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Jeffrey S. Levin was appointed as our President in May 2016. Mr. Levin has also served as the president of TCG BDC II and TCG BDC III since April 2017. Prior to the completion of the NFIC Acquisition in June 2017, Mr. Levin served as the president of NFIC. Prior to his appointment as our President, Mr. Levin served as the Head of Origination. Mr. Levin may from time to time serve as an officer, director or principal of entities affiliated with Carlyle or of investment vehicles managed by Carlyle and its affiliates. Prior to joining Carlyle in 2012, Mr. Levin was a founding member of Morgan Stanley Credit Partners, a corporate debt fund, where he was responsible for originating, structuring and executing credit and private equity investments across various industries. Prior to that
role, Mr. Levin was a member of the Leveraged & Acquisition Finance Group at Morgan Stanley where he was responsible for originating and executing high yield bond and leveraged loan transactions.
Thomas M. Hennigan was appointed as our Chief Financial Officer in March 2018 and our Chief Risk Officer in 2016. Mr. Hennigan also serves as the chief financial officer of BDC II since March 2018, and the chief risk officer of TCG BDC II and TCG BDC III since April 2017. He has been our Head of Underwriting and Portfolio Management since inception. In addition, Mr. Hennigan serves as the Chief Risk Officer for Carlyle Direct Lending. Prior to the completion of the NFIC Acquisition in June 2017, Mr. Hennigan served as the chief risk officer of NFIC. Mr. Hennigan may from time to time serve as an officer, director or principal of entities affiliated with Carlyle or of investment vehicles managed by Carlyle and its affiliates. Prior to joining Carlyle in 2011, Mr. Hennigan was a senior vice president and head of underwriting and portfolio management for Churchill Financial LLC, which he joined in 2006. In this role, Mr. Hennigan was responsible for managing Churchill Financial’s underwriting and portfolio management activities, including supervising the professionals involved in the underwriting process and overseeing the firm’s regular portfolio review meetings. Mr. Hennigan joined Churchill Financial from GE Corporate Financial Services. During his four years at GE, Mr. Hennigan had underwriting and portfolio management responsibilities in the Global Sponsor Finance Group and in the Global Media and Communications Group. Mr. Hennigan began his career with Wachovia Securities, Inc. in 1998, where he worked in middle market investment banking and loan syndications.
Venugopal Rathi was appointed as our Treasurer in 2015 and is our principal accounting officer for SEC reporting purposes. Mr. Rathi has also served as the treasurer of TCG BDC II and TCG BDC III since April 2017. Mr. Rathi served as our Chief Financial Officer from 2015 to March 2018 and the chief financial officer of TCG BDC II and TCG BDC III from April 2017 to March 2018. Prior to the completion of the NFIC Acquisition in June 2017, Mr. Rathi served as the chief financial officer and treasurer of NFIC. Mr. Rathi may from time to time serve as an officer, director or principal of entities affiliated with Carlyle or of investment vehicles managed by Carlyle and its affiliates. Prior to joining Carlyle, Mr. Rathi worked at EY and provided assurance and advisory services to a wide variety of clients in the financial services industry. Mr. Rathi has extensive knowledge of fund-level and vehicle-level accounting, accounting principles generally accepted in the United States (“U.S. GAAP”) and SOX compliance, valuation, and financial reporting practices across a wide range of investment strategies, including carry funds, hedge funds, CLOs, BDCs and mutual funds.PROPOSAL NO. 1
Erik Barrios was appointed as our Chief Compliance Officer and Secretary in 2018 and is a Vice President of Carlyle. Mr. Barrios has also served as the chief compliance officer and secretary of TCG BDC II since February 2018. Mr. Barrios may from time to time serve as an officer, director or principal of entities affiliated with Carlyle or of investment vehicles managed by Carlyle and its affiliates. Prior to joining Carlyle, Mr. Barrios was Counsel at Avenue Capital Group, where he was responsible for legal matters relating to the firm’s registered investment company business. Prior to that role, he was an Associate General Counsel at Cohen & Steers, where he focused on the firm’s registered investment company clients.AUTHORIZATION TO SELL OR OTHERWISE ISSUE SHARES OF COMMON STOCK BELOW NET ASSET VALUE
CORPORATE GOVERNANCE
Our Board of Directors
Board Composition
Our Board consists of five members. Pursuant to our Articles of Amendment and Restatement, the Board is divided into three classes, with the members of each class each serving staggered, three-year terms. The term of our Class I Directors will expire at the 2020 annual meeting of stockholders; the term of our Class II Directors will expire at the Meeting; and the term of our Class III Directors will expire at the 2019 annual meeting of stockholders.
Mr. Hart serves as Class I Director (with a term expiring in 2020). Messrs. Merrill and Andrews serve as Class II Directors (with a term expiring at the Meeting). Ms. Bradford and Mr. Nestor serve as Class III Directors (with a term expiring in 2019). Any Class II Directors elected at the Meeting will have a term expiring in 2021.
Independent Directors
Pursuant to Section 56 of the 1940 Act, a majority of a BDC’s board of directors must be comprised of persons who are not “interested persons” of the Company, of the Adviser, or of any of their respective affiliates, as defined in Section 2(a)(19) of the 1940 Act (“Independent Directors”).
Consistent with these considerations, after review of all relevant transactions and relationships between each Director, or any of his or her family members, and the Company, the Adviser, or of any of their respective affiliates, the Board has determined that each of Ms. Bradford and Messrs. Andrews and Nestor qualifies as an Independent Director. Each Director who serves on the Audit Committee is an Independent Director for purposes of Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Interested Directors
Each of Messrs. Hart and Merrill is considered an “interested person” (as defined in the 1940 Act) of the Company because of his respective relationship with us, our Adviser or affiliated persons of the Adviser (each, an “Interested Director”).
Meetings and Attendance
Our Board met nine times during the year ended December 31, 2017, including four regular quarterly meetings and five special meetings, and acted on various occasions by written consent. No incumbent Director attended fewer than 75% of the aggregate of the total number of meetings of the Board (held during the period for which he or she has been a Director) and the total number of meetings held by all committees of the Board on which he or she served (during the period that he or she served).
Board Attendance
All Directors are expected to attend at least 75% of the aggregate number of meetings of our Board and of the respective committees on which they serve. We require each Director to make a diligent effort to attend all Board and committee meetings. The Company encourages, but does not require, the members of the Board to attend the Company’s annual meeting of its stockholders. One Director attended our 2017 annual meeting of stockholders.
Board Leadership Structure
Our Board monitors and performs an oversight role with respect to our business and affairs, including with respect to our investment practices and performance, compliance with regulatory requirements and the services, expenses and performance of our service providers. Among other things, our Board approves the appointment of our Adviser and officers, reviews and monitors the services and activities performed by our Adviser and executive officers, and approves the engagement and reviews the performance of our independent registered public accounting firm.
Under our Bylaws, our Board may designate a Chairman to preside over the meetings of our Board and meetings of the stockholders and to perform such other duties as may be assigned to him by the Board. We do not have a fixed policy as to whether the Chairman of the Board should be an Independent Director, and we believe that we should maintain the flexibility to select the Chairman and reorganize the leadership structure, from time to time, based on criteria that are in our best interests and our stockholders’ best interests at such times.
Presently, Mr. Hart serves as Chairman of our Board. Mr. Hart is an Interested Director. We believe that Mr. Hart’s extensive knowledge of the financial services industry and capital markets in particular qualifies him to serve as the Chairman of our Board. We believe that we are best served through this existing leadership structure, as Mr. Hart’s relationship with our Adviser provides an effective bridge and encourages an open dialogue between management and our Board, ensuring that both groups act with a common purpose.
Our Board does not currently have a designated lead Independent Director. We are aware of the potential conflicts that may arise when an Interested Director is Chairman of the Board, but believe these potential conflicts are offset by our strong corporate governance policies. Our corporate governance policies include regular meetings of the Independent Directors in executive session without the presence of Interested Directors and management, the establishment of an Audit Committee comprised solely of Independent Directors and the appointment of a Chief Compliance Officer, with whom the Independent Directors meet regularly without the presence of Interested Directors and other members of management, for administering our compliance policies and procedures.
We recognize that different board leadership structures are appropriate for companies in different situations.
Role in Risk Oversight
Our Board performs its risk oversight function primarily through (a) its standing Audit Committee, which reports to the entire Board and is comprised solely of Independent Directors, and (b) active monitoring by our Chief Compliance Officer and of the operation of our compliance policies and procedures. As described below in more detail under “Committees of the Board of Directors,” the Audit Committee assists our Board in fulfilling its risk oversight responsibilities. The Audit Committee’s risk oversight responsibilities include overseeing the internal audit staff (sourced through the Administrator and The Carlyle Group Employee Co., L.L.C. (“Carlyle Employee Co.”), with whom we have a personnel agreement), accounting and financial reporting processes, our valuation process, our systems of internal controls regarding finance and accounting and audits of our financial statements.
Our Board also performs its risk oversight responsibilities with the assistance of the Chief Compliance Officer. Our Board annually reviews a written report from the Chief Compliance Officer discussing the adequacy and effectiveness of our compliance policies and procedures and our service providers. The Chief Compliance Officer’s annual report addresses, at a minimum: (a) the operation of our compliance policies and procedures and our service providers since the last report; (b) any material changes to such policies and procedures since the last report; (c) any recommendations for material changes to such policies and procedures as a result of the Chief Compliance Officer’s annual review; and (d) any compliance matter that has occurred since the date of the last report about which our Board would reasonably need to know to oversee our compliance activities and risks. In addition, the Chief Compliance Officer meets separately in executive session with the Independent Directors at least four times each year.
