UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08985
Western Asset Corporate Loan Fund Inc.
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 47th Floor,
New York, NY 10018
(Address of principal executive offices) (Zip code)
George P. Hoyt
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (888) 777-0102
Date of fiscal year end: September 30
Date of reporting period: September 30, 2020
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
| Annual Report | September 30, 2020 |
WESTERN ASSET
CORPORATE LOAN
FUND INC. (TLI)
Beginning in or after March 2021, as permitted by regulations adopted by the Securities and Exchange Commission, the Fund intends to no longer mail paper copies of the Fund’s shareholder reports like this one, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary (such as a broker-dealer or bank). Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you invest through a financial intermediary and you already elected to receive shareholder reports electronically (“e-delivery”), you will not be affected by this change and you need not take any action. If you have not already elected e-delivery, you may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary.
You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account at that financial intermediary. If you are a direct shareholder with the Fund, you can call the Fund at 1-888-888-0151, or write to the Fund by regular mail at P.O. Box 505000, Louisville, KY 40233 or by overnight delivery to Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account held directly with the fund complex.
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Fund objective
The Fund’s investment objective is to maximize current income consistent with prudent efforts to preserve capital.
The Fund invests primarily in floating- or variable-rate collateralized senior loans to corporations, partnerships or other business entities operating in various industries and geographic regions.
Dear Shareholder,
We are pleased to provide the annual report of Western Asset Corporate Loan Fund Inc. for the twelve-month reporting period ended September 30, 2020. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.
Special shareholder notices
On July 31, 2020, Franklin Resources, Inc. (“Franklin Resources”) acquired Legg Mason, Inc. (“Legg Mason”) in an all-cash transaction. As a result of the transaction, Legg Mason Partners Fund Advisor, LLC (“LMPFA”) and the subadviser became indirect, wholly-owned subsidiaries of Franklin Resources. Under the Investment Company Act of 1940, as amended, consummation of the transaction automatically terminated the management and subadvisory agreements that were in place for the Fund prior to the transaction. The Fund’s manager and subadviser continue to provide uninterrupted services with respect to the Fund pursuant to interim management and subadvisory agreements that were approved by the Fund’s board.
Franklin Resources, whose principal executive offices are at One Franklin Parkway, San Mateo, California 94403, is a global investment management organization operating, together with its subsidiaries, as Franklin Templeton. As of September 30, 2020, after giving effect to the transaction described above, Franklin Templeton’s asset management operations had aggregate assets under management of approximately $1.4 trillion.
| II | Western Asset Corporate Loan Fund Inc. |
On July 7, 2020, the Board of Directors of Western Asset Corporate Loan Fund Inc. announced that the Board had approved a plan of liquidation and dissolution (the “Plan”) of the Fund, subject to stockholder approval of the Plan in accordance with Maryland law. The Plan will become effective only upon (a) its adoption and approval by the holders of a majority of the votes entitled to be cast by the outstanding shares of capital stock of the Fund and (b) the satisfactory resolution in the sole discretion of the Board of any and all claims pending against the Fund and/or the Board. To ensure an orderly liquidation of its assets, the Fund may deviate from its investment objective and strategies. In connection with the proposal to approve the Plan, the Fund filed a definitive proxy statement with the SEC on October 1, 2020, mailing said proxy statement to shareholders of record on or about that date. A special meeting of stockholders is scheduled for November 13, 2020 for the purposes of considering and voting upon the liquidation. If the liquidation is approved by stockholders, management, under the oversight of the Board, will proceed to wind up the Fund’s affairs as soon as reasonably practicable thereafter in a timeframe that allows for an orderly liquidation of portfolio holdings under then-current market conditions. The Fund anticipates that the liquidation will occur on or around November 20, 2020. The Fund cannot predict at this time how long it will take to accomplish an orderly liquidation.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:
| • | Fund prices and performance, |
| • | Market insights and commentaries from our portfolio managers, and |
| • | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
October 30, 2020
| Western Asset Corporate Loan Fund Inc. | III |
Q. What is the Fund’s investment strategy?
A. The Fund’s investment objective is to maximize current income consistent with prudent efforts to preserve capital. The Fund invests primarily in floating- or variable-rate collateralized senior loans to corporations, partnerships or other business entities operating in various industries and geographic regions. Under normal market conditions, the Fund invests at least 80% of total assets in collateralized senior loans.
