(RULE 14a-101)
Information Required in Proxy Statement
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
☒
☐
☒ No fee required. ☐ Fee computed on table below per Exchange Act Rules 14a-6(i) |
(1) and 0-11.
¨
1450 Brickell Avenue, 31st Floor
Miami, Florida 33131
21, 2019
| Sincerely yours, | | | | |
| | | | | |
Stuart Aronson | |||||
Chief Executive Officer | | | | |
1450 Brickell Avenue, 31st Floor
Miami, Florida 33131
(305) 381-6999
TO BE HELD ON AUGUST 1, 2018
2019
| By Order of the Board of Directors, | | | | |
| | | | | |
| Richard Siegel Secretary | | | | |
| |||||
Miami, Florida June 21, 2019 | |||||
| | |
1450 Brickell Avenue, 31st Floor
Miami, Florida 33131
(305) 381-6999
For
2018
2019 Annual Meeting of Stockholders
To Be Held on August 1, 2018
2019
Votes Required
Approval of Application of Reduced Asset Coverage Requirements
Approval of the application of reduced asset coverage requirements under Section 61(a)(2) of the 1940 Act requires the affirmative vote of a majority of the votes cast by stockholders at the Annual Meeting in person or by proxy and entitled to vote. Stockholders may not cumulate their votes. Abstentions will not be included in determining the number of votes cast and, as a result, will have no effect on this Proposal.
1.
If a Stockholder wishes to participate in the Annual Meeting but does not wish to give a proxy by the Internet, the Stockholder may attend the Annual Meeting in person or request and submit a proxy card by following the instructions on the Notice of Internet Availability of Proxy Materials.
as amended (the “1940 Act”).
Percentage of Common Stock outstanding | ||||||||||
Name and Address | Type of Ownership | Shares Owned | Percentage | |||||||
H.I.G. Bayside Debt & LBO Fund II, L.P.(1) | Beneficial | 6,337,976 | 30.9 | % | ||||||
H.I.G. Bayside Loan Opportunity Fund II, L.P.(1) | Beneficial | 5,164,646 | 25.2 | % | ||||||
Hamilton Lane Advisors, L.L.C.(2) | Beneficial | 1,174,562 | 5.7 | % | ||||||
Stuart Aronson(3) | Beneficial | 14,000 | * | |||||||
John Bolduc(3)(4) | Beneficial | 191,975 | * | |||||||
Jay Carvell(3) | Beneficial | 15,629 | * | |||||||
Sami Mnaymneh(5)(6) | Beneficial | 11,761,988 | 57.3 | % | ||||||
Anthony Tamer(5)(7) | Beneficial | 11,752,422 | 57.2 | % | ||||||
Kevin F. Burke(3) | Beneficial | — | * | |||||||
Rick P. Frier(3) | Beneficial | — | * | |||||||
Rick D. Puckett(3)(8) | Beneficial | 18,912 | * | |||||||
G. Stacy Smith(3) | Beneficial | 30,000 | * | |||||||
Marco Collazos(3) | Beneficial | — | * | |||||||
Edward J. Giordano(3) | Beneficial | — | * | |||||||
All officers and directors as a group (9 persons) | Beneficial | 270,516 | 1.3 | % |
| | | Type of Ownership | | | Of Common Stock outstanding | | ||||||||||||
Name and Address | | | Shares Owned | | | Percentage | | ||||||||||||
H.I.G. Bayside Debt & LBO Fund II, L.P.(1) | | | | | Beneficial | | | | | | 4,507,204 | | | | | | 21.9% | | |
H.I.G. Bayside Loan Opportunity Fund II, L.P.(1) | | | | | Beneficial | | | | | | 3,672,796 | | | | | | 17.9% | | |
Hamilton Lane Advisors, L.L.C.(2) | | | | | Beneficial | | | | | | 1,075,244 | | | | | | 5.2% | | |
Stuart Aronson(3) | | | | | Beneficial | | | | | | 18,000 | | | | | | * | | |
John Bolduc(3)(4) | | | | | Beneficial | | | | | | 191,975 | | | | | | * | | |
Jay Carvell(3) | | | | | Beneficial | | | | | | 15,629 | | | | | | * | | |
Sami Mnaymneh(5)(6) | | | | | Beneficial | | | | | | 8,466,697 | | | | | | 41.2% | | |
Anthony Tamer(5)(7) | | | | | Beneficial | | | | | | 8,456,117 | | | | | | 41.2% | | |
Kevin F. Burke(3) | | | | | Beneficial | | | | | | 7,530 | | | | | | * | | |
Rick P. Frier(3) | | | | | Beneficial | | | | | | — | | | | | | * | | |
Rick D. Puckett(3)(8) | | | | | Beneficial | | | | | | 18,912 | | | | | | * | | |
G. Stacy Smith(3) | | | | | Beneficial | | | | | | — | | | | | | * | | |
Marco Collazos(3) | | | | | Beneficial | | | | | | — | | | | | | * | | |
Edward J. Giordano(3) | | | | | Beneficial | | | | | | — | | | | | | * | | |
All officers and directors as a group (9 persons) | | | | | Beneficial | | | | | | 252,046 | | | | | | 1.2% | | |
Reports
Name of Director | | | Dollar Range of Equity Securities in
