 30, 2017 | | | 9.43 | | | | 9.30 | | | | 8.05 | | �� | | (1.38 | )% | | | (14.63 | )% | | | 0.22275 | | December 31, 2017 | | | 9.30 | | | | 8.70 | | | | 7.35 | | | | (6.45 | )% | | | (20.97 | )% | | | 0.19000 | | Fiscal 2018 | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | | 9.16 | | | | 7.80 | | | | 7.05 | | | | (14.85 | )% | | | (23.04 | )% | | | 0.19000 | | June 30, 2018 | | | 8.87 | | | | 7.90 | | | | 7.25 | | | | (10.94 | )% | | | (18.26 | )% | | | 0.19000 | | September 30, 2018 | | | 8.64 | | | | 8.20 | | | | 7.05 | | | | (5.09 | )% | | | (18.40 | )% | | | 0.19000 | | December 31, 2018 | | | 7.84 | | | | 7.12 | | | | 5.15 | | | | (9.18 | )% | | | (34.31 | )% | | | 0.28000 | | Fiscal 2019 | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2019 | | | — | | | | 6.40 | | | | 5.25 | | | | — | | | | — | | | | — | | June 30, 2019 (through April 2, 2019) | | | — | | | | 6.18 | | | | 6.15 | | | | — | | | | — | | | | — | |
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(1) | NAV per Share is determined as of the last day in the relevant period and therefore may not reflect the net asset value per Share on the date of the high and low closing sales prices. The NAVs shown are based on outstanding Shares at the end of the most recently completed calendar quarter, of 1.75% (7.0% annualized) (the “Hurdle Rate”), subject to a “catch up” feature (as described below). For this purpose, “Pre-Incentive Feerelevant period. Net Investment Income” means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the Base Management Fee under this Agreement and the InvestmentCo-Advisory Agreement, expenses reimbursed to the Adviser under those certain Administration Agreements, each dated as of [●], 2018, by and between the Company and each of the Adviser and theCo-Adviser, as each may be amended from time to time, whereby the Adviser and theCo-Adviser, in coordination, provides administrative services necessary for the operation of the Company, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the Incentive Fee under this Agreement and the InvestmentCo-Advisory Agreement).Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments withpayment-in-kind interest and zero coupon securities), accrued income that the Companyasset value per Share has not yet received in cash.Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital lossesbeen publicly disclosed for the three months ended March 31, 2019.
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(2) | Calculated as the respective high or unrealized capital appreciation or depreciation. The calculationlow closing sale price less NAV, divided by NAV (in each case, as of the Subordinated Incentive Fee on Income for each quarter is as follows:
(A) No Subordinated Incentive Fee on Income shall be payable to the Adviser in any calendar quarter in which the Company’sPre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate;
(B) 50% of the Company’sPre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than or equal to 2.1875% in any calendar quarter (8.75% annualized) shall be payable to the Adviser. This portion of the Company’s Subordinated Incentive Fee on Income is referred to as the “catch up” and is intended to provide the Adviser with an incentive fee of 10.0% on all of the Company’sPre-Incentive Fee Net Investment Income when the Company’sPre-Incentive Fee Net Investment Income reaches 2.1875% (8.75% annualized) on net assets in any calendar quarter; and
(C) For any quarter in which the Company’sPre-Incentive Fee Net Investment Income exceeds 2.1875% (8.75% annualized) on net assets, the Subordinated Incentive Fee on Income shall equal 10.0% of the amount of the Company’sPre-Incentive Fee Net Investment Income, as the Hurdle Rate andcatch-up will have been achieved;
provided that, the Subordinated Incentive Fee on Income is subject to a cap (the “Incentive Fee Cap”)applicable period).
The Incentive Fee Cap is an amount equal to 50% of:
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As of April 2, 2019, the Company had 4,776 record holders of our common stock, which does not include beneficial owners of Shares held in “street” name by brokers and other institutions on behalf of beneficial owners. On April 2, 2019, the reported closing sales price of the Company’s Shares on the NYSE was $6.18 per Share. Conditions to the Sale of Shares below NAV per Share If stockholders approve the Share Issuance Proposal, the Company will sell Shares at a price below NAV per Share only if the following conditions are met: | (i) | 20% of the Per SharePre-Incentive Fee Return for the Current Quarter (as defined below) and the eleven quarters preceding the Current Quarter,less |
it is determined that any such sales would be in the best interests of the Company and its stockholders by a required majority of directors; | (ii) | the cumulative Per Share Incentive Fees accrued and/or payable for the eleven calendar quarters preceding the Current Quarter |
multipliedby the weighted average number of shares of common stock of the Company outstanding during the calendar quarter for which the Subordinated Incentive Fee on Income is being calculated (the “Current Quarter”)
a required majority of directors, in consultation with the underwriter or underwriters of the offering, if it is underwritten, have determined in good faith, and as of a time immediately prior to the first solicitation by or on behalf of the Company of a firm commitment to purchase Shares or immediately prior to the issuance of Shares, that the price at which Shares are to be sold is not less than a price which closely approximates the market value for Shares, less any distributing commission or discount; and the cumulative number of Shares sold pursuant to such authority does not exceed 25% of the Company’s then outstanding Shares immediately prior to each such sale. Dilution Before voting on the Share Issuance Proposal or giving proxies with regard to this matter, stockholders should consider the potentially dilutive effect on the Company’s NAV per Share as a result of the issuance of Shares at a price less than NAV per Share. Any sale of Shares by the Company at a price below NAV per Share would result in an immediate dilution to existing stockholders on a per Share basis. This dilution would include reduction in the NAV per Share as a result of the issuance of Shares at a price below NAV per Share and a proportionately greater decrease in a stockholder’s per Share interest in the earnings and assets of the Company and per Share voting interest in the Company. The Board has considered the potential dilutive effect of the issuance of Shares at a price below NAV per Share under various hypothetical scenarios and will consider again such dilutive effect when considering whether to authorize any specific issuance of Shares below NAV per Share. The 1940 Act establishes a connection between the price at which common stock is sold and NAV because, when common stock is sold at a price per share below NAV per share, the resulting increase in the number of outstanding shares of common stock is not accompanied by a proportionate increase in the net assets of the issuer. Stockholders of the Company should also consider that they will have no subscription, preferential or preemptive rights to shares authorized for issuance, and thus any future issuance of shares at a price below NAV per share would dilute a stockholder’s holdings of shares as a percentage of shares outstanding to the extent the stockholder does not purchase sufficient shares in the offering or otherwise to maintain the stockholder’s percentage interest. Further, if the stockholder does not purchase, or is unable to purchase, any shares to maintain the stockholder’s percentage interest, regardless of whether such offering is at a price above or below the then-current NAV per share, the stockholder’s voting power will be diluted. 44
The precise extent of any such dilution to the Company’s common stock cannot be estimated before the terms of a common stock offering are set. As a general proposition, however, the amount of potential dilution will increase as the size of the offering increases. Another factor that will influence the amount of dilution resulting from an offering is the amount of net proceeds that the Company receives from such offering. The Board would expect that the net proceeds to the Company will be equal to the price that investors pay per Share, less the amount of any underwriting discounts and commissions—typically approximately 95% of the market price. The following examples indicate how an offering would immediately affect the NAV per Share of the Company’s common stock based on the assumptions set forth below. The examples do not include any effects or influence on the market price for Shares due to changes in investment performance over time, distribution policy, increased trading volume or other qualitative aspects of the Shares. Examples of Dilutive Effect of the Issuance of Shares at a Price Below NAV per Share Impact on Existing Stockholders who do not Participate in the Offering Existing stockholders of the Company who do not participate, or who are not given the opportunity to participate, in an offering below NAV per Share by the Company or who do not buy additional Shares in the secondary market at the same or lower price obtained by the Company in the offering (after expenses and any underwriting discounts and commissions) face the greatest potential risks. All stockholders will experience an immediate decrease (often called dilution) in the NAV per Share of the Shares they hold. Stockholders who do not participate in the offering will also experience a disproportionately greater decrease in their participation in the Company’s earnings and assets and their voting power than stockholders who do participate in the offering. All stockholders may also experience a decline in the market price of their Shares, which often reflects, to some degree, announced or potential increases and decreases in NAV per Share. A decrease could be more pronounced as the size of the offering and level of discounts increase. The following examples illustrate the level of NAV per Share dilution that would be experienced by a nonparticipating stockholder in four different hypothetical common stock offerings of different sizes and levels of discount to NAV per Share, although it is not possible to predict the level of market price decline that may also occur. Actual sales prices and discounts may differ from the presentation below. 45
The examples assume that Entity XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current NAV and NAV per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive effect on nonparticipating stockholder A of (1) an offering of 50,000 shares (5% of the outstanding shares) at $9.50 per share after offering expenses and any underwriting discounts and commissions (a 5% discount to NAV per share); (2) an offering of 100,000 shares (10% of the outstanding shares) at $9.00 per share after offering expenses and any underwriting discounts and commissions (a 10% discount to NAV per share); and (3) an offering of 200,000 shares (20% of the outstanding shares) at $8.00 per share after offering expenses and any underwriting discounts and commissions (a 20% discount to NAV per share). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Prior to Sale Below NAV per Share | | | Example 1 5% offering at 5% Discount | | | Example 2 10% offering at 10% Discount | | | Example 3 20% offering at 20% Discount | | | Following Sale | | | % Change | | | Following Sale | | | % Change | | | Following Sale | | | % Change | | Offering Price | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Price per Share to Public | | | — | | | $ | 10.05 | | | | — | | | $ | 9.52 | | | | — | | | $ | 8.47 | | | | — | | Net Proceeds per Share to Issuer | | | — | | | $ | 9.50 | | | | — | | | $ | 9.00 | | | | — | | | $ | 8.00 | | | | — | | Decrease to NAV per Share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Shares Outstanding | | | 1,000,000 | | | | 1,050,000 | | | | 5.00 | % | | | 1,000,000 | | | | 10.00 | % | | | 1,200,000 | | | | 20.00 | % | NAV per Share | | $ | 10.00 | | | $ | 9.98 | | | | (0.20) | % | | $ | 9.91 | | | | (0.90) | % | | $ | 9.67 | | | | (3.30) | % | Dilution to Stockholder | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares Held by Stockholder A | | | 10,000 | | | | 10,000 | | | | — | | | | 10,000 | | | | — | | | | 10,000 | | | | — | | Percentage Held by Stockholder A | | | 1.00 | % | | | 0.95 | % | | | (5.00) | % | | | 0.91 | % | | | (9.00) | % | | | 0.83 | % | | | (17.00) | % | Total Asset Values | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total NAV Held by Stockholder A | | $ | 100,000 | | | $ | 99,800 | | | | (0.20) | % | | $ | 99,100 | | | | (0.90) | % | | $ | 95,700 | | | | (3.30) | % | | | | | | | | Prior to Sale Below NAV per Share | | | Example 1 5% offering at 5% Discount | | | Example 2 10% offering at 10% Discount | | | Example 3 20% offering at 20% Discount | | | Following Sale | | | % Change | | | Following Sale | | | % Change | | | Following Sale | | | % Change | | Total Investment by Stockholder A (Assumed to be $10.00 per Share) | | $ | 100,000 | | | $ | 100,000 | | | | — | | | $ | 100,000 | | | | — | | | $ | 100,000 | | | | — | | Total Dilution to Stockholder A (Total NAV Less Total Investment) | | | — | | | $ | (200) | | | | — | | | $ | (900) | | | | — | | | $ | (3,300) | | | | — | | Per Share Amounts | | | | | | | | | | | | | | | | | | | | | | | | | | | | | NAV per Share Held by Stockholder A | | | — | | | $ | 9.98 | | | | — | | | $ | 9.91 | | | | — | | | $ | 9.67 | | | | — | | Investments per Share Held by Stockholder A (Assumed to be $10.00 per Share on Shares Held Prior to Sale) | | $ | 10.00 | | | $ | 10.00 | | | | — | | | $ | 10.00 | | | | — | | | $ | 10.00 | | | | — | | Dilution per Share Held by Stockholder A (NAV per Share Less Investment per Share) | | | — | | | $ | (0.02) | | | | — | | | $ | (0.09) | | | | — | | | $ | (0.33) | | | | — | | Percentage Dilution to Stockholder A (Dilution per Share Divided by Investment per Share) | | | — | | | | — | | | | (0.20) | % | | | — | | | | (0.90) | % | | | — | | | | (3.30) | % |