We believe that our Board’s role in risk oversight is effective and appropriate given the extensive regulation to which we are already subject as a BDC. As a BDC, we are required to comply with certain regulatory requirements that control the levels of risk in our business and operations. For example, our ability to incur indebtedness is limited such that our asset coverage must equal at least 200% or, effective April 9, 2019 (unless the Company’s stockholders approve the Asset Coverage Ratio Proposal at the Meeting, in which case effective as of the first day after the Meeting), 150%, immediately after each time we incur indebtedness, we generally have to invest at least 70% of our total assets in “qualifying assets” and we are not generally permitted to invest in any portfolio company in which one of our affiliates currently has an investment.
We recognize that different board roles in risk oversight are appropriate for companies in different situations. We intend to re-examine the manners in which our Board administers its oversight function on an ongoing basis to ensure that they continue to meet our needs.
Communications with Directors
Our Board has established procedures whereby our stockholders and other interested parties may communicate with any member of our Board, the chairman of any of our Board committees or with our Independent Directors as a group by mail addressed to the applicable Directors or Director group, in the care of the Secretary of the Company, Erik Barrios, TCG BDC, Inc., 520 Madison Avenue, 41st Floor, New York, NY 10022. Such communications should specify the intended recipient or recipients. All such communications, other than unsolicited commercial solicitations, will be forwarded to the appropriate Director, or Directors, for review.
SOX Code of Ethics
The Company has adopted a Code of Ethics for Principal Executive and Senior Financial Officers under the Sarbanes-Oxley Act of 2002, as amended (the “SOX Code of Ethics”), which applies to, among others, our principal executive officer and principal financial officer. There have been no material changes to our SOX Code of Ethics or material waivers of the SOX Code of Ethics that apply to our Chief Executive Officer or Chief Financial Officer. We hereby undertake to provide a copy of the SOX Code of Ethics to any person, without charge, upon request. Requests for a copy of the SOX Code of Ethics may be made in writing addressed to the Secretary of the Company, Erik Barrios, TCG BDC, Inc., 520 Madison Avenue, 41st Floor, New York, NY 10022.
Committees of the Board of Directors
Our Board has established an Audit Committee, a Compensation Committee and a Nominating and Governance Committee, and may establish additional committees in the future.
Audit Committee
The Audit Committee is currently composed of Messrs. Andrews and Nestor and Ms. Bradford, all of whom are Independent Directors. Mr. Andrews serves as Chairman of the Audit Committee. Our Board has determined that Mr. Andrews is an “audit committee financial expert” as that term is defined under Item 407 of Regulation S-K, as promulgated under the Exchange Act. Each of Messrs. Andrews and Nestor and Ms. Bradford meets the current independence and experience requirements of Rule 10A-3 of the Exchange Act. The Audit Committee operates pursuant to a charter approved by our Board, which sets forth the responsibilities of the Audit Committee. The Audit Committee’s responsibilities include establishing guidelines and making recommendations to our Board regarding the valuation of our loans and investments, selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our financial statements, pre-approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual financial statements, overseeing internal audit staff and periodic filings and receiving our audit reports and financial statements.
The Audit Committee held eight meetings during the year ended December 31, 2017.
The Audit Committee’s charter is available on our website at: www.tcgbdc.com.
Nominating and Governance Committee
The Nominating and Governance Committee is currently composed of Messrs. Andrews and Nestor and Ms. Bradford, each of whom is independent for purposes of the 1940 Act and is independent for listing exchange corporate governance regulations. Mr. Nestor serves as Chairman of the Nominating and Governance Committee. The Nominating and Governance Committee is responsible for (i) developing, reviewing and, as appropriate, updating certain policies regarding the nomination of directors and recommending such policies or any changes in such policies to the Board for approval, (ii) identifying individuals qualified to become directors, (iii) evaluating and recommending to the Board nominees to fill vacancies on the Board or committees thereof or to stand for election by the stockholders of the Company, (iv) reviewing the Company’s policies relating to corporate governance and recommending any changes in such policies to the Board, and (v) overseeing the evaluation of the Board (including its leadership structure) and its committees.
The Nominating and Governance held one meeting during the year ended December 31, 2017.
The Nominating and Governance Committee’s charter is available on our website at: www.tcgbdc.com.
The Nominating and Governance Committee considers nominees properly recommended by stockholders in compliance with the procedures set forth in our Bylaws. Our Bylaws provide with respect to an annual meeting of stockholders, nominations of persons for election to the Board and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by or at the direction of the Board or (3) by a stockholder who is a stockholder of record both at the time of giving notice, as provided by the Bylaws, and at the time of the annual meeting and who is entitled to vote at the meeting and who has complied with the advance
notice procedures of our Bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the Board at a special meeting may be made only pursuant to our notice of the meeting and (1) by or at the direction of the Board or (2) provided that the Board has determined that directors will be elected at the meeting, by a stockholder who is a stockholder of record both at the time of giving notice, as provided by the Bylaws, and at the time of the special meeting and who is entitled to vote at the meeting and who has complied with the advance notice provisions of the Bylaws.
Compensation Committee
The Compensation Committee is currently composed of Messrs. Andrews and Nestor and Ms. Bradford, each of whom is independent for purposes of the 1940 Act and is independent for listing exchange corporate governance regulations. Mr. Andrews serves as chairman of the Compensation Committee. The Compensation Committee is responsible for determining, or recommending to the Board for determining, any compensation paid directly, if any, by us to our executive officers. The Compensation Committee is also charged with assisting the Board with all matters related to compensation, as directed by the Board. None of our executive officers are directly compensated by us and, as a result, the Compensation Committee does not produce and/or review and report on executive compensation practices.
The Compensation Committee did not meet during the year ended December 31, 2017.
The Compensation Committee’s charter is available on our website at: www.tcgbdc.com.
Director Nominations
Nomination for election as a Director may be made by the Nominating and Governance Committee or by stockholders in compliance with the procedures set forth in our Bylaws.
The Nominating and Governance Committee seeks candidates who possess the background, skills and expertise to make a significant contribution to our Board, our Company and our stockholders. In considering possible candidates for election as a director, the Nominating and Governance Committee takes into account, in addition to such other factors as it deems relevant, the desirability of selecting directors who:
are of high character and integrity;
are accomplished in their respective fields, with superior credentials and recognition;
have relevant expertise and experience upon which to be able to offer advice and guidance to management;
have sufficient time available to devote to our affairs;
are able to work with the other members of our Board and contribute to our success;
can represent the long-term interests of our stockholders as a whole; and
are selected such that our Board represents a range of backgrounds and experience.
The Nominating and Governance Committee has not adopted a formal policy with regard to the consideration of diversity in identifying Director nominees. In determining whether to recommend a Director nominee, the Nominating and Governance Committee considers and discusses diversity, among other factors, with a view toward the needs of our Board as a whole. The Nominating and Governance Committee generally conceptualizes diversity expansively to include, without limitation, concepts such as race, gender, national origin, differences of viewpoint, professional experience, education, skill and other qualities that contribute to our Board when identifying and recommending Director nominees. The Nominating and Governance Committee believes that the inclusion of diversity as one of many factors considered in selecting Director nominees is consistent with the goal of creating a Board that best serves our needs and the interests of our stockholders.
The Nominating and Governance Committee selects and evaluates any candidates for Independent Directors or Interested Directors in accordance with the criteria set forth above. The Nominating and Governance Committee is then responsible for recommending to the Board a slate of nominees for Independent Director and Interested Director positions, as applicable, for the Board’s approval. Generally, candidates for a position as a member of the Board are suggested by existing Board members to the Nominating and Governance Committee; however, as noted
above, the Nominating and Governance Committee will consider nominees properly recommended by stockholders, and will evaluate any such recommendations using the criteria set forth above.
Rule 17j-1 Code of Ethics
We have adopted a code of ethics (the “Code of Ethics”) pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain transactions by our personnel. We have also adopted the Adviser’s Policies and Procedures Regarding Material, Non-Public Information and the Prevention of Insider Trading (the “Code of Conduct and Insider Trading Policies”), intended to comply with Rule 17j-1 under the 1940 Act and Rule 204A-1 under the Investment Advisers Act of 1940, as amended. The Code of Ethics and the Code of Conduct and Insider Trading Policies generally do not permit investments by our and the Adviser’s personnel in securities that may be purchased or sold by us.
Involvement in Certain Legal ProceedingsBackground
The Company may become party to certain lawsuits in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. The Company is not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against the Company.
Election of Officers
Our Board elects our officers and each of our officers serves until his or her earlier death, resignation or termination or until his or her successor is duly elected and qualified.
Compensation and Insider Participation
Compensation of Independent Directors
Each Independent Director received the following amounts for serving as a Director of the Company: (i) a $90,000 annual fee; (ii) for a meeting of our Board, $2,500 for each such board meeting attended in person, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending such board meeting, and $950 for each such board meeting attended telephonically; (iii) for a meeting of a committee of the Board, $1,250 for each such committee meeting attended in person, plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending such committee meeting, and $650 for each such committee meeting attended telephonically; and (iv) an annual fee of $16,000 for the Chairman of our Audit Committee
The Independent Directors review their own compensation and recommend to the Board the appropriate level of compensation. This level of compensation may be adjusted from time to time. In conducting their review, the Independent Directors use such information as they deem relevant, including compensation paid to directors of other BDCs of similar size and the time and effort required of the directors in fulfilling their responsibilities to the Company. The Board determines the compensation of the Independent Directors.