| |
Independent Directors | | | | |
Kevin F. Burke | | Over $100,000 | | |
Rick P. Frier | | | — | |
Rick D. Puckett | | | Over $100,000 | |
G. Stacy Smith | | — | | |
Interested Directors | | | | |
Stuart Aronson | | | Over $100,000 | |
John Bolduc | | | Over $100,000 | |
Jay Carvell | | | Over $100,000 |
Name, Age and Address | | | Position(s) Held with the Company | | | Term of Office and Length of Time Served | | | Principal Occupation(s) | During the Past Five Years | | | Other Directorships Held by Director or Nominee for Director During the Past Five Years(2) | | |
| | | | | | | |||||||||
| | | | | |||||||||||
| |||||||||||||||
Class I and II Directors (continuing directors not up for re-election at the Annual Meeting)
| |||||||||||||
Kevin F. Burke | | | Director, Co-Chairman of the Nominating and Corporate Governance Committee | | | Class I director since 2017; term expires | | | Mr. Burke serves as a Senior Advisor to THL Credit Advisors LLC, an alternative credit investment manager for both direct lending and broadly syndicated investments through public and private vehicles, and to Churchill Asset Management LLC, a leading provider of senior and unitranche debt financing to middle market companies. Previously, from January 2016 until December 2016, Mr. Burke was a Senior Managing Director responsible for Loan Syndication, Sales and Trading at Antares Capital, a company specializing in acquisition finance for private equity firms. Prior to this position, from April 2003 until December 2015, Mr. Burke was a Senior Managing Director of GE Capital, a leading provider of debt financing to the U.S. sponsor middle market. | | | None | |
G. Stacy Smith (51) | | | Director, Co-Chairman of the Nominating and Corporate Governance Committee | | | Class I director since 2015; term expires 2022 (if re-elected) | | | Mr. Smith has served as a partner of each of Trinity Investment Group, an investment firm, and SCW Capital, LP, a hedge fund, since 2013. From 1997 through December 2012, Mr. Smith was a partner at Walker Smith Capital, a hedge fund. | | | Mr. Smith currently serves on the board of directors of Independent Bank Group, a bank holding company, to which he was elected in February 2013. He also serves on the board of directors of USD Partners LP, an energy-related logistics company, to which he was elected in October 2015. | |
Name, Age and Address(1) | | | Position(s) Held with the Company | | | Term of Office and Length of Time Served | | | Principal Occupation(s) During the Past Five Years | | | Other Directorships Held by Director or Nominee for Director During the Past Five Years(2) | | ||
Independent Directors | | | | | | | | | | | | | | ||
Rick P. Frier | | | Director, Chairman of the Compensation Committee | | | Class II director since 2016; term expires 2020 | | | Mr. Frier was | | | Mr. Frier currently serves on the board of directors of Affinion Group, Inc., a company that provides loyalty program and customer engagement solutions for other businesses, to which he was elected in November 2015. He also serves as the Chairman of the board of directors of Exal Corporation, a producer of aluminum cans, to which he was elected in December 2016. | |||
| |||||||||||||||
| | | Director, Chairman of the | | | Class | | | Until his retirement in December 2017, Mr. | | | Mr. |
| |
Name, Age and Address(1) | | | Position(s) Held with the Company | | | Term of Office and Length of Time Served | | | Principal Occupation(s) During the Past Five Years | | | Other Directorships Held by Director or Nominee for Director During the Past Five Years(2) | |
Interested Directors | | | | | | | | | | | | | |
Stuart Aronson | | | Chief Executive Officer and Director | | | Class II director since 2017; term expires 2020 | | | Mr. Aronson serves as Group Head of the U.S. direct lending platform of H.I.G. Capital, L.L.C. (“H.I.G. Capital”), a position he has held since February 2016. Prior to joining H.I.G. Capital, from July 1990 through December 2015 Mr. Aronson served as an officer of the General Electric Company and as the President and Chief Executive Officer of the U.S. Sponsor Finance business of GE Capital (“GSF”), a leading provider of debt financing to the U.S. sponsor middle market. | | | Mr. Aronson currently serves on the board of Kids in Crisis, a non-profit organization located in Greenwich, Connecticut. | |