Impact on Existing Stockholders who Participate in the Offering An existing stockholder of the Company who participates in an offering by the Company of Shares at a price below NAV per Share or who buys additional Shares in the secondary market at the same or lower price as obtained by the Company in an offering (after expenses and any underwriting discounts and commissions) will experience the same types of NAV per Share dilution as the nonparticipating stockholders, albeit at a lower level, to the extent they purchase less than the same percentage of the discounted offering as their interest in the Shares immediately prior to the offering. The level of NAV per Share dilution on an aggregate basis will decrease as the number of Shares such stockholders purchase increases. Existing stockholders of the Company who buy more than such percentage will experience NAV per Share dilution, but will, in contrast to existing stockholders of the Company who purchase less than their proportionate share of the offering, experience an increase (often called accretion) in NAV per share over their investment per share and will also experience a disproportionately greater 46
increase in their participation in the Company’s earnings and assets and their voting power than the Company’s increase in assets, potential earning power and voting interests due to the offering. The level of accretion will increase as the excess number of shares such stockholder purchases increases. Even a stockholder who over-participates will, however, be subject to the risk that the Company may make additional discounted offerings in the future in which such stockholder does not participate, in which case such stockholder will experience NAV per share dilution as described above in such subsequent offerings. These stockholders may also experience a decline in the market price of their shares, which often reflects, to some degree, announced or potential increases and decreases in NAV per share. Their decrease could be more pronounced as the size of the Company’s offering and level of discount to NAV per share increases. The following examples assume that Entity XYZ has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities. The current NAV and NAV per share are thus $10,000,000 and $10.00, respectively. The table below illustrates the dilutive and accretive effect in the hypothetical 20% discount offering from the prior chart for stockholder A that acquires shares equal to (1) 50% of their proportionate share of the offering (i.e., 1,000 shares, which is 0.50% of the offering of 200,000 shares rather than their 1.00% proportionate share) and (2) 150% of their proportionate share of the offering (i.e., 3,000 shares, which is 1.50% of the offering of 200,000 shares rather than their 1.00% proportionate share). The Company’s prospectus pursuant to which any offering of Shares by the Company at a price less than the then-current NAV per share is made will include a chart for its example based on the actual number of shares in such offering and the actual discount to the most recently determined NAV per share. | | | | | | | | | | | | | | | | | | | | | | | 50% Participation | | | 150% Participation | | | | | | | Prior to Sale Below NAV per Share | | | Following Sale | | | % Change | | | Following Sale | | | % Change | | Offering Price | | | | | | | | | | | | | | | | | | | | | Price per share to public | | | — | | | $ | 8.47 | | | | — | | | $ | 8.47 | | | | — | | Net proceeds per share to issuer | | | — | | | $ | 8.00 | | | | — | | | $ | 8.00 | | | | — | | Increases in shares and Decrease to NAV per share | | | | | | | | | | | | | | | | | | | | | Total shares outstanding | | | 1,000,000 | | | | 1,200,000 | | | | 20.00 | % | | | 1,200,000 | | | | 20.00 | % | NAV per share | | $ | 10.00 | | | $ | 9.67 | | | | (3.30) | % | | $ | 9.67 | | | | (3.30) | % | (Dilution)/Accretion to Participating Stockholder A | | | | | | | | | | | | | | | | | | | | | Shares held by stockholder A | | | 10,000 | | | | 11,000 | | | | 10.00 | % | | | 13,000 | | | | 30.00 | % | Percentage held by stockholder A | | | 1.0 | % | | | 0.92 | % | | | (8.00) | % | | | 1.08 | % | | | 8.00 | % | Total Asset Values | | | | | | | | | | | | | | | | | | | | | Total NAV held by stockholder A | | $ | 100,000 | | | $ | 106,370 | | | | 6.37 | % | | $ | 125,710 | | | | 25.71 | % | Total investment by stockholder A (assumed to be $10.00 per share on shares held prior to sale) | | $ | 100,000 | | | $ | 108,470 | | | | 8.47 | % | | $ | 125,410 | | | | 25.41 | % | Total (dilution)/accretion to stockholder A (total NAV less total investment) | | | — | | | | (2,100 | ) | | | — | | | $ | 300 | | | | — | | Per Share Amounts | | | | | | | | | | | | | | | | | | | | | NAV per share held by stockholder A | | | — | | | $ | 9.67 | | | | — | | | $ | 9.67 | | | | — | | Investment per share held by stockholder A (assumed to be $10.00 per share on shares held prior to sale) | | $ | 10.00 | | | $ | 9.86 | | | | (1.40) | % | | $ | 9.65 | | | | (3.50) | % | (Dilution)/accretion per share held by stockholder A (NAV per share less investment per share) | | | — | | | $ | (0.19 | ) | | | — | | | $ | 0.02 | | | | — | | Percentage (dilution)/accretion to stockholder A (dilution/ accretion per share divided by investment per share | | | — | | | | — | | | | (1.93) | % | | | — | | | | 0.21 | % |
Other Considerations In reaching its recommendation to stockholders to approve the Share Issuance Proposal, the Board considered a possible source of conflict of interest due to the fact that the proceeds from the issuance of additional Shares may increase the management fees that the Company pays to the Advisor as such fees are 47
partially based on the value of the Company’s gross assets. The Board, including the independent directors, concluded that, prior to approving any issuance of Shares below NAV per Share, it would determine that the benefits to the Company’s stockholders from increasing the Company’s capital base or from other uses would outweigh any detriment from increased management fees. Potential Investors The Company has not solicited any potential buyers of the Shares that it may elect to issue in any future offering of Shares to comply with the federal securities laws. No Shares are earmarked for management or other affiliated persons of the Company. However, members of the Company’s management and other affiliated persons may participate in an offering of Shares by the Company on the same terms as others. THE BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” THE SHARE ISSUANCE PROPOSAL. 48
SUBMISSION OF STOCKHOLDER PROPOSALS A stockholder who intends to present a proposal at the Company’s 2020 annual meeting of stockholders, including nomination of a director, must submit the proposal in writing to the Secretary of the Company at FS KKR Capital Corp., 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, and the Company must receive the proposal no later than December 31, 2019 in order for the proposal to be considered for inclusion in the Company’s proxy statement for that meeting (or if the 2020 annual meeting is held more than 30 days before or after the first anniversary of the 2019 annual meeting of stockholders, the Company must receive such proposal within a reasonable time prior to the Company beginning to print and distribute proxy materials for such meeting). Notices of intention to present proposals, including nomination of a director, at the Company’s 2020 annual meeting of stockholders should be addressed to the Secretary of the Company and should be received by the Company between December 1, 2019 and 5:00 p.m., Eastern Time, on December 31, 2019, which such dates are the 150th day and 120th day, respectively, prior to the first anniversary of the date that the Company’s proxy statement was released to stockholders for the 2019 annual meeting of stockholders. In the event that the date of the Company’s 2020 annual meeting of stockholders is advanced or delayed by more than 30 days from the first anniversary of the 2019 annual meeting of stockholders, a notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to the date of the 2020 annual meeting of stockholders and not later than 5:00 p.m., Eastern Time, on the later of the 120th day prior to the date of the 2020 annual meeting of stockholders or the tenth day following the day on which public announcement of the date of the 2020 annual meeting of stockholders is first made. The submission of a proposal does not guarantee its inclusion in the Company’s proxy statement or presentation at a meeting unless certain securities law requirements are met. The Company reserves the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with the foregoing or other applicable requirements. OTHER MATTERS TO COME BEFORE THE MEETING The Board is not aware of any matters that will be presented for action at the Annual Meeting other than the matters set forth herein. Should any other matters requiring a vote of stockholders arise, it is intended that the proxies that do not contain specific instructions to the contrary will be voted in accordance with the judgment of the persons named in the enclosed form of proxy. 49
INVESTMENT ADVISER AND ADMINISTRATOR ANDCO-ADMINISTRATOR Set forth below are the names and addresses of the Company’s investment adviser and administrator andco-administrator: | | | 4INVESTMENT ADVISER
AND ADMINISTRATOR | | CO-ADMINISTRATOR | FS/KKR Advisor, LLC 201 Rouse Boulevard Philadelphia, PA 19112 | | State Street Bank and Trust Company One Lincoln Street, Mailstop SUM 0703 Boston, MA 02111 |
PLEASE VOTE PROMPTLY BY SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE ACCOMPANYING POSTAGE PAID RETURN ENVELOPE OR BY FOLLOWING THE INSTRUCTIONS PRINTED ON THE PROXY CARD, WHICH PROVIDES INSTRUCTIONS FOR AUTHORIZING A PROXY BY TELEPHONE OR THROUGH THE INTERNET. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. 50
| | | For the foregoing purpose, the “Per SharePre-Incentive Fee ReturnFS KKR CAPITAL CORP.” for any calendar quarter is an amount equal to:
| (i) | the sum of thePre-Incentive Fee Net Investment Income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company for the for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, Base Management Fees for the calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
For the foregoing purpose, the “Per Share Incentive Fee201 Rouse Boulevard” for any calendar quarter is equal to:
| (i) | the Incentive Fee accrued and/or payable for such calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
If the Incentive Fee Cap is zero or a negative value, the Company shall pay no Subordinated Incentive Fee on Income to the Adviser for the Current Quarter.