The following table sets forth information concerning total compensation earned by or paid to each of our Independent Directors during the fiscal year ended December 31, 2017:
|
| | | | | | | | | | | | |
| | | Fees Earned or Paid in Cash | | Total Compensation from the Company | | Total Compensation from the Fund Complex(1) |
| Nigel D.T. Andrews, Director | | $ | 141,531 |
| | $ | 141,531 |
| | $ | 170,042 |
|
Leslie E. Bradford, Director(2) | | $ | 24,398 |
| | $ | 24,398 |
| | $ | 37,802 |
|
| John G. Nestor, Director | | $ | 136,399 |
| | $ | 136,399 |
| | $ | 163,060 |
|
William P. Hendry, Director (deceased) (2) | | $ | 121,942 |
| | $ | 121,942 |
| | $ | 132,956 |
|
(1) Messrs. Andrews, Hendry and Nestor served on the board of directors of NFIC until the NFIC Acquisition in June 2017. Messrs. Andrews and Nestor and Ms. Bradford serve on the board of directors of TCG BDC II. The Company, TCG BDC II and, until the NFIC Acquisition, NFIC were part of the Fund Complex during the year ended December 31, 2017. Compensation amounts shown include compensation such Directors received from the Company, TCG BDC II and, until the NFIC Acquisition, NFIC for services rendered during the fiscal year ended December 31, 2017. TCG BDC IIIclosed-end investment company that has not elected to be regulated as a business development company (“BDC”) under the 1940 Act. The 1940 Act generally prohibits the Company, as a BDC, or commenced operationsfrom offering and thus TCG BDC III was not partselling shares of the Fund Complex duringCompany’s common stock, par value $0.01 per share (the “Shares”), at a price per Share, after deducting underwriting commissions and discounts, below the fiscalthen-current NAV per Share unless the policy and practice of doing so is approved by the Company’s stockholders within one year ended December 31, 2017.immediately prior to any such sales.
(2) Ms. Bradford was appointedThe Company is seeking stockholder approval of the Share Issuance Proposal, which 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 October 2017the Company’s best interests and that of stockholders. In addition,during volatile periods, this ability could, among other things, add financial flexibility to fillcomply with regulatory requirements and debt facility covenants, including the vacancy resulting fromapplicable debt to equity ratio, provide access to capital markets to pursue attractive investment and acquisition opportunities and improve capital resources to enable the death of Mr. Hendry in September 2017.
Compensation of Executive Officers
We doCompany to compete more effectively for high quality investment opportunities. It could also minimize the likelihood that the Company would be required to sell assets that the Company would not currently have any employeesotherwise sell, which sales could occur at times and do not expectat prices that are disadvantageous to have any employees. Services necessary for our business are provided by individuals who are employees of the Adviser or its affiliates or by subcontractors, pursuant to the terms of the investment advisory agreement entered into by and between the Company and its stockholders. The final terms of any such sales will be determined by the Adviser,Board at the time of sale. Also, because the Company does not have any immediate plans to sell any Shares at a price below the then-current 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 administration agreement entered intouse of any such consideration, will be reviewed and approved by and betweenthe 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 Administrator (the “Administration Agreement”). Each of our executive officersauthorization would be effective for Shares sold during the next 12 months following stockholder approval. The Company sought and received stockholder approval for a similar proposal last year. This proxy statement is not an employeeoffer to sell securities of the AdviserCompany. Securities may not be offered or its affiliates. Our day-to-day investment operations are managed bysold in the Adviser. MostUnited 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 the then-current NAV per Share, on an aggregate basis, including any prior offerings made pursuant to this authority, to 25% of the services necessaryCompany’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 the originationa discussion and administration of our investment portfolio are provided by investment professionals employed by the Adviser or its affiliates or by subcontractors.
None of our officers receives direct compensation from us. We have agreed to reimburse the Administrator for our allocable portionan example of the compensation paid to or compensatory distributions received by our Chief Financial Officer and Chief Compliance Officer. In addition, to the extent that the Administrator outsources any of its functions, we will pay the fees associated with such functions at cost. We have agreed to reimburse the Administrator, Carlyle Employee Co., with whom we entered into a personnel agreement, for our allocable portiondilutive effect of the compensationsale of any personnel, other than legal department personnel, that they provide for our use.Shares at a price below NAV per Share.
No compensation is expected to be paid to Directors who are Interested Directors.
Certain Relationships and Related Party Transactions
Investment Advisory Agreement
On April 3, 2013, theThe Board, including a majority of the Independent Directors approved an investment advisory agreement (the “Original Investment Advisory Agreement”) between the Company and the Adviser in accordance with, and on the basis of an evaluation satisfactory to such Directors as required by, Section 15(c) of the 1940 Act. The Original Investment Advisory Agreement was amended on September 15, 2017 (as amended, the “Investment Advisory Agreement”) after the approval of the Board, including a majority of the Independent Directors at an in-person meeting of the Board held on May 30, 2017 and the approval of the Company’s stockholders at a special meeting of stockholders held on September 15, 2017. The Investment Advisory Agreement was amended, among other things, to (i) reduce the incentive fee payable by the Company to the Adviser from an annual rate of 20% to an annual rate of 17.5%, (ii) delete the incentive fee payment deferral test described below, and (iii) includewho have no financial interest in the pre-incentive fee net investment income, in the case of investments with a deferred interest feature, accrued income that the CompanyShare Issuance Proposal, has not yet received in cash. The initial term of the Investment Advisory Agreement is two years from September 15, 2017 and, unless terminated earlier, the Investment Advisory Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by the vote of the Board and by the vote of a majority of the Independent Directors. The Investment Advisory Agreement will automatically terminate in the event of an assignment and may be terminated by either party without penalty upon at least 60 days’ written notice to the other party. Subject to the overall supervision of the Board, the Adviser provides investment advisory services to the Company. For providing these services, the Adviser receives fees from the Company consisting of two components—a base management fee and an incentive fee.
Effective September 15, 2017, the base management fee is calculated and payable quarterly in arrears at an annual rate of 1.50% of the average value of the gross assets at the end of the two most recently completed fiscal quarters, except for the first quarter following the IPO, in which case the base management fee is calculated based on the Company’s gross assets as of the end of such fiscal quarter. In each case, the base management fee will be appropriately adjusted for any share issuances or repurchases during such fiscal quarter and the base management fees for any partial month or quarter will be pro-rated. The Company’s gross assets exclude any cash and cash equivalents and include assets acquired through the incurrence of debt from use of the TCG BDC SPV LLC credit facility, the Company’s senior secured revolving credit facility and the notes offered in the Debt Securitization. For purposes of this calculation, cash and cash equivalents include any temporary investments in cash-equivalents, U.S. government securities and other high quality investment grade debt investments that mature in 12 months or less from the date of investment.
Prior to September 15, 2017, under the Original Investment Advisory Agreement, the base management fee was calculated and payable quarterly in arrears at an annual rate of 1.50% of the average daily gross assets of the Company for the period adjusted for share issuances or repurchases. Prior to the Company’s initial public offering (“IPO”), the Adviser waived its right to receive one-third (0.50%) of the 1.50% base management fee. Any waived base management fees are not subject to recoupment by the Adviser.
The fee waiver terminated when the IPO had been consummated. As previously disclosed, in connection with the IPO, the Adviser has agreed to continue the fee waiver until the completion of the first full quarter after the consummation of the IPO. As a result, beginning October 1, 2017, the base management fee is calculated at an annual rate of 1.50% of the Company’s gross assets, excluding cash and cash equivalents.
The incentive fee has two parts. The first part is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter. The second part is determined and payable in arrears based on capital gains as of the end of each calendar year.
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 operating expenses accrued for the quarter (including the base management fee, expenses payable under the Administration Agreement, and any interest expense or fees on any credit facilities or outstanding debt 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, 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.
Effective September 15, 2017, pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, will be compared to a “hurdle rate” of 1.50% per quarter (6% annualized) or a “catch-up rate” of 1.82% per quarter (7.28% annualized), as applicable.
Pursuant to the Investment Advisory Agreement, the Company pays the Adviser an incentive fee with respect to its pre-incentive fee net investment income in each calendar quarter as follows:
no incentive fee based on pre-incentive fee net investment income in any calendar quarter in which its pre-incentive fee net investment income does not exceed the hurdle rate of 1.50%;
100% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 1.82% in any calendar quarter (7.28% annualized). The Company refers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 1.82%) as the “catch-up.” The “catch-up” is meant to provide the Adviser with approximately 17.5% of the Company’s pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 1.82% in any calendar quarter; and
17.5% of the amount of pre-incentive fee net investment income, if any, that exceeds 1.82% in any calendar quarter (7.28% annualized) will be payable to the Adviser. This reflects that once the hurdle
rate is reached and the catch-up is achieved, 17.5% of all pre-incentive fee investment income thereafter is allocated to the Adviser.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 17.5% of realized capital gains, if any, on a cumulative basis from inception through the date of determination, computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation, less the aggregate amount of any previously paid capital gain incentive fees, provided that, the incentive fee determined at the end of the first calendar year of operations may be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation.