| |||||||||||||
John Bolduc (54)(3) | | | Chairman of the Board | | | Class III director since 2012; term expires 2021 | | | Mr. Bolduc serves as an Executive Managing Director of H.I.G. Capital. | | | None | |
Jay Carvell | | | Director | | | Class II director since 2012; term expires 2020 | | | Mr. Carvell serves as a Managing Director at an investment adviser affiliated with H.I.G. Capital. Prior to joining H.I.G. Capital, Mr. Carvell was a partner at WhiteHorse Capital Partners, L.P. | | | None |
|
Mr. Burke’s experience as a senior managing director and his debt financing expertise is among the attributes that led to the conclusion that Mr. Burke should serve on the Board.
Nominating and Corporate Governance Committee
Name | | Age | | | Position | | |
Edward J. Giordano | | 48 | | | Interim Chief Financial Officer | | |
Marco Collazos | | 43 | | | Chief Compliance Officer | |
Edward J. Giordano:Giordano: Mr. Giordano has served as our interim Chief Financial Officer since August 2016. He also serves as Chief Financial Officer of H.I.G. Capital’s $10$11 billion Credit Platform, where he is responsible for the financial reporting and operations oversight for all of H.I.G.’s credit funds. Mr. Giordano has more than 1213 years of experience focused on overseeing the finance functions of credit funds. Prior to joining H.I.G. Capital in 2013, Mr. Giordano was a Managing Director and Chief Accounting Officer of Black Diamond Capital Management or BDCM,(“BDCM”), where he was responsible for the firm’s finance and operation groups overseeing all finance, accounting, tax and operational activities for BDCM and its affiliates. Previously, he was a Senior Manager in Ernst & Young’s and Arthur Andersen’s Transaction Advisory Services practices where he led teams providing financial, tax and human capital due diligence services to large private equity and strategic buyers. Prior to this, Mr. Giordano was a Senior Manager in Arthur Andersen’s audit practice where he was responsible for the audit process for regulated investment companies and companies in various other industries. Mr. Giordano earned his B.S. in Accounting from Villanova University.
Name | Aggregate Compensation from WhiteHorse Finance | Pension or Retirement Benefits Accrued as Part of Our Expenses(1) | Total Compensation from WhiteHorse Finance | |||||||||
Independent Directors | ||||||||||||
Kevin F. Burke(2) | $ | 42,875 | — | $ | 42,125 | |||||||
Rick P. Frier | 85,750 | — | 85,750 | |||||||||
Rick D. Puckett | 89,250 | — | 89,250 | |||||||||
G. Stacy Smith | 85,750 | — | 85,750 | |||||||||
Interested Directors | ||||||||||||
Stuart Aronson(2) | — | — | — | |||||||||
John Bolduc | — | — | — | |||||||||
Jay Carvell | — | — | — |
Name | | | Aggregate Compensation from WhiteHorse Finance | | | Pension or Retirement Benefits Accrued as Part of Our Expenses(1) | | | Total Compensation from WhiteHorse Finance | | |||||||||
Independent Directors | | | | | | | | | | | | | | | | | | | |
Kevin F. Burke | | | | $ | 82,750 | | | | | | — | | | | | $ | 82,750 | | |
Rick P. Frier | | | | | 85,750 | | | | | | — | | | | | | 85,750 | | |
Rick D. Puckett | | | | | 91,500 | | | | | | — | | | | | | 91,500 | | |
G. Stacy Smith | | | | | 86,500 | | | | | | — | | | | | | 86,500 | | |
Interested Directors | | | | | | | | | | | | | | | | | | | |
Stuart Aronson | | | | | — | | | | | | — | | | | | | — | | |
John Bolduc | | | | | — | | | | | | — | | | | | | — | | |
Jay Carvell | | | | | — | | | | | | — | | | | | | — | | |
The base management fee and incentive fee paid to WhiteHorse Advisers are based on the value of our investments and there may be a conflict of interest when personnel of WhiteHorse Advisers are involved in the valuation process for our portfolio investments. For the fiscal year ended December 31, 2017,2018, WhiteHorse Advisers earned a base management fee, net of fees waived, of $9.5$10.2 million and a performance-based incentive fee of $6.6$12.1 million.