If the Incentive Fee Cap is a positive value but is less than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Incentive Fee Cap for the Current Quarter.
If the Incentive Fee Cap is equal to or greater than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Subordinated Incentive Fee on Income for the Current Quarter.
(ii) The second part of the Incentive Fee, referred to as the “Incentive Fee on Capital GainsPHILADELPHIA, PA 19112,” shall be determined and payable in arrears as of the end of each calendar year (or upon termination of this Agreement). This fee shall equal 10.0% of the Company’s incentive fee capital gains, which shall equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less 50% of the aggregate amount of any previously paid capital gain incentive fees.
| | 4. | Covenants of the Adviser. |
The Adviser is registered as an investment adviser under the Advisers Act and covenants that it will maintain such registration. The Adviser agrees that its activities will at all times be in compliance in all material respects with all applicable federal and state laws governing its operations and investments.
The Adviser, in coordination with theCo-Adviser, is hereby authorized, to the fullest extent now or hereafter permitted by law, to cause the Company to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged for effecting that transaction, if the Adviser, in coordination with theCo-Adviser, determines in good faith, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities, that such amount of commission is reasonable in relation to the value of the brokerage and/or research services provided by such member, broker or dealer, viewed in terms of either that particular transaction or its overall responsibilities with respect to the Company’s portfolio, and is consistent with the Adviser’s andCo-Adviser’s duty to seek the best execution on behalf of the Company.![LOGO](https://files.docoh.com/DEF 14A/0001193125-19-115023/g712174pclogo.jpg)
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6. | Other Activities of the Adviser. |
The services provided byUse the AdviserInternet to the Company are not exclusive, and the Adviser may engage in any other business or render similar or different services to others including, without limitation, the direct or indirect sponsorship or management of other investment based accounts or commingled pools of capital, however structured, having investment objectives similar to those of the Company, so long as its services to the Company hereunder are not impaired thereby, and nothing in this Agreement shall limit or restrict the right of any manager, partner, member (including its members and the owners of its members), officer or employee of the Adviser to engage in any other business or to devote his or her time and attention in part to any other business, whether of a similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including fees for serving as a director of, or providing consulting services to, one or more of the Company’s portfolio companies, subject to applicable law). The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder. It is understood that directors, officers, employees and stockholders of the Company are or may become interested in the Adviser and its affiliates, as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors, officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly interested in the Company as stockholders or otherwise.
7. | Responsibility of Dual Directors, Officers and/or Employees. |
If any person who is a manager, partner, member, officer or employee of the Adviser is or becomes a director, officer and/or employee of the Company and acts as such in any business of the Company, then such manager, partner, member, officer and/or employee of the Adviser shall be deemed to be acting in such capacity solely for the Company, and not as a manager, partner, member, officer or employee of the Adviser or under the control or direction of the Adviser, even if paid by the Adviser.
The Adviser and anySub-Adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the Investment Company Act) and any other person or entity affiliated with, or acting on behalf of, the Adviser orSub-Adviser) (each, an “Indemnified Party” and, collectively, the “Indemnified Parties”), shall not be liable to the Company for any action taken or omitted to be taken by any such Indemnified Party in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company shall indemnify, defend and protect the Indemnified Parties (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) (“Losses”) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Indemnified Parties’ duties or obligations under this Agreement, anySub-Advisory Agreement, or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Articles, the laws of the State of Maryland, the Investment Company Act or other applicable law. Notwithstanding the preceding sentence of thisSection 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any Losses to the Company or its stockholders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Adviser’s duties or by reason of the reckless disregard of the Adviser’s duties and obligations under this Agreement (to the extent applicable, as the same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff
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thereunder). In addition, notwithstanding any of the foregoing to the contrary, the provisions of thisSection 8 shall not be construed so as to provide for the indemnification of any Indemnified Party for any liability (including liability under federal securities laws which, under certain circumstances, impose liability even on persons that act in good faith), to the extent (but only to the extent) that such indemnification would be in violation of applicable law, but shall be construed so as to effectuate the provisions of this Section 8 to the fullest extent permitted by law.
9. | Duration and Termination of Agreement. |
(a)Term. This Agreement shall remain in effect for two (2) years commencing on the date hereof, and thereafter shall continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstandingtransmit your voting securities of the Company and (ii) the vote of a majority of the Company’s directors who are not parties to this Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the Investment Company Act) of any such party, in accordance with the requirements of the Investment Company Act.
(b)Termination. This Agreement may be terminated at any time, without the payment of any penalty, upon sixty (60) days’ written notice (i) by the Company to the Adviser, (x) upon vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the Investment Company Act), or (y) by the vote of the Board, or (ii) by the Adviser to the Company. This Agreement shall automatically terminate in the event of (x) its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the Investment Company Act), or (y) the effectiveness of an Investment Advisory Agreement by and between the Company and FS/KKR Advisor, LLC. Further, notwithstanding the termination or nonrenewal of this Agreement as aforesaid, the Adviser shall be entitled to any amounts owed to it underSection 3 through the date of termination or nonrenewal, the provisions ofSection 8 of this Agreement shall remain in full force and effect, and the Adviser shall remain entitled to the benefits thereof.
(c)Payments to and Duties of Adviser Upon Termination.
(i) After the termination of this Agreement, the Adviser shall not be entitled to compensation or reimbursement for further services provided hereunder, except that it shall be entitled to receive from the Company within thirty (30) days after the effective date of such termination all unpaid reimbursements and all earned but unpaid fees payable to the Adviser prior to termination of this Agreement.
(ii) The Adviser shall promptly upon termination:
(A) Deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;
(B) Deliver to the Board all assets and documents of the Company then in custody of the Adviser; and
(C) Cooperate with the Company to provide an orderly management transition.
The Adviser, in coordination with theCo-Adviser, will exercise voting rights on any assets held in the portfolio securities of portfolio companies. The Adviser is obligated to furnish to the Company, in a timely manner, a record of all proxies voted in such form and format that complies with applicable federal statutes and regulations.
Any notice under this Agreement shall be given in writing, addressed and delivered or mailed, postage prepaid, to the other party at its principal office.
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This Agreement may be amended by mutual consent but the consent of the Company must be obtained in conformity with the requirements of the Investment Company Act.
13. | Entire Agreement; Governing Law. |
This Agreement contains the entire agreement of the parties and supersedes all prior agreements, understandings and arrangements with respect to the subject matter hereof. Notwithstanding the place where this Agreement may be executed by any of the parties hereto, this Agreement shall be construed in accordance with the laws of the State of New York. For so long as the Company is regulated as a BDC under the Investment Company Act, this Agreement shall also be construed in accordance with the applicable provisions of the Investment Company Act. In such case, to the extent the applicable laws of the State of New York, or any of the provisions herein, conflict with the provisions of the Investment Company Act, the latter shall control.
If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof.
This Agreement may be executed in counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart.
16. | Third Party Beneficiaries. |
Except for anySub-Adviser (with respect toSection 8) and any Indemnified Party, suchSub-Adviser and the Indemnified Parties each being an intended beneficiary of this Agreement, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein express or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any legal or equitable rights hereunder.
The provisions ofSections 8,9(b),9(c),13,16 and this Section 17 shall survive termination of this Agreement.
Subject to the requirements of Rule17d-1(d)(7) under the Investment Company Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar insurance policy, which may name the Adviser,Co-Adviser and anySub-Adviser each as an additional insured party (each an “Additional Insured Party” and collectively the “Additional Insured Parties”). Such insurance policy shall include reasonable coverage from a reputable insurer. The Company shall make all premium payments required to maintain such policy in full force and effect;provided,however, each Additional Insured Party, if any, shall pay to the Company, in advance of the due date of such premium, its allocated share of the premium. Irrespective of whether the Adviser,Co-Adviser and anySub-Adviser is a named Additional Insured Party on such policy, the Company shall provide the Adviser,Co-Adviser and anySub-Adviser with written notice upon receipt of any notice of: (a) any default under such policy; (b) any pending or threatened termination, cancellation or
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non-renewal of such policy or (c) any coverage limitation or reduction with respect to such policy. The foregoing provisions of thisSection 17 notwithstanding, the Company shall not be required to acquire or maintain any insurance policy to the extent that the same is not available upon commercially reasonable pricing terms or at all, as determined in good faith by the required majority (as defined in Section 57(o) of the Investment Company Act) of the Board.