The Fund may also invest up to 20% of total assets in uncollateralized senior loans; investment and non-investment grade corporate debt securities; U.S. government debt; money market instruments; derivatives designed to hedge risks inherent in the Fund’s portfolio; and certain other securities received in connection with investments in collateralized senior loans. The Fund’s emphasis on long-term investing is combined with consistent monitoring and selling on early warning signs whenever possible. The core credit strategy of the Fund is to identify strong credits in stable industries through thorough analysis and research.
At Western Asset Management Company, LLC (“Western Asset”), the Fund’s subadviser, we utilize a fixed income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio management personnel, research analysts and an in-house economist. Under this team approach, management of client fixed income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are S. Kenneth Leech, Michael C. Buchanan and Ryan Kohan.
Q. What were the overall market conditions during the Fund’s reporting period?
A. Fixed income markets, in general, posted mixed results over the twelve-month reporting period ended September 30, 2020. Most spread sectors (non-Treasuries) lagged equal durationi Treasuries amid periods of heightened volatility. This was driven by a number of factors, including extreme risk aversion as the COVID-19 pandemic escalated, sharply falling global growth, aggressive monetary policy accommodation from the Federal Reserve Board (the “Fed”)ii, ongoing trade conflicts and a number of geopolitical issues.
Both short- and long-term U.S. Treasury yields moved sharply lower during the reporting period. The yield for the two-year Treasury note began the reporting period at 1.63% and rose as high as 1.68% on November 7 and November 8, 2019. The low for the period of 0.11% occurred several times toward the end of July 2020, the beginning of August 2020, and the end of September 2020, and ended the period at 0.13%. The yield for the ten-year Treasury began the reporting period at 1.68% and moved as high as 1.94% on November 8, 2019. The low of 0.52% occurred on August 4, 2020, and ended the period at 0.69%.
For the twelve months ended September 30, 2020, the Bloomberg Barclays U.S. Aggregate Indexiii returned 6.98%, while the leveraged loan market, as measured by the S&P/LSTA Performing Loan Indexiv returned 1.35%.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 1 |
Fund overview (cont’d)
Q. How did we respond to these changing market conditions?
A. Subject to shareholder approval, the Fund is scheduled to liquidate in November 2020. As a result, we prepared for this event by allowing maturing securities to run off and did not reinvest this capital.
The use of leverage was tactically managed during the reporting period. We ended the period with no leverage in the Fund, versus roughly 29% at the beginning of the period. The use of leverage in general detracted from results during the twelve months ended September 30, 2020.
Performance review
For the twelve months ended September 30, 2020, Western Asset Corporate Loan Fund Inc. returned -5.64% based on its net asset value (“NAV”)v and 6.39% based on its New York Stock Exchange (“NYSE”) market price per share. The S&P/LSTA Performing Loan Index and the Lipper Loan Participation Closed-End Funds Category Averagevi returned 1.35% and -3.9%, respectively, over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.
During the twelve-month period, the Fund made distributions to common stock shareholders totaling $0.78 per share of which $0.14 will be treated as a return of capital for tax purposes.* The performance table shows the Fund’s twelve-month total return based on its NAV and market price as of September 30, 2020. Past performance is no guarantee of future results.
| Performance Snapshot as of September 30, 2020 | ||||
| Price Per Share | 12-Month Total Return** | |||
| $9.46 (NAV) | -5.64 | %†# | ||
| $9.26 (Market Price) | 6.39 | %‡ | ||
All figures represent past performance and are not a guarantee of future results.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
† Total return assumes the reinvestment of all distributions, including returns of capital, at NAV.
‡ Total return assumes the reinvestment of all distributions, including returns of capital, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.