Fiscal Years Ended December 31, | ||||||||
2017 | 2016 | |||||||
Audit Fees | $ | 358 | $ | 277 | ||||
Audit-Related Fees | 30 | 7 | ||||||
Tax Fees | — | — | ||||||
All Other Fees | — | — | ||||||
Total Fees | $ | 388 | $ | 284 |
| | | Fiscal Years Ended December 31, | | |||||||||
| | | 2018 | | | 2017 | | ||||||
Audit Fees | | | | $ | 380 | | | | | $ | 358 | | |
Audit-Related Fees | | | | | 50 | | | | | | 30 | | |
Tax Fees | | | | | — | | | | | | — | | |
All Other Fees | | | | | — | | | | | | — | | |
Total Fees | | | | $ | 430 | | | | | $ | 388 | | |
2017.
June 21, 2019 The Audit Committee Rick D. Puckett, Chairman Kevin F. Burke Rick P. Frier G. Stacy Smith (1) The material in this 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 |
PROPOSAL 3: APPROVAL OF APPLICATION OF REDUCED ASSET COVERAGE REQUIREMENTS TO THE COMPANY
Background and 1940 Act Requirements
The Company is a externally managed, non-diversified, closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the 1940 Act. The 1940 Act contains asset coverage requirements which limit the ability of BDCs to incur leverage, and BDCs are generally only allowed to borrow amounts by issuing debt securities or preferred stock (collectively referred to as “senior securities”) if the BDC’s asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. 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 preferred stock).
On March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was enacted into law. The SBCAA, among other things, amended Section 61(a) of the 1940 Act to add a new Section 61(a)(2) that reduces the asset coverage requirement applicable to BDCs from 200% to 150% so long as the BDC meets certain disclosure requirements and obtains certain approvals. The reduced asset coverage requirement would permit a BDC to have a debt-to-equity ratio of a maximum of 2x (i.e., $2 of debt outstanding for each $1 of equity) as compared to a maximum of 1x (i.e., $1 of debt outstanding for each $1 of equity) under the 200% asset coverage requirement. Effectiveness of the reduced asset coverage requirement to a BDC requires approval by either (1) a “required majority,” as defined in Section 57(o) of the 1940 Act, of such BDC’s board of directors with effectiveness one year after the date of such approval or (2) a majority of votes cast at a special or annual meeting of such BDC’s stockholders at which a quorum is present, which can be effective as soon as the day after such stockholder approval.
At a meeting of the Board held on May 3, 2018, the Board, including a “required majority” (as defined in Section 57(o) of the 1940 Act) thereof, approved the application of the reduced asset coverage requirement in Section 61(a)(2) of the 1940 Act as being in the best interests of the Companyhereof and its Stockholders. As a result, and subject to certain additional disclosure requirements as described below and provided such approval is not later rescinded, the reduced asset coverage requirement will apply to the Company effective as of May 3, 2019, unless earlier approved by a vote of a majority of the Stockholders at the Annual Meeting as described below.