The Adviser conducts its investment advisory business under, and owns all rights to, the trademark “FB Income Advisor” and the “FB Income Advisor” design (collectively, the “Brand”). In connection with the Company’s (a) public filings; (b) requests for information from state and federal regulators; (c) offering materials and advertising materials; and (d) investor communications, the Company may state in such materials that investment advisory services are being provided by the Adviser to the Company under the terms of this Agreement. The Adviser hereby grants anon-exclusive,non-transferable,non-sublicensable and royalty-free license (the “License”) to the Company for the use of the Brand solely as permitted in the foregoing sentence. Prior to using the Brand in any manner, the Company shall submit all proposed uses to the Adviser for prior written approval solely to the extent the Company’s use of the Brand or any combination or derivation thereof has materially changed from the Company’s use of the Brand previously approved by the Adviser. The Adviser reserves the right to terminate the License immediately upon written notice for any reason, including if the usage is not in compliance with its standards and policies. Notwithstanding the foregoing, the term of the License granted under thisSection 19 shall be for the term of this Agreement only, including renewals and extensions, and the right to use the Brand as provided herein shall terminate immediately upon the termination of this Agreement. The Company agrees that the Adviser is the sole owner of the Brand, and any and all goodwill in the Brand arising from the Company’s use shall inure solely to the benefit of the Adviser. Without limiting the foregoing, the License shall have no effect on the Company’s ownership rights of the works within which the Brand shall be used.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date above written.
| | | FS INVESTMENT CORPORATION | | | By: | | | | | Name: | | | Title: | | FB INCOME ADVISOR, LLC | | | By: | | | | | Name: | | | Title: |
[Signature Page to Investment Advisory Agreement]
EXHIBIT B
INVESTMENT ADVISORY
AGREEMENT
BETWEEN
FS INVESTMENT CORPORATION
AND
KKR CREDIT ADVISORS (US) LLC
This Investment Advisory Agreement (this “Agreement”) made this [●] day of [●], 2018, by and between FS INVESTMENT CORPORATION, a Maryland corporation (the “Company”), and KKR CREDIT ADVISORS (US) LLC, a Delaware limited liability company (the “Adviser”).
WHEREAS, the Company is anon-diversified,closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
WHEREAS, the Adviser is an investment adviser that has registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”);
WHEREAS, the Company desires to retain the Adviser to furnish investment advisory services (the “Investment Advisory Services”) to the Company on the terms and conditions hereinafter set forth, and the Adviser wishes to be retained to provide such services; and
WHEREAS, the Company is simultaneously entering into an Investment Advisory Agreement with FB INCOME ADVISOR, LLC (the “Co-Adviser”), dated as of the date hereof (the “InvestmentCo-Advisory Agreement”), pursuant to which theCo-Adviser will, as aco-adviser with the Adviser, furnish investment advisory services to the Corporation on the terms and conditions identical to those set forth herein.
NOW, THEREFORE, in consideration of the premisesinstructions and for other good and valuable consideration, the parties hereby agree as follows:
(a)Retention of the Adviser. The Company hereby appoints the Adviser to act asco-adviser to the Company and to manage, in coordination with theCo-Adviser, the investment and reinvestment of the assets of the Company, subject to the supervision of the Board of Directors of the Company (the “Board”), for the period and upon the terms herein set forth, in accordance with:
(i) the investment objectives, policies and restrictions that are set forth in the Company’s filings with the Securities and Exchange Commission (the “SEC”), as supplemented, amended or superseded from time to time;
(ii) all other applicable federal and state laws, rules and regulations, and the Company’s articles of amendment and restatement (as may be amended from time to time, the “Articles”) and bylaws (as may be amended from time to time); and
(iii) such investment policies, directives and regulatory restrictions as the Company may from time to time establish or issue and communicate to the Adviser in writing.
(b)Responsibilities of the Adviser. Without limiting the generality of the foregoing, the Adviser shall, in coordination with theCo-Adviser, during the term and subject to the provisions of this Agreement:
(i) determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes;
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(ii) identify, evaluate and negotiate the structure of the investments made by the Company;
(iii) execute, monitor and service the Company’s investments;
(iv) place orders with respect to, and arrange for, any investment by the Company;
(v) determine the securities and other assets that the Company shall purchase, retain, or sell;
(vi) perform due diligence on prospective portfolio companies; and
(vii) provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.
The Company acknowledges that the Adviser andCo-Adviser, may from time to time, designate one or the other as being primarily responsible for certain investments. The Adviser shall have no obligation hereunder to supervise theCo-Adviser’s provision of services under the InvestmentCo-Advisory Agreement.
(c)Power and Authority. To facilitate the Adviser’s performance of these undertakings, but subject to the restrictions contained herein, the Company hereby delegates to the Adviser (which power and authority may be delegated by the Adviser to one or moreSub-Advisers (as defined below)), and the Adviser hereby accepts, the power and authority to act on behalf of the Company, in coordination with theCo-Adviser, to effectuate investment decisions for the Company, including the negotiation, execution andelectronic delivery of all documents relating toinformation up until 11:59 P.M. Eastern Time the Company’s investments andday before the placing of orders for other purchase or sale transactions on behalf of the Company. In the event that the Company determines to acquire debt or other financing (or to refinance existing debt or other financing), the Adviser, in coordination with theCo-Adviser,cut-off shall seek to arrange for such financing on the Company’s behalf, subject to the oversight and approval of the Board. If it is necessary or appropriate for the Adviser to make investments on behalf of the Company through one or more special purpose vehicles, the Adviser, in coordination with theCo-Adviser, shall have authority to create or arrange for the creation of such special purpose vehicles and to make such investments through such special purpose vehicles in accordance with applicable law. The Company also grants to the Adviser, in coordination with theCo-Adviser, power and authority to engage in all activities and transactions (and anything incidental thereto) that the Adviser, in coordination with theCo-Adviser, deems appropriate, necessary or advisable to carry out its duties pursuant to this Agreement, including the authority to provide, on behalf of the Company, significant managerial assistance to the Company’s portfolio companies to the extent required by the Investment Company Act or otherwise deemed appropriate by the Adviser, in coordination with theCo-Adviser.
(d)Acceptance of Appointment. The Adviser hereby accepts such appointment and agrees during the term hereof to render the services described herein for the compensation provided herein, subject to the limitations contained herein.
(e)Sub-Advisers. The Adviser, subject to the prior written consent of theCo-Adviser, is hereby authorized to enter into one or moresub-advisory agreements (each a “Sub-Advisory Agreement”) with other investment advisers or other service providers (each, a “Sub-Adviser”) pursuant to which the Adviser may obtain the services of theSub-Adviser(s) to assist the Adviser in fulfilling its responsibilities hereunder, subject to the oversight of the Adviser and the Company. Specifically, the Adviser may retain aSub-Adviser to recommend specific securities or other investments based upon the Company’s investment objectives, policies and restrictions, and work, along with the Adviser, in sourcing, structuring, negotiating, arranging or effecting the acquisition or disposition of such investments and monitoring investments on behalf of the Company, subject to the oversight of the Adviser and the Company, with the scope of such services and oversight to be set forth in eachSub-Advisory Agreement.
(i) The Adviser and/orCo-Adviser, and not the Company, shall be responsible for any compensation payable to anySub-Adviser; provided, however, that the Adviser shall have the right to direct the Company to
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pay directly anySub-Adviser the amounts due and payable to suchSub-Adviser from the fees and expenses otherwise payable to the Adviser under this Agreement.
(ii) AnySub-Advisory Agreement entered into by the Adviser shall be in accordance with the requirements of the Investment Company Act, including, without limitation, the requirements relating to the Board and Company stockholder approval thereunder, and other applicable federal and state law.
(iii) AnySub-Adviser shall be subject to the same fiduciary duties imposed on the Adviser pursuant to this Agreement, the Investment Company Act and the Advisers Act, as well as other applicable federal and state law.
(f)Independent Contractor Status. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, except as expressly provided or authorized herein, shall have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company.
(g)Record Retention. Subject to review by, and the overall control of, the Board, the Adviser shall keep and preserve for the period required by the Investment Company Act or the Advisers Act, as applicable, any books and records relevant to the provision of the Investment Advisory Services to the Company and shall specifically maintain all books and records with respect to the Company’s portfolio transactions and shall render to the Board such periodic and special reports as the Board may reasonably request or as may be required under applicable federal and state law, and shall make such records available for inspection by the Board and its authorized agents, at any time and from time to time during normal business hours. The Adviser agrees that all records that it maintains for the Company are the property of the Company and shall surrender promptly to the Company any such records upon the Company’s request and upon termination of this Agreement pursuant toSection 9, provided that the Adviser may retain a copy of such records. The Adviser shall have the right to retain copies, or originals where required by Rule204-2 promulgated under the Advisers Act, of such records to the extent required by applicable law.
2. | Expenses Payable by the Adviser. |
All personnel of the Adviser, when and to the extent engaged in providing the Investment Advisory Services herein, and the compensation and routine overhead expenses of such personnel allocable to such services, shall be provided and paid for by the Adviser or its affiliates and not by the Company.
3. | Compensation of the Adviser. |
The Company agrees to pay, and the Adviser agrees to accept, as compensation for the services provided by the Adviser herein, a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”) as hereinafter set forth. Any of the fees payable to the Adviser under this Agreement for any partial month or calendar quarter shall be appropriately prorated. The Adviser may agree to temporarily or permanently waive, in whole or in part, the Base Management Fee and/or the Incentive Fee. Prior to the payment of any fee to the Adviser, the Company shall obtain written instructions from the Adviser with respect to any waiver or deferral of any portion of such fees. Any portion of a deferred fee payable to the Adviser and not paid over to the Adviser with respect to any month, calendar quarter or year shall be deferred without interest and may be paid over in any such other month prior to the termination of this Agreement, as the Adviser may determine upon written notice to the Company. The base management fee and incentive fee under the InvestmentCo-Advisory Agreement are equal to the Base Management Fee and Incentive Fee payable to the Adviser hereunder.
(a)Base Management Fee. The Base Management Fee shall be calculated at an annual rate of 0.75% of the Company’s average weekly gross assets. The Base Management Fee shall be payable quarterly in arrears, and shall be calculated based on the average weekly value of the Company’s gross assets during the most recently completed calendar quarter. All or any part of the Base Management Fee not taken as to any quarter shall be deferred without interest and may be taken in such other quarter as the Adviser shall determine.
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(b)Incentive Fee. The Incentive Fee shall consist of two parts, as follows:
(i) The first part of the Incentive Fee, referred to as the “Subordinated Incentive Fee on Income,” shall be calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net InvestmentIncome” for the immediately preceding quarter. The payment of the Subordinated Incentive Fee on Income shall be subject to a quarterly hurdle rate expressed as a rate of return on the value of the Company’s net assets at the end of the most recently completed calendar quarter, of 1.75% (7.0% annualized) (the “Hurdle Rate”), subject to a “catch up” feature (as described below).