Prior to September 15, 2017, under the Original Investment Advisory Agreement, pre-incentive fee net investment income, which did not include, in the case of investments with a deferred interest feature, accrued income that the Company has not yet received in cash, and was expressed as a rate of return on the average daily Hurdle Calculation Value (as defined below) throughout the immediately preceding calendar quarter, was compared to a “hurdle rate” of 1.50% per quarter (6% annualized) or a “catch-up” of 1.875% per quarter (7.50% annualized), as applicable. “Hurdle Calculation Value” meant, on any given day, the sum of (x) the value of net assets as of the end of the calendar quarter immediately preceding such day plus (y) the aggregate amount of capital drawn from investors (or reinvested in the Company pursuant to a dividend reinvestment plan) from the beginning of the current quarter to such day minus (z) the aggregate amount of distributions (including share repurchases) made by the Company from the beginning of the current quarter to such day, but only to the extent such distributions were not declared and accounted for on the books and records in a previous quarter. In addition, under the Original Investment Advisory Agreement, the Company deferred payment of any incentive fee otherwise earned by the Adviser if, during the most recent four full calendar quarter periods ending on or prior to the date such payment is to be made, the sum of (a) the aggregate distributions to stockholders and (b) the change in net assets (defined as gross assets less indebtedness and before taking into account any incentive fees payable during the period) is less than 6.0% of net assets (defined as gross assets less indebtedness) at the beginning of such period. These calculations were adjusted for any share issuances or repurchases. Any deferred incentive fees were carried over for payment in subsequent calculation periods.
As previously disclosed, in connection with the IPO, the Adviser agreed to charge 17.5% instead of 20% with respect to, or effectively waive 2.5% from, the entire calculation of the incentive fee beginning on the first full quarter following the consummation of the IPO until the earlier of (i) October 1, 2017 and (ii) the date that the Company’s stockholders vote on the approval of the amendment to the Original Investment Advisory Agreement. The Company’s stockholders voted to approve the Investment Advisory Agreement on September 15, 2017.
For the years ended December 31, 2017 and 2016, base management fees were $19,327 thousand and $12,359 thousand, respectively (net of waiver of $5,927 thousand and $6,180 thousand, respectively), incentive fees related to pre-incentive fee net investment income were $21,084 thousand and $14,905 thousand, respectively, and there were no incentive fees related to realized capital gains. For the years ended December 31, 2017 and 2016, there were no accrued capital gains incentive fees based upon the cumulative net realized and unrealized appreciation (depreciation). The accrual for any capital gains incentive fee under U.S. GAAP in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual.
As of December 31, 2017 and 2016, $13,098 thousand and $8,157 thousand, respectively, was included in base management and incentive fees payable in the accompanying Consolidated Statements of Assets and Liabilities included in the Annual Report.
On April 3, 2013, the Adviser entered into a personnel agreement with Carlyle Employee Co., an affiliate of the Adviser, pursuant to which Carlyle Employee Co. provides the Adviser with access to investment professionals.
Administration Agreement
On February 26, 2018, at an in-person meeting of the Board, the Board, including a majority of the Independent Directors, approved the continuance of the Administration Agreement, dated April 3, 2013, between the Company and the Administrator,Share Issuance Proposal as well as the sub-administration agreements referred to below. Pursuant to the Administration Agreement, the Administrator provides services and receives reimbursements equal to an amount that reimburses the Administrator for its costs and expenses and the Company’s allocable portion of overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company’s allocable portion of the compensation paid to or compensatory distributions received by the Company’s officers (including the Chief Compliance Officer and Chief Financial Officer) and respective staff who provide services to the Company, operations staff who provide services to the Company, and any internal audit staff, to the extent internal audit performs a role in the Company’s Sarbanes-Oxley Act internal control assessment. Reimbursement under the Administration Agreement occurs quarterly in arrears.
For the years ended December 31, 2017 and 2016, the Company incurred $661 thousand and $703 thousand, respectively, in fees under the Administration Agreement, which are included in administrative service fees in the Consolidated Statements of Operations included in the Annual Report. As of December 31, 2017 and 2016, $95 thousand and $137 thousand, respectively, were unpaid and included in administrative service fees payable in the Consolidated Statements of Assets and Liabilities included in the Annual Report.
Sub-Administration Agreements
On April 3, 2013, the Administrator entered into sub-administration agreements with Carlyle Employee Co. and CELF Advisors LLP (“CELF”). Pursuant to the agreements, Carlyle Employee Co. and CELF provide or provided the Administrator with access to personnel. The sub-administration agreement between the Administrator and CELF was terminated, effective as of February 26, 2018.
On April 3, 2013, the Administrator entered into a sub-administration agreement with State Street Bank and Trust Company (as amended, the “State Street Sub-Administration Agreement”). On March 11, 2015, the Board, including a majority of the Independent Directors, approved an amendment to the State Street Sub-Administration Agreement. The initial term of the State Street Sub-Administration Agreement ended on April 1, 2015 and, unless terminated earlier, the State Street Sub-Administration Agreement will renew 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. The State Street Sub-Administration Agreement may be terminated upon at least 60 days’ written notice and without penalty by the vote of a majority of the outstanding securities of the Company, or by the vote of the Board or by either party to the State Street Sub-Administration Agreement. For the years ended December 31, 2017 and 2016, fees incurred in connection with the State Street Sub-Administration Agreement, which amounted to $725 thousand and $602 thousand, respectively, were included in other general and administrative in the Consolidated Statements of Operations included in the Annual Report. As of December 31, 2017 and 2016, $196 thousand and $159 thousand, respectively, were unpaid and included in other accrued expenses and liabilities in the Consolidated Statements of Assets and Liabilities included in the Annual Report.
License Agreement
We have entered into a royalty free license agreement with Carlyle Investment Management L.L.C. (“CIM”), which wholly owns our Adviser and is a wholly owned subsidiary of Carlyle, pursuant to which CIM has granted us a non-exclusive, revocable and non-transferable license to use the name and mark “Carlyle.”
Placement Fees
On April 3, 2013, the Company entered into a placement fee arrangement with TCG Securities, L.L.C. (“TCG”), a licensed broker-dealer and an affiliate of the Adviser, which may require stockholders to pay a placement fee to TCG for TCG’s services. At the time of the IPO, the placement fee arrangement with TCG was automatically terminated.
For the years ended December 31, 2017 and 2016, TCG earned placement fees of $19 thousand and $12 thousand, respectively, from TCG BDC stockholders in connection with the issuance or sale of the Company’s common stock.
Review, Approval or Ratification of Related Party Transactions
In the ordinary course of business, we may enter into transactions with affiliates and portfolio companies that may be considered related party transactions. In order to ensure that we do not engage in any prohibited transactions with any persons affiliated with us, we have implemented certain policies and procedures whereby certain of our executive officers screen each of our transactions for any possible affiliations between the proposed portfolio investment, us, companies controlled by us, stockholders that own more than 5% of us and our employees and Directors. We will not enter into any agreements unless and until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek review and approval by our Board or exemptive relief for such transactions. Our Board will review these procedures on an annual basis.
From time to time, the Adviser, the Administrator or their respective affiliates, may pay third-party providers to provide goods or services to us. We will subsequently reimburse the Adviser, the Administrator or such affiliates thereof for any such amounts paid on our behalf.
Address of Our Adviser and Administrator
The principal executive offices of our Adviser, Carlyle Global Credit Investment Management L.L.C., and our Administrator, Carlyle Global Credit Administration L.L.C., are at 520 Madison Avenue, 40th Floor, New York, NY 10022.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our Directors and executive officers, as defined under the Exchange Act, and persons who own more than 10% of a registered class of our equity securities to file initial reports of ownership and reports of changes in ownership with the SEC. Such executive officers, Directors and stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of such forms filed by such persons, the Company believes that all persons subject to the reporting requirements of Section 16(a) filed all required reports on a timely basis in 2017.
Required Vote
Each Director nominee shall be elected by a plurality of all the votes cast at the Meeting in person or by proxy, provided that a quorum is present. Abstentions will not be included in determining the number of votes cast and, as a result, will have no effect on this proposal. Shares represented by broker non-votes also are not considered votes cast and thus have no effect on the proposal.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ELECTION OF EACH OF ELIOT P.S. MERRILL AND NIGEL D.T. ANDREWS
PROPOSAL NO. 2
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our Audit Committee has selected EY to serve as our independent registered public accounting firm to audit our consolidated financial statements for the year ending December 31, 2018. While the Audit Committee is responsible for the appointment, compensation, retention, termination and oversight of the independent auditor, we are requesting, as a matter of good corporate governance, that the stockholders ratify the appointment of EY as our independent registered public accounting firm. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether to retain EY and may retain that firm or another without re-submitting the matter to our stockholders. Even if the appointment is ratified, the Audit Committee may, in its discretion, direct the appointment of a different independent registered public accounting firm at any time during the year.
EY’s representatives are expected to be available telephonically for the Meeting and will have an opportunity to make a statement, if they so desire, as well as to respond to appropriate questions asked by our stockholders.
Principal Accountant Fees and Services
Set forth in the table below are audit fees and non-audit related fees billed to the Company and payable to EY for professional services performed for the Company’s fiscal years ended December 31, 2017 and 2016.