In addition, the Board has determined that it is advisable and in the best interests of the Company and its Stockholders that the reduced asset coverage requirement for senior securities in Section 61(a)(2) of the 1940 Act apply to the Company as soon as practicable. Therefore, the Board has decided to seek the approval of the Stockholders at the Annual Meeting which, if successful, would accelerate the effectiveness of the reduced asset coverage requirement. If this Proposal 3 is approved by the Stockholders at the Annual Meeting, the asset coverage required for the Company’s senior securities will be 150% rather than 200% commencing on the first day after such approval, or August 2, 2018, unless the Annual Meeting is adjourned or otherwise postponed.
Recommendation and Rationale
The Board has approved and 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 Proposal 3 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):
Flexibility to manage capital to take advantage of attractive investment opportunities and flexibility to delay potential equity capital raises until a time when the trading price of the Common Stock exceeds net asset value per share
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 or the Company is unable to raise additional equity due to the 1940 Act limitations on the issuances of common stock at prices below net asset value per share absent stockholder approval (which the Company does not currently have). If the Company is not able to access additional capital (either at all or on favorable terms) when attractive investment opportunities arise, including because the trading price of the Common Stock is less than the then-current net asset value per share, 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 March 31, 2018, reducing the asset coverage requirements applicable to the Company from 200% to 150% would allow the Company to borrow nearly $586 million in capital (representing an increase of approximately $239 million). 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 would enable the Company to participate more meaningfully in the private debt markets by allowing the Company to make additional investments in both new and existing portfolio companies with no loss of diversification of the overall portfolio. With more capital, the Company expects that it would, over time, increase its diversification of the overall portfolio, be a more meaningful capital provider to the middle market and be able to better compete for high-quality investment opportunities with other companies having greater resources than the Company currently has.
In addition, the Board believes that the capital made available by incurring additional leverage would allow the Company to better manage its capital and to only undertake equity capital raises when market conditions are optimal for doing so and when the trading price of the Common Stock exceeds the then-current net asset value per share.
Investment strategy and focus on first lien senior secured loans
The Board noted that the Company has primarily invested in senior secured loans and expects that the Company’s portfolio will include a majority of first lien senior secured financings. As of March 31, 2018 and December 31, 2017, 51.9% and 47.4%, respectively, of the Company’s total assets at fair value were invested in first lien senior secured loans. A portfolio comprised of such assets is well suited to take advantage of additional leverage. As noted below, additional leverage would magnify increases in the Company’s income, if any, which could cause the Company’s net income to exceed the quarterly hurdle rate for the incentive fee the Company pays to WhiteHorse Advisers with comparatively lower absolute unlevered returns on the Company’s investments. 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 assets considered “non-qualifying assets” for purposes of Section 55 of the 1940 Act, which will also give the Company greater flexibility when evaluating investment opportunities.
Ability to broaden the Company’s portfolio
The Board noted that, as of March 31, 2018, the Company was invested in the securities of 34 portfolio companies across 22 industries with an average investment size of $9.7 million. The ability to access additional capital through a reduced asset coverage requirement applicable to the Company will allow the Company to make additional loans to new portfolio companies, and, as a result, increase diversification of its current portfolio (whether by number of portfolio companies or industries to which the Company has investment exposure); additionally, the Company could make additional loans to existing portfolio companies with no corresponding loss of diversification of its current portfolio.
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. Thus, the Board noted that additional leverage may allow the Company to maintain its historical distribution rate while investing in assets with lower absolute, but better, or more favorable, risk-adjusted, returns than the Company’s current portfolio. 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 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 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 amendments to the Credit Facility or the entry into new credit 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, as a result, net asset value, 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.