For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the Base Management Fee under this Agreement and the InvestmentCo-Advisory Agreement, expenses reimbursed to the Adviser under those certain Administration Agreements, each dated as of [●], 2018, by and between the Company and each of the Adviser and theCo-Adviser, as each may be amended from time to time, whereby the Adviser and theCo-Adviser, in coordination, provides administrative services necessary for the operation of the Company, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the Incentive Fee under this Agreement and the InvestmentCo-Advisory Agreement).Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments withpayment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash.Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
The calculation of the Subordinated Incentive Fee on Income for each quarter is as follows:
(A) No Subordinated Incentive Fee on Income shall be payable to the Adviser in any calendar quarter in which the Company’sPre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate;
(B) 50% of the Company’sPre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than or equal to 2.1875% in any calendar quarter (8.75% annualized) shall be payable to the Adviser. This portion of the Company’s Subordinated Incentive Fee on Income is referred to as the “catch up” and is intended to provide the Adviser with an incentive fee of 10.0% on all of the Company’sPre-Incentive Fee Net Investment Income when the Company’sPre-Incentive Fee Net Investment Income reaches 2.1875% (8.75% annualized) on net assets in any calendar quarter; and
(C) For any quarter in which the Company’sPre-Incentive Fee Net Investment Income exceeds 2.1875% (8.75% annualized) on net assets, the Subordinated Incentive Fee on Income shall equal 10.0% of the amount of the Company’sPre-Incentive Fee Net Investment Income, as the Hurdle Rate andcatch-up will have been achieved;
provided that, the Subordinated Incentive Fee on Income is subject to a cap (the “Incentive Fee Cap”).
The Incentive Fee Cap is an amount equal to 50% of:
| (i) | 20% of the Per SharePre-Incentive Fee Return for the Current Quarter (as defined below) and the eleven quarters preceding the Current Quarter,less |
| (ii) | the cumulative Per Share Incentive Fees accrued and/or payable for the eleven calendar quarters preceding the Current Quarter |
multipliedby the weighted average number of shares of common stock of the Company outstanding during the calendar quarter for which the Subordinated Incentive Fee on Income is being calculated (the “Current Quarter”).
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For the foregoing purpose, the “Per SharePre-Incentive Fee Return” for any calendar quarter is an amount equal to:
| (i) | the sum of thePre-Incentive Fee Net Investment Income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company for the for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, Base Management Fees for the calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
For the foregoing purpose, the “Per Share Incentive Fee” for any calendar quarter is equal to:
| (i) | the Incentive Fee accrued and/or payable for such calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
If the Incentive Fee Cap is zero or a negative value, the Company shall pay no Subordinated Incentive Fee on Income to the Adviser for the Current Quarter.
If the Incentive Fee Cap is a positive value but is less than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Incentive Fee Cap for the Current Quarter.
If the Incentive Fee Cap is equal to or greater than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Subordinated Incentive Fee on Income for the Current Quarter.
(ii) The second part of the Incentive Fee, referred to as the “Incentive Fee on Capital Gains,” shall be determined and payable in arrears as of the end of each calendar year (or upon termination of this Agreement). This fee shall equal 10.0% of the Company’s incentive fee capital gains, which shall equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less 50% of the aggregate amount of any previously paid capital gain incentive fees.
4. | Covenants of the Adviser. |
The Adviser is registered as an investment adviser under the Advisers Act and covenants that it will maintain such registration. The Adviser agrees that its activities will at all times be in compliance in all material respects with all applicable federal and state laws governing its operations and investments.
The Adviser, in coordination with theCo-Adviser, is hereby authorized, to the fullest extent now or hereafter permitted by law, to cause the Company to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged for effecting that transaction, if the Adviser, in coordination with theCo-Adviser, determines in good faith, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities, that such amount of commission is reasonable in relation to the value of the brokerage and/or research services provided by such member, broker or dealer, viewed in terms of either that particular transaction or its overall responsibilities with respect to the Company’s portfolio, and is consistent with the Adviser’s andCo-Adviser’s duty to seek the best execution on behalf of the Company.
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6. | Other Activities of the Adviser. |
The services provided by the Adviser to the Company are not exclusive, and the Adviser may engage in any other business or render similar or different services to others including, without limitation, the direct or indirect sponsorship or management of other investment based accounts or commingled pools of capital, however structured, having investment objectives similar to those of the Company, so long as its services to the Company hereunder are not impaired thereby, and nothing in this Agreement shall limit or restrict the right of any manager, partner, member (including its members and the owners of its members), officer or employee of the Adviser to engage in any other business or to devote his or her time and attention in part to any other business, whether of a similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including fees for serving as a director of, or providing consulting services to, one or more of the Company’s portfolio companies, subject to applicable law). The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder. It is understood that directors, officers, employees and stockholders of the Company are or may become interested in the Adviser and its affiliates, as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors, officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly interested in the Company as stockholders or otherwise.
7. | Responsibility of Dual Directors, Officers and/or Employees. |
If any person who is a manager, partner, member, officer or employee of the Adviser is or becomes a director, officer and/or employee of the Company and acts as such in any business of the Company, then such manager, partner, member, officer and/or employee of the Adviser shall be deemed to be acting in such capacity solely for the Company, and not as a manager, partner, member, officer or employee of the Adviser or under the control or direction of the Adviser, even if paid by the Adviser.
The Adviser and anySub-Adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the Investment Company Act) and any other person or entity affiliated with, or acting on behalf of, the Adviser orSub-Adviser) (each, an “Indemnified Party” and, collectively, the “Indemnified Parties”), shall not be liable to the Company for any action taken or omitted to be taken by any such Indemnified Party in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company shall indemnify, defend and protect the Indemnified Parties (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) (“Losses”) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Indemnified Parties’ duties or obligations under this Agreement, anySub-Advisory Agreement, or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Articles, the laws of the State of Maryland, the Investment Company Act or other applicable law. Notwithstanding the preceding sentence of thisSection 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any Losses to the Company or its stockholders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Adviser’s duties or by reason of the reckless disregard of the Adviser’s duties and obligations under this Agreement (to the extent applicable, as the same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff
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thereunder). In addition, notwithstanding any of the foregoing to the contrary, the provisions of thisSection 8 shall not be construed so as to provide for the indemnification of any Indemnified Party for any liability (including liability under federal securities laws which, under certain circumstances, impose liability even on persons that act in good faith), to the extent (but only to the extent) that such indemnification would be in violation of applicable law, but shall be construed so as to effectuate the provisions of this Section 8 to the fullest extent permitted by law.
9. | Duration and Termination of Agreement. |
(a)Term. This Agreement shall remain in effect for two (2) years commencing on the date hereof, and thereafter shall continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s directors who are not parties to this Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the Investment Company Act) of any such party, in accordance with the requirements of the Investment Company Act.
(b)Termination. This Agreement may be terminated at any time, without the payment of any penalty, upon sixty (60) days’ written notice (i) by the Company to the Adviser, (x) upon vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the Investment Company Act), or (y) by the vote of the Board, or (ii) by the Adviser to the Company. This Agreement shall automatically terminate in the event of (x) its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the Investment Company Act), or (y) the effectiveness of an Investment Advisory Agreement by and between the Company and FS/KKR Advisor, LLC. Further, notwithstanding the termination or nonrenewal of this Agreement as aforesaid, the Adviser shall be entitled to any amounts owed to it underSection 3 through the date of termination or nonrenewal, the provisions ofSection 8 of this Agreement shall remain in full force and effect, and the Adviser shall remain entitled to the benefits thereof.
(c)Payments to and Duties of Adviser Upon Termination.
(i) After the termination of this Agreement, the Adviser shall not be entitled to compensation or reimbursement for further services provided hereunder, except that it shall be entitled to receive from the Company within thirty (30) days after the effective date of such termination all unpaid reimbursements and all earned but unpaid fees payable to the Adviser prior to termination of this Agreement.
(ii) The Adviser shall promptly upon termination:
(A) Deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;
(B) Deliver to the Board all assets and documents of the Company then in custody of the Adviser; and
(C) Cooperate with the Company to provide an orderly management transition.
The Adviser, in coordination with theCo-Adviser, will exercise voting rights on any assets held in the portfolio securities of portfolio companies. The Adviser is obligated to furnish to the Company, in a timely manner, a record of all proxies voted in such form and format that complies with applicable federal statutes and regulations.
Any notice under this Agreement shall be given in writing, addressed and delivered or mailed, postage prepaid, to the other party at its principal office.
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This Agreement may be amended by mutual consent but the consent of the Company must be obtained in conformity with the requirements of the Investment Company Act.
13. | Entire Agreement; Governing Law. |
This Agreement contains the entire agreement of the parties and supersedes all prior agreements, understandings and arrangements with respect to the subject matter hereof. Notwithstanding the place where this Agreement may be executed by any of the parties hereto, this Agreement shall be construed in accordance with the laws of the State of New York. For so long as the Company is regulated as a BDC under the Investment Company Act, this Agreement shall also be construed in accordance with the applicable provisions of the Investment Company Act. In such case, to the extent the applicable laws of the State of New York, or any of the provisions herein, conflict with the provisions of the Investment Company Act, the latter shall control.
If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof.
This Agreement may be executed in counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart.
16. | Third Party Beneficiaries. |
Except for anySub-Adviser (with respect toSection 8) and any Indemnified Party, suchSub-Adviser and the Indemnified Parties each being an intended beneficiary of this Agreement, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein express or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any legal or equitable rights hereunder.
The provisions ofSections 8,9(b),9(c),13,16 and this Section 17 shall survive termination of this Agreement.