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| Fiscal Year/Period | | Audit Fees | | Audit-Related Fees(1) | | Tax Fees(2) | | All Other Fees(3) |
| 2017 | | $ | 829,000 |
| | $ | 70,896 |
| | $ | 20,000 |
| | $ | — |
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| 2016 | | $ | 431,500 |
| | $ | 59,188 |
| | $ | 20,000 |
| | $ | — |
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(1) | “Audit-Related Fees” are those fees billed to the Company relating to audit services provided by EY. |
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(2) | “Tax Fees” are those fees billed to the Company in connection with tax consulting services performed by EY, including primarily the review of the Company’s income tax returns. |
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(3) | “All Other Fees” are those fees billed to the Company in connection with permitted non-audit services performed by EY. |
The Audit Committee reviews, negotiates and approves in advance the scope of work, any related engagement letter and the fees to be charged by the independent registered public accounting firm for audit services and permitted non-audit services for the Company and for permitted non-audit services for the Company’s investment advisers and any affiliates thereof that provide services to the Company if such non-audit services have a direct impact on the operations or financial reporting of the Company. All of the audit and non-audit services described above for which fees were incurred by the Company for the fiscal years ended December 31, 2017 and 2016, were pre-approved by the Audit Committee, in accordance with its pre-approval policy.
Audit Committee Report
As part of its oversight of the Company’s financial statements, on February 26, 2018, the Audit Committee reviewed and discussed with both management and the Company’s independent registered public accounting firm the Company’s financial statements to be filed with the SEC for the fiscal year ended December 31, 2017. Management advised the Audit Committee that all financial statements were prepared in accordance with U.S. GAAP, and reviewed significant accounting matters with the Audit Committee. The Audit Committee also discussed with the independent registered public accounting firm the matters required to be discussed by the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”).
The Audit Committee has pre-approved, in accordance with its pre-approval policy, the permitted audit, audit-related, tax, and other services to be provided by EY, the Company’s independent registered public accounting firm, in order to assure that the provision of such services does not impair the firm’s independence.
Any requests for audit, audit-related, tax and other services that have not received general pre-approval must be submitted to the Audit Committee for specific pre-approval in accordance with its pre-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 has delegated pre-approval authority to the Chairman of the Audit Committee, Nigel D.T. Andrews, who reports any pre-approval decisions to the Audit Committee at its next scheduled meeting. The Audit Committee does not delegate its responsibilities to pre-approve services performed by EY to management.
The Audit Committee received and reviewed the written disclosures from EY required by the applicable PCAOB rule regarding the independent registered public accounting firm’s communications with audit committees concerning independence, and has discussed with EY its independence. The Audit Committee has reviewed the audit fees paid by the Company to EY. It has also reviewed non-audit services and fees to assure compliance with the Company’s and the Audit Committee’s policies restricting EY 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 Company’s financial statements as of and for the year ended December 31, 2017 be included in the 2017 Form 10-K, for filing with the SEC. The Audit Committee also recommended the appointment of EY to serve as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2018.
Audit Committee Members:
Nigel D.T. Andrews,Chairman
John G. Nestor
Leslie E. Bradford
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 of 1933, as amended, or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Required Vote
The affirmative vote of a majority of the votes cast at the Meeting, in person or by proxy, provided a quorum is present, is required to ratify the appointment of EY to serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2018. Abstentions will not be included in determining the number of votes cast and, as a result, will not have any effect on the result of the vote. Because brokers will have discretionary authority to vote for the ratification of the appointment of the Company’s independent registered public accounting firm in the event that they do not receive voting instructions from the beneficial owner of the shares, there will not be any broker non-votes with respect to this proposal.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” RATIFICATION OF EY AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM OF THE COMPANY
FOR THE FISCAL YEAR ENDING DECEMBER 31, 2018.
PROPOSAL NO. 3
APPROVAL OF THE APPLICATION OF A MINIMUM ASSET COVERAGE RATIO OF 150% TO THE COMPANY
Background
On March 23, 2018, an amendment to Section 61(a) of the 1940 Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150% and, as a result, to potentially increase the ratio of a BDC’s debt to equity to a maximum 2 to 1 from a maximum of 1 to 1, so long as certain approval and disclosure requirements are satisfied. Specifically, the Company is permitted to apply a lower minimum asset coverage ratio of 150% if: (1) the Company complies with certain additional asset coverage disclosure requirements, as discussed below; and (2)(A) a “required majority” of the Company’s directors, as defined in Section 57(o) of the 1940 Act, approves the application of such a lower minimum asset coverage ratio to the Company, in which case the 150% minimum asset coverage ratio will become effective on the date that is one year after the date of such Independent Director approval; or (B) the Company obtains, at a special or annual meeting of its stockholders at which a quorum is present, the approval of more than 50% of the votes cast for the application of such a lower minimum asset coverage ratio to the Company, in which case the 150% minimum asset coverage ratio will become effective on the first day after the date of such stockholder approval. “Asset coverage” for purposes of this proposal has the meaning set forth in Section 18(h) of the 1940 Act and generally is a company’s total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness and, if applicable, preferred stock.
At a meeting of the Board held on April 9, 2018, the Board, including a “required majority” of the Company’s directors, as defined in Section 57(o) of the 1940 Act, approved the 150% minimum asset coverage ratio as being in the best interests of the Company and its stockholders. Asstockholders and recommends it to the stockholders for their approval. For these purposes, Directors will not be deemed to have a result,financial interest solely by reason of their ownership of the Company’s Shares.
If this authorization is approved on June 6, 2024, it will expire on June 6, 2025, 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 subject to certain additional disclosure requirements as describedsell Shares at prices below the 150% minimum asset coverage ratio will applythen-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
•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 Company effective asfirst solicitation by or on behalf of April 9, 2019.
In addition, in order to provide the Company withof a firm commitment to purchase Shares or immediately prior to the maximumissuance 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 sell or otherwise issue 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, 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. For these purposes, Directors will not be deemed to have a financial interest solely by reason of their ownership of the Company’s Shares. The Board believes that having the flexibility at the earliest possible date, the Board authorizedfor the Company to seeksell its Shares below NAV in certain instances is in the Company’s best interests and the best interests of its stockholders. This would, among other things, add financial flexibility to comply with regulatory requirements and debt facility covenants, including the applicable debt to equity ratio and provide access to the capital markets to pursue attractive investment opportunities during periods of volatility and improve capital resources to enable the Company to compete more effectively for high quality investment opportunities. Upon obtaining the requisite stockholder approval, the Company will comply with the conditions described in this proxy statement in connection with any offering undertaken pursuant to the Share Issuance Proposal. See below for a discussion and an example of the Asset Coverage Ratio Proposal. If the Company’s stockholders approve the Asset Coverage Ratio Proposal at the Meeting, the 150% minimum asset coverage ratio will then apply effective asdilutive effect of the first day after the Meeting.sale of Shares at a price below NAV per Share.
Recommendation of the Board; Reasons for the Asset Coverageto Offer Shares at a Price Below NAV per Share
Status as a RIC and Maintaining a Favorable Debt to Equity Ratio Proposal
The Board unanimously recommends that the Company’s stockholders approve the Asset Coverage Ratio Proposal. In consideration of the application of the 150% minimum asset coverage ratio to the Company, the Board considered the information it received relating to, among other things:
the benefits of increased financial flexibility;
the potential to increase and sustain returns on equity;
the Company’s investment strategy and portfolio construction;
the current middle market direct lending landscape;
the risks relative to benefits associated with the use of increased leverage;
impact on the base management and incentive fees payable to the Company’s investment adviser (the “Investment Adviser”);
limitations of current credit facilities; and
the Company’s additional disclosure obligations.
Benefits of Increased Financial Flexibility
The Board considered that, asAs a BDC and a regulated investment company (“RIC”) for tax purposes, the Company will benefitmay want to raise capital through the sale of Shares. RICs generally must distribute substantially all of their earnings from increasingdividends, interest and short-term gains to stockholders in order to achieve pass-through tax treatment, which prevents the maximum regulatory leverage, through significantly more flexibility for complyingCompany from using those earnings to support its operations, which may include paying down existing debt or making new investments (including investments into existing portfolio companies). The Company must also comply with the asset coverage requirements applicable to BDCs. Importantly, application of the 150% minimum asset coverage ratio would enable the Company to better withstand potential adverse market movements while still meeting its asset coverage requirements. For example, as of December 31, 2017, the Company’s asset coverage ratio was 235%, which,requirement under the current 200% minimum asset coverage ratio, provided a 15% cushion based on1940 Act in order to incur debt or issue senior securities. Because BDCs must determine the fair value of investments. Underthe assets in their portfolio on a 150% minimum asset coverage ratio, all else being equal,quarterly basis, an unfavorable shift in market dynamics or the existence of underperforming assets may lower that cushion would be 36% based ondetermination of fair value and therefore proportionately increase the value of investments.
For example, even ifbalance sheet debt compared to assets. Failure to maintain the underlying performance of one or more portfolio companies may not indicate an impairment or inability to repay all principal and interest in full, volatility in the capital markets may negatively impact the valuations of the Company’s investments and create unrealized capital depreciation on certain investments. Any such reductions in value (as well as unrealized capital depreciation based on the underlying performance of the Company’s portfolio companies, if any) will negatively impact the Company’s total assets and the ability to satisfy the minimum asset coverage ratio. Any failure to satisfy therequired asset coverage ratio could have severe negative consequences for the Company, including the inability to pay dividends and breach of covenants in the Company’s credit facility. Issuing additional equity would allow the Company to realign its debt to equity ratio and avoid these negative consequences.