Q. What were the leading contributors to performance?
A. The largest contributor to the Fund’s relative performance during the reporting period was our quality biases. In particular, an opportunistic allocation to investment-grade corporate bonds was beneficial as their spreads narrowed after widening sharply in the
| * | For the tax character of distributions paid during the fiscal year ended September 30, 2020, please refer to page 24 of this report. |
| # | The total return on NAV reflects the impact of certain non-recurring legal and transfer agent fees. Without these fees, the total return based on NAV would have been -5.04%. |
| 2 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
spring of 2020. In addition, an underweight to higher rated securities was rewarded, as they outperformed their lower rated counterparts. In terms of individual holdings, our overweight to Petco was beneficial. The company’s results were resilient in the face of the pandemic.
Q. What were the leading detractors from performance?
A. The largest detractor from the Fund’s relative performance during the reporting period was its sector positioning, as underweights to Financials and Technology were negative for results.
Individual holdings that detracted from performance included an overweight position in Atlantic Aviation, an aviation services company that operates a chain of fixed-based operator facilities across the U.S. It performed poorly as air travel plunged given the pandemic. Elsewhere, an overweight in Equinox Group, an American luxury fitness company that operates several separate lifestyle brands, was not rewarded. It was also hurt by COVID-19 lockdowns and social distancing mandates.
Looking for additional information?
The Fund is traded under the symbol “TLI” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol “XTLIX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com (click on the name of the Fund).
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in Western Asset Corporate Loan Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Western Asset Management Company, LLC
October 30, 2020
RISKS: The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Fund’s common stock is traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Because the Fund is non-diversified, it may be more susceptible to economic, political or regulatory events than a diversified fund. The Fund invests in fixed income securities which are subject to a number of risks, such as credit risk, the risk of nonpayment of scheduled interest or loan payments, which could lower the Fund’s value. The Fund can normally be expected to have less significant interest rate related fluctuations in its NAV than investment companies investing
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 3 |
Fund overview (cont’d)
primarily in fixed rate fixed income securities (other than money market funds) because the floating or variable rate collateralized senior loans in which the Fund invests float in response to changes in prevailing market interest rates. Because floating or variable interest rates on collateralized senior loans reset periodically, however, there can be some, typically short term, dislocation between prevailing market interest rates and the interest rates paid on the Fund’s collateralized senior loans. Accordingly, the Fund’s NAV may experience related fluctuations from time to time. Similarly, a sudden and extreme increase in prevailing interest rates may cause a decline in the Fund’s NAV. The Fund may invest in foreign securities which are subject to certain risks not associated with domestic investing, such as currency fluctuations, and changes in political and economic conditions, which could increase volatility. High-yield lower-rated securities (commonly known as “junk bonds”), involve greater credit and liquidity risks than investment grade securities.
Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. The Fund may make investments in derivative instruments. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
| i | Duration is the measure of the price sensitivity of a fixed income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows. |
| ii | The Federal Reserve Board (the “Fed”) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. |
| iii | The Bloomberg Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| iv | The S&P/LSTA Performing Loan Index is a sub-index of the S&P/LSTA Leveraged Loan Index (LLI) and it is all loans excluding those in payment default. The S&P/LSTA Leveraged Loan Index tracks the current outstanding balance and spread over LIBOR for fully funded term loans. The facilities included represent a broad cross section of leveraged loans syndicated in the U.S., including dollar-denominated loans to overseas issuers. The market value return component of the Index is based on secondary market pricing received from dealers. |
| v | Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any), from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares. |
| vi | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended September 30, 2020, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 54 funds in the Fund’s Lipper category. |
| 4 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of September 30, 2020. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time. |
| ‡ | Represents less than 0.1%. |
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 5 |
September 30, 2020
Western Asset Corporate Loan Fund Inc.