Subject to the requirements of Rule17d-1(d)(7) under the Investment Company Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar insurance policy, which may name the Adviser,Co-Adviser and anySub-Adviser each as an additional insured party (each an “Additional Insured Party” and collectively the “Additional Insured Parties”). Such insurance policy shall include reasonable coverage from a reputable insurer. The Company shall make all premium payments required to maintain such policy in full force and effect;provided,however, each Additional Insured Party, if any, shall pay to the Company, in advance of the due date of such premium, its allocated share of the premium. Irrespective of whether the Adviser,Co-Adviser and anySub-Adviser is a named Additional Insured Party on such policy, the Company shall provide the Adviser,Co-Adviser and anySub-Adviser with written notice upon receipt of any notice of: (a) any default under such policy; (b) any pending or threatened termination, cancellation ornon-renewal of such policy or (c) any coverage limitation or reduction with respect to such policy. The foregoing
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provisions of thisSection 17 notwithstanding, the Company shall not be required to acquire or maintain any insurance policy to the extent that the same is not available upon commercially reasonable pricing terms or at all, as determined in good faith by the required majority (as defined in Section 57(o) of the Investment Company Act) of the Board.
The Adviser conducts its investment advisory business under, and owns all rights to, the trademark “KKR” and the “KKR” design (collectively, the “Brand”). In connection with the Company’s (a) public filings; (b) requests for information from state and federal regulators; (c) offering materials and advertising materials; and (d) investor communications, the Company may state in such materials that investment advisory services are being provided by the Adviser to the Company under the terms of this Agreement. The Adviser hereby grants anon-exclusive,non-transferable,non-sublicensable and royalty-free license (the “License”) to the Company for the use of the Brand solely as permitted in the foregoing sentence. Prior to using the Brand in any manner, the Company shall submit all proposed uses to the Adviser for prior written approval solely to the extent the Company’s use of the Brand or any combination or derivation thereof has materially changed from the Company’s use of the Brand previously approved by the Adviser. The Adviser reserves the right to terminate the License immediately upon written notice for any reason, including if the usage is not in compliance with its standards and policies. Notwithstanding the foregoing, the term of the License granted under thisSection 19 shall be for the term of this Agreement only, including renewals and extensions, and the right to use the Brand as provided herein shall terminate immediately upon the termination of this Agreement. The Company agrees that the Adviser is the sole owner of the Brand, and any and all goodwill in the Brand arising from the Company’s use shall inure solely to the benefit of the Adviser. Without limiting the foregoing, the License shall have no effect on the Company’s ownership rights of the works within which the Brand shall be used.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date above written.
| | | FS INVESTMENT CORPORATION | | | By: | | | | | Name: | | | Title: | | KKR CREDIT ADVISORS (US) LLC | | | By: | | | | | Name: | | | Title: |
[Signature Page to Investment Advisory Agreement]
EXHIBIT C
INVESTMENT ADVISORY
AGREEMENT
BETWEEN
FS INVESTMENT CORPORATION
AND
FS/KKR ADVISOR, LLC
This Investment Advisory Agreement (this “Agreement”) made this [●] day of [●], 2018, by and between FS INVESTMENT CORPORATION, a Maryland corporation (the “Company”), and FS/KKR ADVISOR, LLC, a Delaware limited liability company (the “Adviser”).
WHEREAS, the Company is anon-diversified,closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
WHEREAS, the Adviser is a newly organized investment adviser that intends to register as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and
WHEREAS, the Company desires to retain the Adviser to furnish investment advisory services (the “Investment Advisory Services”) to the Company on the terms and conditions hereinafter set forth, and the Adviser wishes to be retained to provide such services.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the parties hereby agree as follows:
(a)Retention of the Adviser. The Company hereby appoints the Adviser to act as an investment adviser to the Company and to manage the investment and reinvestment of the assets of the Company, subject to the supervision of the Board of Directors of the Company (the “Board”), for the period and upon the terms herein set forth, in accordance with:
(i) the investment objectives, policies and restrictions that are set forth in the Company’s filings with the Securities and Exchange Commission (the “SEC”), as supplemented, amended or superseded from time to time;
(ii) all other applicable federal and state laws, rules and regulations, and the Company’s articles of amendment and restatement (as may be amended from time to time, the “Articles”) and bylaws (as may be amended from time to time); and
(iii) such investment policies, directives and regulatory restrictions as the Company may from time to time establish or issue and communicate to the Adviser in writing.
(b)Responsibilities of the Adviser. Without limiting the generality of the foregoing, the Adviser shall, during the term and subject to the provisions of this Agreement:
(i) determine the composition and allocation of the Company’s investment portfolio, the nature and timing of any changes therein and the manner of implementing such changes;
(ii) identify, evaluate and negotiate the structure of the investments made by the Company;
(iii) execute, monitor and service the Company’s investments;
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(iv) place orders with respect to, and arrange for, any investment by the Company;
(v) determine the securities and other assets that the Company shall purchase, retain, or sell;
(vi) perform due diligence on prospective portfolio companies; and
(vii) provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.
(c)Power and Authority. To facilitate the Adviser’s performance of these undertakings, but subject to the restrictions contained herein, the Company hereby delegates to the Adviser (which power and authority may be delegated by the Adviser to one or moreSub-Advisers (as defined below)), and the Adviser hereby accepts, the power and authority to act on behalf of the Company to effectuate investment decisions for the Company, including the negotiation, execution and delivery of all documents relating to the Company’s investments and the placing of orders for other purchase or sale transactions on behalf of the Company. In the event that the Company determines to acquire debt or other financing (or to refinance existing debt or other financing), the Adviser shall seek to arrange for such financing on the Company’s behalf, subject to the oversight and approval of the Board. If it is necessary or appropriate for the Adviser to make investments on behalf of the Company through one or more special purpose vehicles, the Adviser shall have authority to create or arrange for the creation of such special purpose vehicles and to make such investments through such special purpose vehicles in accordance with applicable law. The Company also grants to the Adviser power and authority to engage in all activities and transactions (and anything incidental thereto) that the Adviser deems appropriate, necessary or advisable to carry out its duties pursuant to this Agreement, including the authority to provide, on behalf of the Company, significant managerial assistance to the Company’s portfolio companies to the extent required by the Investment Company Act or otherwise deemed appropriate by the Adviser.
(d)Acceptance of Appointment. The Adviser hereby accepts such appointment and agrees during the term hereof to render the services described herein for the compensation provided herein, subject to the limitations contained herein.
(e)Sub-Advisers. The Adviser is hereby authorized to enter into one or moresub-advisory agreements (each a “Sub-Advisory Agreement”) with other investment advisers or other service providers (each, a “Sub-Adviser”) pursuant to which the Adviser may obtain the services of theSub-Adviser(s) to assist the Adviser in fulfilling its responsibilities hereunder, subject to the oversight of the Adviser and the Company. Specifically, the Adviser may retain aSub-Adviser to recommend specific securities or other investments based upon the Company’s investment objectives, policies and restrictions, and work, along with the Adviser, in sourcing, structuring, negotiating, arranging or effecting the acquisition or disposition of such investments and monitoring investments on behalf of the Company, subject to the oversight of the Adviser and the Company, with the scope of such services and oversight to be set forth in eachSub-Advisory Agreement.
(i) The Adviser and not the Company shall be responsible for any compensation payable to anySub-Adviser; provided, however, that the Adviser shall have the right to direct the Company to pay directly anySub-Adviser the amounts due and payable to suchSub-Adviser from the fees and expenses otherwise payable to the Adviser under this Agreement.
(ii) AnySub-Advisory Agreement entered into by the Adviser shall be in accordance with the requirements of the Investment Company Act, including, without limitation, the requirements relating to the Board and Company stockholder approval thereunder, and other applicable federal and state law.
(iii) AnySub-Adviser shall be subject to the same fiduciary duties imposed on the Adviser pursuant to this Agreement, the Investment Company Act and the Advisers Act, as well as other applicable federal and state law.
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(f)Independent Contractor Status. The Adviser shall, for all purposes herein provided, be deemed to be an independent contractor and, except as expressly provided or authorized herein, shall have no authority to act for or represent the Company in any way or otherwise be deemed an agent of the Company.
(g)Record Retention. Subject to review by, and the overall control of, the Board, the Adviser shall keep and preserve for the period required by the Investment Company Act or the Advisers Act, as applicable, any books and records relevant to the provision of the Investment Advisory Services to the Company and shall specifically maintain all books and records with respect to the Company’s portfolio transactions and shall render to the Board such periodic and special reports as the Board may reasonably request or as may be required under applicable federal and state law, and shall make such records available for inspection by the Board and its authorized agents, at any time and from time to time during normal business hours. The Adviser agrees that all records that it maintains for the Company are the property of the Company and shall surrender promptly to the Company any such records upon the Company’s request and upon termination of this Agreement pursuant toSection 9, provided that the Adviser may retain a copy of such records. The Adviser shall have the right to retain copies, or originals where required by Rule204-2 promulgated under the Advisers Act, of such records to the extent required by applicable law.
2. | Expenses Payable by the Adviser. |
All personnel of the Adviser, when and to the extent engaged in providing the Investment Advisory Services herein, and the compensation and routine overhead expenses of such personnel allocable to such services, shall be provided and paid for by the Adviser or its affiliates and not by the Company.
3. | Compensation of the Adviser. |
The Company agrees to pay, and the Adviser agrees to accept, as compensation for the services provided by the Adviser herein, a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”) as hereinafter set forth. Any of the fees payable to the Adviser under this Agreement for any partial month or calendar quarter shall be appropriately prorated. The Adviser may agree to temporarily or permanently waive, in whole or in part, the Base Management Fee and/or the Incentive Fee. Prior to the payment of any fee to the Adviser, the Company shall obtain written instructions from the Adviser with respect to any waiver or deferral of any portion of such fees. Any portion of a deferred fee payable to the Adviser and not paid over to the Adviser with respect to any month, calendar quarter or year shall be deferred without interest and may be paid over in any such other month prior to the termination of this Agreement, as the Adviser may determine upon written notice to the Company.
(a)Base Management Fee. The Base Management Fee shall be calculated at an annual rate of 1.50% of the Company’s average weekly gross assets. The Base Management Fee shall be payable quarterly in arrears, and shall be calculated based on the average weekly value of the Company’s gross assets during the most recently completed calendar quarter. All or any part of the Base Management Fee not taken as to any quarter shall be deferred without interest and may be taken in such other quarter as the Adviser shall determine.