Higher Market Capitalization and Liquidity May Make the Company’s Shares More Attractive to Investors
If the Company issues additional Shares, its market capitalization and the amount of its publicly tradable Shares may increase, which may afford stockholders greater liquidity. A larger market capitalization may make the Shares more attractive to a material adverselarger number of investors who have limitations of the size of companies in which they invest. Furthermore, a larger number of Shares outstanding may increase the Company’s trading volume, which could decrease the volatility in the secondary market price of its Shares.
Reduced Expenses Per Share
An offering that increases the Company’s total assets may reduce its overall expenses per Share due to the spreading of fixed expenses over a larger asset base. The Company must bear certain fixed expenses, such as certain administrative,
governance and compliance costs that do not generally vary based on its size. On a per Share basis, these fixed expenses would be reduced when supported by a larger asset base.
Market Conditions Have Created, and May in the Future Create, Attractive Investment and Acquisition Opportunities
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, the re-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.
The Company believes that favorable investment opportunities to invest at attractive risk-adjusted returns, including opportunities to make acquisitions of other companies or investment portfolios at attractive values, may be created during periods of market disruption and volatility. However, periods of disruption and volatility may also adversely affect the Company’s access to sufficient debt and equity capital in order to take advantage of attractive opportunities that are created during these periods. In addition, the debt capital that will be available, if any, may be at a higher cost and on less favorable terms and conditions in the future. Stockholder approval of the Share Issuance Proposal, subject to the conditions set forth herein, would provide the Company with the flexibility to raise equity capital to invest in such attractive investment opportunities, which typically need to be made expeditiously.
The additional capital raised through an offering of the Company’s Shares may also help the Company generate additional investment opportunities. With more capital to make investments, the Company could be a more meaningful capital provider and such additional capital would allow it to compete more effectively for high-quality investment opportunities. Such investment opportunities may be funded with proceeds of an offering of Shares.
There is no assurance that our stockholders will realize the benefits discussed above.
Trading History
The Company’s Shares have been listed on The NASDAQ Global Select Market (“NASDAQ”) under the symbol “CGBD” since June 14, 2017. Prior to such date, 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, for each fiscal quarter during the last three fiscal years and the first quarter of the current fiscal year, the Company’s NAV per Share, the range of high and low closing sales prices of the Company’s Shares as reported on NASDAQ and the closing high and low sales prices of the Company’s Shares as a premium (discount) to the Company’s NAV.
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| For the Three Months Ended | NAV(1) | | Price Range | | High Sales Price Premium (Discount) to NAV(2) | | Low Sales Price Premium (Discount) to NAV (2) | |
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| Year Ended December 31, 2021 | | | | | | | | | | | | |
| March 31, 2021 | | $ | 15.70 | | | | $ | 13.80 | | | $ | 10.23 | | | (12.10) | % | | (34.84) | % | |
| June 30, 2021 | | $ | 16.14 | | | | $ | 13.97 | | | $ | 12.87 | | | (13.44) | % | | (20.26) | % | |
| September 30, 2021 | | $ | 16.65 | | | | $ | 14.28 | | | $ | 12.99 | | | (14.23) | % | | (21.98) | % | |
| December 31, 2021 | | $ | 16.91 | | | | $ | 14.25 | | | $ | 13.36 | | | (15.73) | % | | (20.99) | % | |
| Year Ending December 31, 2022 | | | | | | | | | | |
| March 31, 2022 | | $ | 17.11 | | | | $ | 14.82 | | | $ | 13.69 | | | (13.38) | % | | (19.99) | % | |
| June 30, 2022 | | $ | 16.81 | | | | $ | 14.84 | | | $ | 12.21 | | | (11.72) | % | | (27.36) | % | |
| September 30, 2022 | | $ | 17.16 | | | | $ | 14.60 | | | $ | 11.44 | | | (14.92) | % | | (33.33) | % | |
| December 30, 2022 | | $ | 16.99 | | | | $ | 14.75 | | | $ | 11.59 | | | (13.18) | % | | (31.78) | % | |
| Year Ending December 31, 2023 | | | | | | | | | | |
| March 31, 2023 | | $ | 17.09 | | | | $ | 15.67 | | | $ | 13.41 | | | (8.31) | % | | (21.53) | % | |
| June 30, 2023 | | $ | 16.73 | | | | $ | 14.88 | | | $ | 13.13 | | | (11.06) | % | | (21.52) | % | |
| September 30, 2023 | | $ | 16.86 | | | | $ | 15.83 | | | $ | 14.44 | | | (6.11) | % | | (14.35) | % | |
| December 31, 2023 | | $ | 16.99 | | | | $ | 15.57 | | | $ | 13.40 | | | (7.65) | % | | (20.52) | % | |
| Year Ending December 31, 2024 | | | | | | | | | | | | |
| March 31, 2024 | | $ | — | | * | | $ | — | | | $ | — | | | — | % | * | — | % | * |
| Through April [_], 2024 | | $ | — | | * | | $ | — | | | $ | — | | | — | % | * | — | % | * |
* NAV per Share has not yet been calculated for the indicated day.
(1) NAV per Share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per Share on the date of the high and low closing sales prices. The NAVs shown are based on outstanding Shares at the end of the relevant quarter.
(2) Calculated as the respective high or low closing sales price less NAV, divided by NAV (in each case, as of the applicable quarter).
On April [__], 2024, the last reported closing sales price of the Company’s Shares on NASDAQ was $[__] per Share.
Dilution and Other Risk Considerations
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 business, financial condition or results of operations, including the Company’s ability to borrow, pay dividends (and,NAV per Share as a result of the Company’s abilityissuance of Shares at a price less than the then-current NAV per Share. Any sale of Shares by the Company at a price below NAV per Share would result in an immediate dilution to maintain its RIC status), or repurchase sharesexisting stockholders on a per Share basis. This dilution would include reduction in the NAV per Share as a result of its common stock.
In addition to enhancing the abilityissuance of Shares at a price below the then-current NAV per Share and a proportionately greater decrease in a stockholder’s per Share interest in the earnings and assets of the Company to bear adverse market movements and still meet the asset coverage requirements, the Board concluded that having the option to access additional financing would giveper Share voting interest in the Company more flexibility to fully execute its business strategy.
Potential to Increase and Sustain Returns on Equitythan the increase in the assets of the Company resulting from such issuance.
The Board1940 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 Investment Adviser discussed how access to greater leverage hasresulting increase in the potential tonumber of outstanding shares of common stock is not accompanied by a proportionate increase and sustainin the Company’s investment yield and returns to common stockholders. Funds that use leverage generally aim to earn an investment return on money raised through leverage that exceedsnet assets of the costs of leveraging, and thereby to increase returns to common stockholders.issuer. The Board discussed thatwill consider such dilutive effect to the Company when considering whether to authorize any investment returns in excessspecific issuance of Shares below NAV per Share.
Stockholders of the costsCompany should also consider that they will have no subscription, preferential or preemptive rights to Shares authorized for issuance, and thus any future issuance of leverageShares at a price below NAV per Share would benefit the holdersdilute a stockholder’s holdings of the common stock; however,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.
The precise extent of any such dilution to the Company’s Shares 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.
As discussed above, it should be noted that the maximum number of Shares issuable below NAV that could result in such dilution is limited to 25% of the Company’s then-outstanding Shares.
Provided a quorum is present, approval of the Share Issuance Proposal requires the affirmative vote of the stockholders of the Company holding (1) a majority of the outstanding shares entitled to vote at the Meeting and (2) a majority of the outstanding shares entitled to vote at the Meeting that are not held by affiliated persons of the Company. The outstanding Shares and preferred stock, voting together as a single class, represent the Company’s outstanding shares entitled to vote at the Meeting. The 1940 Act defines “a majority of outstanding voting securities” of the Company as (a) 67% or more of the voting securities present at the Meeting if the holders of more than 50% of the outstanding voting securities of the Company are present or represented by proxy or (b) more than 50% of the outstanding voting securities of the Company, whichever is less. Abstentions and broker non-votes, if any, will not count as affirmative votes cast and will therefore have the same effect as votes against the Share Issuance Proposal.
The following examples indicate how a public offering of the Company’s Shares at a price less than NAV per Share would immediately affect the NAV per Share 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.
A placement of Shares at a price less than NAV per Share to a third party in a private placement would have an impact substantially similar to the impact on existing stockholders who do not purchase any Shares in the public offering described below.
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 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 dilution risks. These stockholders will experience an immediate decrease in the NAV per Share of the Shares they hold and 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. In addition, the costs of leverage exceed such investment returns, those costs wouldany offering of Shares below the then-current NAV will be borne by all of the Company’s stockholders regardless of whether they purchase additional Shares in the offering.
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 reducelevels of discount to NAV per share by a hypothetical issuer (“Issuer A”). The examples assume that Issuer A 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 returnsdilutive effect on a nonparticipating stockholder (“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); (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); and (4) an offering of 250,000 shares (25% of the outstanding shares) at $7.50 per share after offering expenses and any underwriting discounts and commissions (a 100% discount to NAV per share).NAV dilution similar to that shown herein would also apply to our existing common stockholders who do not receive shares of common stock at below NAV per Share upon conversion of our preferred stock at below NAV per Share, or who do not buy additional shares of common stock in the secondary market at the same or a lower price per share of common stock than the price per Share used in a conversion of preferred stock. The 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 these examples based on the actual number of Shares in such offering and the actual discount to the holdersmost recently determined NAV per share. It is not possible to predict the level of market price decline that may occur. These examples are provided for illustrative purposes only.