Effect of Leverage on Return to Stockholders
The following table illustrates the effect of leverage on returns from an investment in the Common Stock assuming that the Company employs leverage such that its asset coverage equals its actual asset coverage ratio as of March 31, 2018 and hypothetical asset coverage ratios of both 200% and 150%, at various annual returns on the Company’s portfolio as of March 31, 2018, net of expenses. The purpose of this table is to assist investors in understanding the effects of leverage. The calculations in the table below are hypothetical, and actual returns may be 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 March 31, 2018 (259%)(1) | (19.2 | )% | (11.2 | )% | (3.3 | )% | 4.7 | % | 12.7 | % | ||||||||||
Corresponding return to common stockholder assuming 200% asset coverage(2) | (24.6 | )% | (14.8 | )% | (5.0 | )% | 4.9 | % | 14.7 | % | ||||||||||
Corresponding return to common stockholder assuming 150% asset coverage(3) | (39.3 | )% | (24.5 | )% | (9.7 | )% | 5.1 | % | 19.9 | % |
Additional flexibility to make required regulated investment company distributions without violating the 1940 Act
Prior to the passage of the SBCAA, the 1940 Act prohibited BDCs from declaring any dividend or other distribution to holdersirrespective of any class of capital stock,general incorporation language in the case of debt securities, or common stock, in the case of preferred stock, unless the asset coverage with respect toany such senior securities was at least 200%. By lowering the asset coverage requirement to 150%, the Company will have additional flexibility, subject to compliance with the covenants under any debt facilities, to continue making the distributions to Stockholders required to maintain its qualification as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. This additional flexibility may be helpful in circumstances where the value of the Company’s assets, and thus the Company’s asset coverage, declines, but the level of the Company’s net investment income remains relatively constant (i.e., the Company continues to have cash available to make any necessary distributions to Stockholders). If the Company were to fail to make required distributions and no longer qualify as a regulated investment company, the Company would be subject to corporate-level U.S. federal income taxes.
Impact on advisory fees paid by the Company
The base management fee payable to WhiteHorse Advisers pursuant to the Investment Advisory Agreement is calculated at an annual rate of 2.0% of the average value of the Company’s consolidated gross assets, including cash and cash equivalents and assets purchased with borrowed funds, at the end of the two most recently completed calendar quarters. The Board considered the fact that incurring additional leverage will increase the base management fee payable to WhiteHorse Advisers irrespective of the return on the incremental assets and also noted that sourcing additional investment opportunities to deploy any additional capital will require additional time and effort on the part of WhiteHorse Advisers and its investment personnel.
In addition, as additional leverage would magnify positive returns, if any, on the Company’s portfolio, as noted above, the Company’s net investment income may exceed the quarterly hurdle rate for the incentive fee on income payable to WhiteHorse Advisers pursuant to the Investment Advisory Agreement at a lower average unlevered return on the Company’s portfolio. Thus, if the Company incurs additional leverage, WhiteHorse Advisers may receive additional incentive fees without any corresponding increase (and potentially with a decrease) in the Company’s performance. The Board also noted that the incentive fee payable by the Company to WhiteHorse Advisers may create an incentive for it to make investments on the Company’s behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns.
Other Considerations
The Board noted 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 the Stockholders if the assets purchased with the capital raise from such issuances decline in value.
The Board also discussed the additional disclosures required upon the modification of the asset coverage requirement. Such additional disclosure includes a requirement to disclose the approval of the 150% asset coverage requirement in a filing with the SEC within five business days of such approval. Following such approval, the Company will be required to include in its quarterly reports on Form 10-Q and annual reports on Form 10-K the principal amount or liquidation preference of its senior securities and its asset coverage ratio as of the date of the most recent financial statements, the fact that the 150% asset coverage had been approved by the Company and the effective date of such approval along with the principal risk factors associated with the Company’s senior securities. The Board noted that such disclosure requirements were not anticipated to be burdensome to the Company.
Based on its consideration of each of the above factors and such other information as the Board deemed relevant, the Board concluded that Proposal 3 is in the best interests of the Company and the Stockholders and recommended that the Stockholders approve this Proposal.
THE BOARD, INCLUDING EACH OF THE INDEPENDENT DIRECTORS, UNANIMOUSLY RECOMMENDS THAT YOU VOTEFOR THE APPROVAL OF THE APPLICATION OF THE REDUCED ASSET COVERAGE REQUIREMENTS IN SECTION 61(A)(2) OF THE 1940 ACT TO THE COMPANY.
Attn: Chief Compliance Officer
1450 Brickell Avenue, 31stFloor
Miami, Florida 33131
Attn: Chairman of Audit Committee
1450 Brickell Avenue, 31stFloor
Miami, Florida 33131
| By Order of the Board of Directors, | | | | |
| | | | | |
| Richard Siegel Secretary | | | | |
| |||||
Miami, Florida June 21, 2019 | |||||
| | |