(b)Incentive Fee. The Incentive Fee shall consist of two parts, as follows:
(i) The first part of the Incentive Fee, referred to as the “Subordinated Incentive Fee on Income,” shall be calculated and payable quarterly in arrears based on the Company’s “Pre-Incentive Fee Net Investment Income” for the immediately preceding quarter. The payment of the Subordinated Incentive Fee on Income shall be subject to a quarterly hurdle rate expressed as a rate of return on the value of the Company’s net assets at the end of the most recently completed calendar quarter, of 1.75% (7.0% annualized) (the “Hurdle Rate”), subject to a “catch up” feature (as described below).
For this purpose, “Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, other than fees for providing managerial assistance, such as
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commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the Base Management Fee, expenses reimbursed to the Adviser under that certain Administration Agreement, dated as of [●], 2018, as the same may be amended from time to time, whereby the Adviser provides administrative services necessary for the operation of the Company, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the Incentive Fee).Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments withpayment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash.Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
The calculation of the Subordinated Incentive Fee on Income for each quarter is as follows:
(A) No Subordinated Incentive Fee on Income shall be payable to the Adviser in any calendar quarter in which the Company’sPre-Incentive Fee Net Investment Income does not exceed the Hurdle Rate;
(B) 100% of the Company’sPre-Incentive Fee Net Investment Income, if any, that exceeds the Hurdle Rate but is less than or equal to 2.1875% in any calendar quarter (8.75% annualized) shall be payable to the Adviser. This portion of the Company’s Subordinated Incentive Fee on Income is referred to as the “catch up” and is intended to provide the Adviser with an incentive fee of 20% on all of the Company’sPre-Incentive Fee Net Investment Income when the Company’sPre-Incentive Fee Net Investment Income reaches 2.1875% (8.75% annualized) on net assets in any calendar quarter; and
(C) For any quarter in which the Company’sPre-Incentive Fee Net Investment Income exceeds 2.1875% (8.75% annualized) on net assets, the Subordinated Incentive Fee on Income shall equal 20.0% of the amount of the Company’sPre-Incentive Fee Net Investment Income, as the Hurdle Rate andcatch-up will have been achieved;
provided that, the Subordinated Incentive Fee on Income is subject to a cap (the “Incentive Fee Cap”).
The Incentive Fee Cap is an amount equal to:
| (i) | 20% of the Per SharePre-Incentive Fee Return for the Current Quarter (as defined below) and the eleven quarters preceding the Current Quarter,less |
| (ii) | the cumulative Per Share Incentive Fees accrued and/or payable for the eleven calendar quarters preceding the Current Quarter. |
multipliedby the weighted average number of shares of common stock of the Company outstanding during the calendar quarter for which the Subordinated Incentive Fee on Income is being calculated (the “Current Quarter”).
For the foregoing purpose, the “Per SharePre-Incentive Fee Return” for any calendar quarter is an amount equal to:
| (i) | the sum of thePre-Incentive Fee Net Investment Income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of the Company’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, Base Management Fees for the calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
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For the foregoing purpose, the “Per Share Incentive Fee” for any calendar quarter is equal to:
| (i) | the Incentive Fee accrued and/or payable for such calendar quarter,divided by |
| (ii) | the weighted average number of shares of common stock of the Company outstanding during such calendar quarter. |
If the Incentive Fee Cap is zero or a negative value, the Company shall pay no Subordinated Incentive Fee on Income to the Adviser for the Current Quarter.
If the Incentive Fee Cap is a positive value but is less than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Incentive Fee Cap for the Current Quarter.
If the Incentive Fee Cap is equal to or greater than the Subordinated Incentive Fee on Income calculated in accordance withSection 3(b)(i) above, the Company shall pay the Adviser the Subordinated Incentive Fee on Income for the Current Quarter.
(ii) The second part of the Incentive Fee, referred to as the “Incentive Fee on Capital Gains,” shall be determined and payable in arrears as of the end of each calendar year (or upon termination of this Agreement). This fee shall equal 20.0% of the Company’s incentive fee capital gains, which shall equal the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
4. | Covenants of the Adviser. |
The Adviser is registered as an investment adviser under the Advisers Act and covenants that it will maintain such registration. The Adviser agrees that its activities will at all times be in compliance in all material respects with all applicable federal and state laws governing its operations and investments.
The Adviser is hereby authorized, to the fullest extent now or hereafter permitted by law, to cause the Company to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, and operational facilities of the firm and the firm’s risk and skill in positioning blocks of securities, that such amount of commission is reasonable in relation to the value of the brokerage and/or research services provided by such member, broker or dealer, viewed in terms of either that particular transaction or its overall responsibilities with respect to the Company’s portfolio, and is consistent with the Adviser’s duty to seek the best execution on behalf of the Company.
6. | Other Activities of the Adviser. |
The services provided by the Adviser to the Company are not exclusive, and the Adviser may engage in any other business or render similar or different services to others including, without limitation, the direct or indirect sponsorship or management of other investment based accounts or commingled pools of capital, however structured, having investment objectives similar to those of the Company, so long as its services to the Company hereunder are not impaired thereby, and nothing in this Agreement shall limit or restrict the right of any manager, partner, member (including its members and the owners of its members), officer or employee of the Adviser to engage in any other business or to devote his or her time and attention in part to any other business, whether of a
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similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including fees for serving as a director of, or providing consulting services to, one or more of the Company’s portfolio companies, subject to applicable law). The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder. It is understood that directors, officers, employees and stockholders of the Company are or may become interested in the Adviser and its affiliates, as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors, officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly interested in the Company as stockholders or otherwise.
7. | Responsibility of Dual Directors, Officers and/or Employees. |
If any person who is a manager, partner, member, officer or employee of the Adviser is or becomes a director, officer and/or employee of the Company and acts as such in any business of the Company, then such manager, partner, member, officer and/or employee of the Adviser shall be deemed to be acting in such capacity solely for the Company, and not as a manager, partner, member, officer or employee of the Adviser or under the control or direction of the Adviser, even if paid by the Adviser.
The Adviser and anySub-Adviser (and their officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons (as defined in the Investment Company Act) and any other person or entity affiliated with, or acting on behalf of, the Adviser orSub-Adviser) (each, an “Indemnified Party” and, collectively, the “Indemnified Parties”), shall not be liable to the Company for any action taken or omitted to be taken by any such Indemnified Party in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment adviser of the Company (except to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), and the Company shall indemnify, defend and protect the Indemnified Parties (each of whom shall be deemed a third party beneficiary hereof) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) (“Losses”) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Indemnified Parties’ duties or obligations under this Agreement, anySub-Advisory Agreement, or otherwise as an investment adviser of the Company, to the extent such Losses are not fully reimbursed by insurance, and to the extent that such indemnification would not be inconsistent with the Articles, the laws of the State of Maryland, the Investment Company Act or other applicable law. Notwithstanding the preceding sentence of thisSection 8 to the contrary, nothing contained herein shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any Losses to the Company or its stockholders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Adviser’s duties or by reason of the reckless disregard of the Adviser’s duties and obligations under this Agreement (to the extent applicable, as the same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff thereunder). In addition, notwithstanding any of the foregoing to the contrary, the provisions of thisSection 8 shall not be construed so as to provide for the indemnification of any Indemnified Party for any liability (including liability under federal securities laws which, under certain circumstances, impose liability even on persons that act in good faith), to the extent (but only to the extent) that such indemnification would be in violation of applicable law, but shall be construed so as to effectuate the provisions of thisSection 8 to the fullest extent permitted by law.
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9. | Duration and Termination of Agreement. |
(a)Term. This Agreement shall remain in effect for two (2) years commencing on the date hereof, and thereafter shall continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s directors who are not parties to this Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the Investment Company Act) of any such party, in accordance with the requirements of the Investment Company Act.
(b)Termination. This Agreement may be terminated at any time, without the payment of any penalty, upon sixty (60) days’ written notice (i) by the Company to the Adviser, (x) upon vote of a majority of the outstanding voting securities of the Company (within the meaning of Section 2(a)(42) of the Investment Company Act), or (y) by the vote of the Board, or (ii) by the Adviser to the Company. This Agreement shall automatically terminate in the event of its “assignment” (as such term is defined for purposes of Section 15(a)(4) of the Investment Company Act). Further, notwithstanding the termination or nonrenewal of this Agreement as aforesaid, the Adviser shall be entitled to any amounts owed to it underSection 3 through the date of termination or nonrenewal, the provisions ofSection 8 of this Agreement shall remain in full force and effect, and the Adviser shall remain entitled to the benefits thereof.
(c)Payments to and Duties of Adviser Upon Termination.
(i) After the termination of this Agreement, the Adviser shall not be entitled to compensation or reimbursement for further services provided hereunder, except that it shall be entitled to receive from the Company within thirty (30) days after the effective date of such termination all unpaid reimbursements and all earned but unpaid fees payable to the Adviser prior to termination of this Agreement.
(ii) The Adviser shall promptly upon termination:
(A) Deliver to the Board a full accounting, including a statement showing all payments collected by it and a statement of all money held by it, covering the period following the date of the last accounting furnished to the Board;
(B) Deliver to the Board all assets and documents of the Company then in custody of the Adviser; and
(C) Cooperate with the Company to provide an orderly management transition.
The Adviser will exercise voting rights on any assets held in the portfolio securities of portfolio companies. The Adviser is obligated to furnish to the Company, in a timely manner, a record of all proxies voted in such form and format that complies with applicable federal statutes and regulations.
Any notice under this Agreement shall be given in writing, addressed and delivered or mailed, postage prepaid, to the other party at its principal office.
This Agreement may be amended by mutual consent but the consent of the Company must be obtained in conformity with the requirements of the Investment Company Act.
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13. | Entire Agreement; Governing Law. |
This Agreement contains the entire agreement of the parties and supersedes all prior agreements, understandings and arrangements with respect to the subject matter hereof. Notwithstanding the place where this Agreement may be executed by any of the parties hereto, this Agreement shall be construed in accordance with the laws of the State of New York. For so long as the Company is regulated as a BDC under the Investment Company Act, this Agreement shall also be construed in accordance with the applicable provisions of the Investment Company Act. In such case, to the extent the applicable laws of the State of New York, or any of the provisions herein, conflict with the provisions of the Investment Company Act, the latter shall control.
If any provision of this Agreement shall be declared illegal, invalid, or unenforceable in any jurisdiction, then such provision shall be deemed to be severable from this Agreement (to the extent permitted by law) and in any event such illegality, invalidity or unenforceability shall not affect the remainder hereof.