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| 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 | | Example 4
25% offering at
25% Discount |
| | Following Sale | | % Change | | Following Sale | | % Change | | Following Sale | | % Change | | Following Sale | | % Change |
| Offering Price | | | | | | | | | | | | | | | | | |
| Price per Share to Public | — | | | $ | 10.00 | | | — | | | $ | 9.47 | | | — | | | $ | 8.42 | | | — | | | $ | 7.89 | | | — | |
| Net Proceeds per Share to Issuer | — | | | $ | 9.50 | | | — | | | $ | 9.00 | | | — | | | $ | 8.00 | | | — | | | $ | 7.50 | | | — | |
| Decrease to NAV per Share | | | | | | | | | | | | | | | | | |
| Total Shares Outstanding | 1,000,000 | | | 1,050,000 | | | 5.00 | % | | 1,100,000 | | | 10.00 | % | | 1,200,000 | | | 20.00 | % | | 1,250,000 | | | 25.00 | % |
| NAV per Share | $ | 10.00 | | | $ | 9.98 | | | (0.20) | % | | $ | 9.91 | | | (0.90) | % | | $ | 9.67 | | | (3.30) | % | | $ | 9.50 | | | (5.00) | % |
| Dilution to Stockholder | | | | | | | | | | | | | | | | | |
| Shares Held by Stockholder A | 10,000 | | | 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 | % | | (16.67) | % | | 0.80 | % | | (20.00) | % |
| Total Asset Values | | | | | | | | | | | | | | | | | |
| Total NAV Held by Stockholder A | $ | 100,000 | | | $ | 99,800 | | | (0.20) | % | | $ | 99,100 | | | (0.90) | % | | $ | 96,700 | | | (3.30) | % | | $ | 95,000 | | | (5.00) | % |
| Total Investment by Stockholder A (Assumed to be $10.00 per Share) | $ | 100,000 | | | $ | 100,000 | | | — | | | $ | 100,000 | | | — | | | $ | 100,000 | | | — | | | $ | 100,000 | | | — | |
| Total Dilution to Stockholder A (Total NAV Less Total Investment) | — | | | $ | (200) | | | — | | | $ | (900) | | | — | | | $ | (3,300) | | | — | | | $ | (5,000) | | | — | |
| Per Share Amounts | | | | | | | | | | | | | | | | | |
| NAV per Share Held by Stockholder A | — | | | $ | 9.98 | | | — | | | $ | 9.91 | | | — | | | $ | 9.67 | | | — | | | $ | 9.50 | | | — | |
| Investment 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 | | | — | | | $ | 10.00 | | | — | |
| Dilution per Share Held by Stockholder A (NAV per Share Less Investment per Share) | — | | | $ | (0.02) | | | — | | | $ | (0.09) | | | — | | | $ | (0.33) | | | — | | | $ | (0.50) | | | — | |
| Percentage Dilution to Stockholder A (Dilution per Share Divided by Investment per Share) | — | | | — | | | (0.20) | % | | — | | | (0.90) | % | | — | | | (3.30) | % | | — | | | (5.00) | % |
Impact on Existing Stockholders who Participate in the Offering
An existing stockholder of the common stock.
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 the 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 Investment Adviser informedlevel of NAV per Share dilution on an aggregate basis will decrease as the Boardnumber 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 accretion in NAV per Share over their investment per Share and will also experience a disproportionately greater 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 Issuer A 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 for Stockholder A in the hypothetical 25% discount offering from the prior chart, if Stockholder A were to acquire shares equal to (1) 50% of their proportionate share of the offering (i.e.,
1,250 shares, which is 0.50% of the offering of 250,000 shares rather than their 1.00% proportionate share) and (2) 150% of their proportionate share of the offering (i.e., 3,750 shares, which is 1.50% of the offering of 250,000 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 this example based on the actual number of Shares in such offering and the actual discount to the most recently determined NAV per share. It is not possible to predict the level of market price decline that may occur. These examples are provided for illustrative purposes only. Levels of dilution and accretion similar to those shown herein would only expectapply under the above conditions to incura common stockholder that became a common stockholder following such holder’s conversion of preferred stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 50% Participation | | 150% Participation | | % Change |
| | Prior to Sale Below NAV per Share | | Following Sale | | % Change | | Following
Sale | |
| Offering Price | | | | | | | | | |
| Price per share to public | — | | $ | 7.89 | | | — | | $ | 7.89 | | | — |
| Net proceeds per share to issuer | — | | $ | 7.50 | | | — | | $ | 7.50 | | | — |
| Increases in Shares and Decrease to NAV per Share | | | | | | | | | |
| Total shares outstanding | 1,000,000 | | 1,250,000 | | 25.00 | % | | 1,250,000 | | 25.00 | % |
| NAV per share | $ | 10.00 | | | $ | 9.50 | | | (5.00) | % | | $ | 9.50 | | | (5.00) | % |
| (Dilution)/Accretion to Participating Stockholder A | | | | | | | | | |
| Shares held by Stockholder A | 10,000 | | 11,250 | | 12.50 | % | | 13,750 | | 37.50 | % |
| Percentage held by Stockholder A | 1.00 | % | | 0.90 | % | | (10.00) | % | | 1.10 | % | | 10.00 | % |
| Total Asset Values | | | | | | | | | |
| Total NAV held by Stockholder A | $ | 100,000 | | | $ | 106,875 | | | 6.88 | % | | $ | 130,625 | | | 30.63 | % |
| Total investment by Stockholder A (assumed to be $10.00 per share on shares held prior to sale) | $ | 100,000 | | | $ | 109,863 | | | 9.86 | % | | $ | 129,588 | | | 29.59 | % |
| Total (dilution)/accretion to Stockholder A (total NAV less total investment) | — | | $ | (2,988) | | | — | | | $ | 1,037 | | | — | |
| Per Share Amounts | | | | | | | | | |
| NAV per share held by Stockholder A | — | | $ | 9.50 | | | — | | | $ | 9.50 | | | — | |
| Investment per share held by stockholder A (assumed to be $10.00 per share on shares held prior to sale) | $ | 10.00 | | | $ | 9.77 | | | (2.30) | % | | $ | 9.42 | | | (5.80) | % |
| (Dilution)/accretion per share held by Stockholder A (NAV per share less investment per share) | — | | $ | (0.27) | | | — | | | $ | 0.08 | | | — | |
| Percentage (dilution)/accretion to Stockholder A (dilution/accretion per share divided by investment per share) | — | | | — | | | (2.76) | % | | — | | | 0.21 | % |
Notwithstanding the dilutive effect of any equity financing on the Company’s NAV per Share, the Board has considered the Company’s potential need to obtain additional capital for repayment of indebtedness, ifinvestment or other corporate purposes discussed in this proxy statement. With more capital to utilize, the Investment AdviserBoard believes that the Company may be able to pay down its outstanding indebtedness or make additional investments it considers to be attractive. The Board further believes that over time, the costsvalue of carrying the incremental assets toavailable for repayment of debt or other uses, taken together with the other factors previously discussed, may be acquired through leverage are likely to be lower thanreflected positively in the Company’s expected incremental investment yieldmarket price of the Shares and returns on equity.
While no assurances can be given that the investment yield and returns on equity attributable to borrowing wouldsuch increases may exceed the costs of such leverage, the Board concluded that the benefits of increased leverage outweigh the risks, as noted in more detail below.
The Company’s Investment Strategy and Portfolio Construction
The Board considered the Company’s investment strategy and portfolio construction and, based on that review, believesinitial dilutive effects that the Company would be well-positionedis likely to prudently and effectively employ an increased levelexperience in its NAV per Share due to offerings of leverage ifShares in accordance with the Share Issuance Proposal.
Potential Investors
The Company has not solicited any potential buyers of the Shares that it chosemay elect to do so. The Board notedissue 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 except that the Company has historically held a defensive, diversified portfolioreserved Shares for issuance pursuant to the terms of first lien senior secured loans. The Board also noted that the Company focusesits preferred stock issued on stable, healthy businesses with strong cash-flow generation in non-cyclical sectors. As of December 31, 2017, the Company had a portfolio of 107 investments in 90 portfolio companies across 28 industries and 57 unique sponsors. It further noted that, as of December 31, 2017, approximately 99.3%May 5, 2020 to an affiliate of the Company’s debt investments bore interest at floating rates, subject to interest rate floors, and 77.8% of the Company portfolio was invested in first lien debt investments.
The Current Middle Market Direct Lending Landscape
The Board considered the middle market direct lending landscape in which the Company operates. The Company’s primary competitors in providing financing to middle market companies include public and private funds, other BDCs, commercial and investment banks, collateralized loan obligations, commercial finance companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Manyadviser. However, members of the Company’s potential competitors are substantially largermanagement and have considerably greater financial, technical and marketing resources than the Company. For example, some competitorsother affiliated persons may have a lower costparticipate in an offering of funds and access to funding sources that will not be available to the Company. In addition, some competitors may have higher risk tolerances or different risk assessments than the Company, which could allow them to consider a wider variety of investments than the Company. Furthermore, many of the Company’s competitors are not subject to the regulatory restrictions to which the Company is subject under the 1940 Act. Enabling the Company to incur additional indebtedness is expected to increase the competitiveness of the Company. Moreover, if other BDCs take advantage of the ability to incur additional indebtedness and the Company does not have the flexibility to do so, its competitiveness relative to such BDCs may be reduced.