This Agreement may be executed in counterparts, each of which shall be deemed to be an original copy and all of which together shall constitute one and the same instrument binding on all parties hereto, notwithstanding that all parties shall not have signed the same counterpart.
16. | Third Party Beneficiaries. |
Except for anySub-Adviser (with respect toSection 8) and any Indemnified Party, suchSub-Adviser and the Indemnified Parties each being an intended beneficiary of this Agreement, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein express or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any legal or equitable rights hereunder.
The provisions ofSections 8,9(b),9(c),13,16 and this Section 17 shall survive termination of this Agreement.
Subject to the requirements of Rule17d-1(d)(7) under the Investment Company Act, the Company shall acquire and maintain a directors and officers liability insurance policy or similar insurance policy, which may name the Adviser and anySub-Adviser each as an additional insured party (each an “Additional Insured Party” and collectively the “Additional Insured Parties”). Such insurance policy shall include reasonable coverage from a reputable insurer. The Company shall make all premium payments required to maintain such policy in full force and effect;provided,however, each Additional Insured Party, if any, shall pay to the Company, in advance of the due date of such premium, its allocated share of the premium. Irrespective of whether the Adviser and anySub-Adviser is a named Additional Insured Party on such policy, the Company shall provide the Adviser and anySub-Adviser with written notice upon receipt of any notice of: (a) any default under such policy; (b) any pending or threatened termination, cancellation ornon-renewal of such policy or (c) any coverage limitation or reduction with respect to such policy. The foregoing provisions of thisSection 18 notwithstanding, the Company shall not be required to acquire or maintain any insurance policy to the extent that the same is not available upon commercially reasonable pricing terms or at all, as determined in good faith by the required majority (as defined in Section 57(o) of the Investment Company Act) of the Board.
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The Adviser conducts its investment advisory business under, and owns all rights to, the trademark “FS/KKR Advisor” and the “FS/KKR Advisor” design (collectively, the “Brand”). In connection with the Company’s (a) public filings; (b) requests for information from state and federal regulators; (c) offering materials and advertising materials; and (d) investor communications, the Company may state in such materials that investment advisory services are being provided by the Adviser to the Company under the terms of this Agreement. The Adviser hereby grants anon-exclusive,non-transferable,non-sublicensable and royalty-free license (the “License”) to the Company for the use of the Brand solely as permitted in the foregoing sentence. Prior to using the Brand in any manner, the Company shall submit all proposed uses to the Adviser for prior written approval solely to the extent the Company’s use of the Brand or any combination or derivation thereof has materially changed from the Company’s use of the Brand previously approved by the Adviser. The Adviser reserves the right to terminate the License immediately upon written notice for any reason, including if the usage is not in compliance with its standards and policies. Notwithstanding the foregoing, the term of the License granted under thisSection 19 shall be for the term of this Agreement only, including renewals and extensions, and the right to use the Brand as provided herein shall terminate immediately upon the termination of this Agreement. The Company agrees that the Adviser is the sole owner of the Brand, and any and all goodwill in the Brand arising from the Company’s use shall inure solely to the benefit of the Adviser. Without limiting the foregoing, the License shall have no effect on the Company’s ownership rights of the works within which the Brand shall be used.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date above written.
| | | FS INVESTMENT CORPORATION | | | By: | | | | | Name: | | | Title: | | FS/KKR ADVISOR, LLC | | | By: | | | | | Name: | | | Title: |
[Signature Page to Investment Advisory Agreement]
| | | FS INVESTMENT CORPORATION
201 ROUSE BOULEVARD
PHILADELPHIA, PA 19112
| | ![LOGO](https://files.docoh.com/DEF 14A/0001193125-18-013488/g496196imgg01.jpg)
VOTE BY INTERNET -www.proxyvote.com or scan the QR Barcode above.
Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Time the day before the cut-off date or meeting date. Have your proxy card in hand when you access the website and follow the instructions to obtain your records and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically viae-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. GENERAL QUESTIONS 833-VOTE-FSI1-855-486-7904
VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Time the day before thecut-off date or meeting date. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. |
| | | | | TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: KEEP THIS PORTION FOR YOUR RECORDS — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — | THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. | | DETACH AND RETURN THIS PORTION ONLY |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | FS INVESTMENTKKR CAPITAL CORP. | | For CORPORATIONAll
| | Withhold All | | For All Except | | | | To withhold authority to vote for any individual nominee(s), mark “For All Except” and write the number(s) of the nominee(s) on the line below. | | | | | | | | | | | | | | | The Board of Directors recommends you vote FOR the following: | | ☐ | | ☐ | | ☐ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1. Election of Class C Directors | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Nominees: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Class C Directors: 01. Barbara Adams 02. Frederick Arnold 03. Michael C. Forman 04. Jerel A. Hopkins | | | | | | | | | | | | | | | | | | | | | | | | | | The Board of Directors recommends you vote FOR the following proposals:proposal: | | For | | Against | | | | Abstain | | | | | 2. To approve the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act of 1940, as amended, to the Company, which would permit the Company to increase the maximum amount of leverage that it is permitted to incur by reducing the asset coverage requirement applicable to the Company from 200% to 150%. | | ☐ | | ☐ | | | | ☐ | | | | | 3. To approve the proposal to allow the Company in future offerings to sell its shares below net asset value per share in order to provide flexibility for future sales. | | ☐ | | ☐ | | | | ☐ | | | | | | | | | | | 1. To approve a new investment advisory agreement, by and between the Company and FB Income Advisor, LLC (“FB Income Advisor”) (the “FB Income Advisor Investment Co-Advisory Agreement”), and a new investment advisory agreement, by and between the Company and KKR Credit Advisors (US) LLC (“KKR Credit”) (the “KKR Investment Co-Advisory Agreement” and, together with the FB Income Advisor Investment Co-Advisory Agreement, the “Investment Co-Advisory Agreements”), pursuant to which FB Income Advisor and KKR Credit will act as investment co-advisers to the Company.
| | ☐NOTE: Such other business as may properly come before the meeting or any adjournment thereof. | | ☐ | | ☐ | | | | | | | | 2. To approve a new investment advisory agreement, by and between the Company and FS/KKR Advisor, LLC, a newly- formed investment adviser jointly operated by an affiliate of Franklin Square Holdings, L.P. and KKR Credit (the “Joint Advisor”) (the “Joint Advisor Investment Advisory Agreement”), pursuant to which the Joint Advisor will act as investment adviser to the Company.
| | ☐ | | ☐ | | ☐ | | | | | | | The Investment Co-Advisory Agreements and the Joint Advisor Investment Advisory Agreement would not be in effect simultaneously. The Company ultimately intends to receive investment advisory services from the Joint Advisor pursuant to the Joint Advisor Investment Advisory Agreement. | | | | | | | | | | | | | | | Please sign exactly as your name(s) appear(s) hereon. When signing as attorney, executor, administrator, or other fiduciary, please give full title as such. Joint owners should each sign personally. All holders must sign. If a corporation or partnership, please sign in full corporate or partnership name, by authorized officer. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Signature [PLEASE SIGN WITHIN BOX] | | Date | | | | Signature (Joint Owners) | | Date | | | | | | |
Important Notice Regarding the Availability of Proxy Materials for the Special Meeting:
The Notice and Proxy Statement are available at www.proxyvote.com.www.proxyvote.com/FSK.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — | E09826-P79548 | FS INVESTMENT CORPORATIONKKR CAPITAL CORP. SpecialAnnual Meeting of Stockholders
March 26, 2018June 14, 2019
This proxy is solicited by the Board of Directors The undersigned hereby appoints Michael C. Forman and Stephen S. Sypherd and Lee M. Barnard, and each of them, as proxies of the undersigned with full power of substitution in each of them, to attend the Special2019 Annual Meeting of stockholdersStockholders of FS Investment Corporation,KKR Capital Corp., a Maryland corporation (the “Company”), to be held at 2:301:00 p.m., Eastern Time, on March 26, 2018, at the offices of the Company, locatedJune 14, 2019, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, and any adjournments or postponements thereof (the “Special“Annual Meeting”), and vote as designated on the reverse side of this proxy card all of the shares of common stock, par value $0.001 per share, of the Company (“Shares”) held of record by the undersigned as of any applicable record date. The proxy statement and the accompanying materials are being mailed on or about January 25, 2018April 29, 2019 to stockholders of record as of January 18, 2018April 22, 2019 and are available atwww.proxyvote.comwww.proxyvote.com/FSK. All properly executed proxies representing Shares received prior to the SpecialAnnual Meeting will be voted in accordance with the instructions marked thereon. If no instructions are marked,specification is made, the Shares will be voted (1) FOR the proposal to approveelect the investment advisory agreement byfollowing individuals as Class C Directors, each of whom has been nominated for election for a three year term expiring at the 2022 annual meeting of the stockholders: (a) Barbara Adams, (b) Frederick Arnold, (c) Michael C. Forman and between the Company and FB Income Advisor, and the investment advisory agreement by and between the Company and KKR Credit in Proposal 1, and(d) Jerel A. Hopkins, (2) FOR the proposal to approve the investment advisory agreement by and betweenapplication of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act of 1940, as amended, to the Company, which would permit the Company to increase the maximum amount of leverage that it is permitted to incur by reducing the asset coverage requirement applicable to the Company from 200% to 150% and (3) FOR the Joint Advisorproposal to allow the Company in Proposal 2.future offerings to sell its Shares below net asset value per Share in order to provide flexibility for future sales No. If any other business is presented at the Annual Meeting, this proxy will be voted by the proxies in their best judgment, including a motion to adjourn or postpone the Annual Meeting to another time and/or place for the purpose of soliciting additional proxies. At the present time, the board of directors of the Company knows of no other business to be presented at the SpecialAnnual Meeting.Any stockholder who has given a proxy has the right to revoke it at any time prior to its exercise. Any stockholder who executes a proxy may revoke it with respect to a proposal by attending the SpecialAnnual Meeting and voting his or her Shares in person or by submitting a letter of revocation or a later-dated proxy to the Company at the above address prior to the date of the SpecialAnnual Meeting. Continued and to be signed on reverse side |
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