Risks Relative to Potential 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 sharply than it otherwise would have without leverage or with lower leverage. Similarly, any decrease in the Company’s revenue would cause its net income to decline more sharply than it would have if the Company had not borrowed or had borrowed less. However, since the Company already uses leverage in optimizing its investment portfolio, there are no material new risks associated with increased leverage. As a result, the Board concluded that the potential benefits of increased leverage outweigh these risks.
Impact on the Base Management and Incentive Fees
The Board considered the impact of the use of higher leverage on the Company’s base management fee and incentive fee payable to the Investment Adviser, noting that additional leverage would increase the base management fee and could increase the incentive fees. For example, base management fees are payable based on its gross assets, including assets acquired through the use of leverage (but excluding cash and any temporary investments in cash-equivalents), which may give the Investment Adviser an incentive to use a higher level of leverage to make additional investments. Similarly, the incentive fees payableShares by the Company to the Investment Adviser may create an incentive for the Investment Adviser to pursue investments that are riskier or more speculative than would be the case in the absence of such compensation arrangement. However, since the Company already uses leverage in optimizing its investment portfolio, there are no material new risks associated with increased leverage on the base management and incentive fees payable to the Investment Advisor or the Investment Adviser’s incentives. The Investment Advisor also informed the Board that it intends to manage the Company in the same disciplined mannerterms as it has prior to the effectiveness of the lower minimum asset coverage ratio. As a result, the Board concluded that the potential benefits of increased leverage outweigh these risks.
Limitations of Current Credit Facilities
The Company and its wholly owned subsidiary, TCG BDC SPV LLC (“SPV”), have each entered into a senior secured revolving credit facility (collectively, the “Facilities”). The Facilities include financial covenants that require the Company and the SPV to maintain a 200% minimum asset coverage ratio. The Company plans to seek amendments to the Facilities to lower the minimum asset coverage ratio to 150%. The Company cannot assure you that it will be able to negotiate a change to the Facilities to allow it and/or the SPV to incur additional leverage or that any such amendment will be available to it and/or the SPV on favorable terms. An inability on the part of the Company and/or the SPV to amend the contractual asset coverage limitation and access additional leverage could limit the Company’s ability to take advantage of the benefits described above related to its ability to incur additional leverage.
The Company’s Additional Disclosure Obligations
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 either a majority of the Company’s Independent Directors or the Company’s stockholders:
not later than 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) any filing submitted to the SEC under Section 13(a) or 15(d) of the Exchange Act (such as the Company’s Form 8-K, Form 10-Q or Form 10-K); and (2) a notice on the Company’s website (http://tcgbdc.com/), both of which have been done;
the Company is required to disclose, in each periodic filing required under Section 13(a) of the Exchange Act (i.e., the Company’s Form 10-Q or Form 10-K): (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 (i.e., the Company’s Form 10-Q or Form 10-K) 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.
The Board noted that, based on discussions with the Investment Adviser, none of these requirements are burdensome and the additional disclosure is appropriate.
Conclusion
Following consideration of the foregoing benefits and risks, the Board, including all Independent Directors, believes that permitting the Company to apply a minimum asset coverage ratio of 150% as of the earliest possible date is in the best interests of the Company and its stockholders. No single factor was determinative of the Board’s decision, but rather, the Directors based their determination on the total mix of information available to them.
Required Vote
Approval requires the receipt of “FOR” votes constituting a majority of the votes cast on the proposal at the Meeting, provided a quorum is present. Abstentions will not be included in determining the number of votes cast and, as a result, will have no effect on this proposal. Shares represented by broker non-votes also are not considered votes cast and thus have no effect on the proposal.others.
THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ASSET COVERAGE RATIOSHARE ISSUANCE PROPOSAL.
OTHER BUSINESS
The Board is not awareUnder our Bylaws, the only matters that may be acted on at a special meeting of anystockholders are those stated in the Notice. Accordingly, other matterthan procedural matters relating to be submitted atthe proposal, no other business may properly come before the Meeting. IfShould any otherprocedural matter properly comes beforerequiring a vote of stockholders arise, it is the Meeting,intention of the persons named in the enclosed form of proxy generally will have discretionary authority to vote the shares thereby represented in accordance with their judgment.
discretion on such procedural matters.
STOCKHOLDER PROPOSALS AND NOMINATIONS FOR THE 20192025 ANNUAL MEETING OF STOCKHOLDERS
Inclusion of Proposals in Our Proxy Statement and Proxy Card Under the SEC’s Rules
Any proposal of a stockholder intended to be included in our proxy statement and form of proxy/voting instruction card for the 20192025 annual meeting of stockholders pursuant to the SEC’s Rule 14a-8 must be received by us no later than [ ].December 31, 2024. Such proposals must also comply with the requirements as to form and substance established by the SEC if such proposals are to be included in the proxy statement and form of proxy. All proposals should be addressed to the Secretary of the Company, Erik Barrios, 520 MadisonJoshua Lefkowitz, One Vanderbilt Avenue, 41 Floor,Suite 3400, New York, NY 10022.10017.
Bylaw Requirements for Stockholder Submission of Nominations and Proposals
A stockholder recommendation for nomination of a person for election to our board or a proposal for consideration at our 20192025 annual meeting of stockholders, other than stockholder proposals submitted pursuant to the SEC’s Rule 14a-8, must be submitted in accordance with the advance notice procedures and other requirements set forth in our Bylaws. These requirements are separate from the requirements discussed above to have the stockholder nomination or other proposal included in our proxy statement and form of proxy/voting instruction card pursuant to the SEC’s rules. The item to be brought before the meeting must be a proper subject for stockholder action. Our Bylaws require that, to be timely, a stockholder’s notice shall set forth all information required and shall be delivered to the Secretary at the principal executive office of the Company at the above address not earlier than the 150th day nor later than 5:00 p.m., Eastern Time, on the 120th day prior to the first anniversary of the date of the proxy statement for the Meeting. As a result, a stockholder’s notice pursuant to these provisions of our Bylaws must be received no earlier than [ ]November 30, 2024 and no later than 5:00 p.m., Eastern Time, on [ ];December 31, 2024; provided, however, that in the event that the date of the 20192025 annual meeting of stockholders is advanced or delayed by more than 30 days from the first anniversary of the Meeting, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to the date of the 20192025 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 such annual meeting, as originally convened, or the 10th day following the day on which public announcement of the date of such meeting is first made.
ANNUAL REPORT
AWe will furnish, without charge, a copy of our Annual Report which consists of our 2017on Form 10-K (including financial statements), is available, along withfor the Proxy Statement, online at https://proxyonline.com/docs/tcgbdc.pdf. If a printed copyfiscal year ended December 31, 2023 to any stockholder upon request. Requests should be directed to the Secretary of the Proxy Statement is requested, the Annual Report will be furnished with the Proxy Statement.Company, Joshua Lefkowitz, One Vanderbilt Avenue, Suite 3400, New York, NY 10017.
WHETHER OR NOT YOU PLAN TO ATTENDPARTICIPATE IN THE MEETING, WE URGE YOU TO VOTE OVER THE INTERNET, BY TELEPHONE OR BY MARKING, SIGNING AND RETURNING YOUR PROXY OR VOTING INSTRUCTION CARD AS SOON AS POSSIBLE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES.
| | |
|
| By Order of the Board of Directors, |
|
/s/ Erik BarriosJoshua Lefkowitz |
Erik BarriosJoshua Lefkowitz |
| Secretary |
Date: April [__], 2024
TCG BDC,CARLYLE SECURED LENDING, INC.
PRIVACY NOTICE
As part of our compliance with the provisions of certain privacy regulations issued by the United States federal government, we are required to provide you with notice of our policies and practices relating to the use and sharing of your personal information. For residents of the European Economic Area (“EEA”), please also refer to the EEA Investor Privacy Notice, which is available for your review on our website at https://carlylesecuredlending.com/sites/default/files/2018-05/TCGBDCInc_EEA_Privacy_Notice.pdf.
We have a policyare committed to maintainmaintaining the confidentiality, integrity and security of our current and former investors’ non-public personal information. Accordingly, we have developed internal policies to protect confidentiality while allowing investors’ needs to be met. We will not disclose any non-public personal information about investors who are individuals, except to our affiliates and service providers as allowed by applicable law or regulation or to other nonaffiliated third parties as otherwise permitted or required by applicable law or regulation.In the normal course of serving our investors, information we collect may be shared with companies that perform various services such as our accountants and attorneys. We collect non-public information about you from the following sources:
•Information we receive on subscription agreements or other forms, such as name, address, account number and the types and amounts of investments; and
• Information about transactions with us or our affiliates, such as participation in other investment programs, ownership of certain types of accounts or other account data and activity.
We may disclose the information that we collect from our investors or former investors, as described above, only to our affiliates and service providers and only as allowed by applicable law or regulation or to other nonaffiliated third parties as otherwise permitted or required by applicable law or regulation. Any party that receives this information will be required to use it only for the services required by us and as allowed by applicable law or regulation, and is not permitted to share or use this information for any other purpose. To protect the non‐publicnon-public personal information of individuals, we permit access only by authorized personnel who need access to that information to provide services to the fund and its investors. In order to guard investors’ non-public personal information, we maintain physical, electronic and procedural safeguards that are designed to comply with applicable law.
Non-public personal information that we collect about you will generally be stored on secured servers located in the United States. An individual investor’s right to privacy extends to all forms of contact with us, including telephone, written correspondence and electronic media, such as the Internet.
Please be assured that we are committed to protecting the privacy of non-public information about you.
Sincerely,
TCG BDC,Carlyle Secured Lending, Inc.
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