| Security† | Rate | Maturity Date | Face Amount | Value | ||||||||||||
| Senior Loans (a)(b) — 17.2% | ||||||||||||||||
Consumer Cyclical — 6.0% | ||||||||||||||||
CM Acquisition Co., Term Loan (3 mo. USD LIBOR + 10.000%) | 11.000 | % | 7/26/23 | $ | 69,267 | $ | 66,237 | (c)(d) | ||||||||
Equinox Holdings Inc., Second Lien Initial Term Loan (3 mo. USD LIBOR + 7.000%) | 8.000 | % | 9/6/24 | 410,000 | 250,202 | (d) | ||||||||||
Equinox Holdings Inc., Term B-2 Loan (3 mo. USD LIBOR + 9.000%) | 10.000 | % | 3/8/24 | 937,650 | 932,962 | (c)(d) | ||||||||||
Michaels Stores Inc., 2018 New Replacement Term Loan B (1 mo. USD LIBOR + 2.500%) | 3.500 | % | 1/30/23 | 1,009,415 | 1,008,658 | (d) | ||||||||||
Mohegan Tribal Gaming Authority, Term Loan B (3 mo. USD LIBOR + 6.375%) | 7.375 | % | 10/13/23 | 1,007,567 | 915,970 | (d) | ||||||||||
TKC Holdings Inc., Second Lien Initial Term Loan (3 mo. USD LIBOR + 8.000%) | 9.000 | % | 2/1/24 | 1,649,924 | 1,394,186 | (d) | ||||||||||
Wynn Resorts Finance LLC, Term Loan Facility A (1 mo. USD LIBOR + 1.750%) | 1.900 | % | 9/20/24 | 1,102,000 | 1,046,900 | (c)(d) | ||||||||||
Total Consumer Cyclical | 5,615,115 | |||||||||||||||
Consumer Non-Cyclical — 4.2% | ||||||||||||||||
8th Avenue Food & Provisions Inc., Second Lien Term Loan (1 mo. USD LIBOR + 7.750%) | 7.901 | % | 10/1/26 | 1,080,000 | 1,071,900 | (c)(d) | ||||||||||
EyeCare Partners LLC, Second Lien Initial Term Loan (1 mo. USD LIBOR + 8.250%) | 8.400 | % | 2/4/28 | 1,060,000 | 1,002,760 | (d) | ||||||||||
Global Medical Response Inc., 2018 Term Loan (3 mo. USD LIBOR + 3.250%) | 4.250 | % | 4/28/22 | 906,803 | 904,819 | (d) | ||||||||||
Medical Solutions Holdings Inc., First Lien Closing Date Term Loan (3 mo. USD LIBOR + 4.500%) | 5.500 | % | 6/14/24 | 960,300 | 929,090 | (c)(d) | ||||||||||
Total Consumer Non-Cyclical | 3,908,569 | |||||||||||||||
Energy — 1.0% | ||||||||||||||||
Paragon Offshore Finance Co., Term Loan | — | — | 1,830 | 861 | *(c)(e) | |||||||||||
Penn Virginia Holdings Corp., Second Lien Advance Term Loan (1 mo. USD LIBOR + 7.000%) | 8.000 | % | 9/29/22 | 950,000 | 883,500 | (c)(d) | ||||||||||
Permian Production Partners LLC, Initial Term Loan (3 mo. USD LIBOR + 3.000%) | 3.250 | % | 5/20/24 | 798,000 | 59,850 | (c)(d)(f) | ||||||||||
Total Energy | 944,211 | |||||||||||||||
Financial Other — 0.5% | ||||||||||||||||
Finco I LLC, 2020 Term Loan (1 mo. USD LIBOR + 2.500%) | 2.648 | % | 6/27/25 | 463,204 | 461,467 | (d) | ||||||||||
Industrial Other — 0.0%†† | ||||||||||||||||
Prime Security Services Borrower LLC, 2019 Refinancing Term Loan B1 | 4.250 | % | 9/23/26 | 2,412 | 2,393 | (d) | ||||||||||
See Notes to Financial Statements.
| 6 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Western Asset Corporate Loan Fund Inc.
| Security† | Rate | Maturity Date | Face Amount | Value | ||||||||||||
Technology — 4.4% | ||||||||||||||||
Blackhawk Network Holdings Inc., Second Lien Term Loan (1 mo. USD LIBOR + 7.000%) | 7.188 | % | 6/15/26 | $ | 2,180,000 | $ | 2,012,866 | (d) | ||||||||
Global Tel Link Corp., Second Lien Term Loan (1 mo. USD LIBOR + 8.250%) | 8.397 | % | 11/29/26 | 1,520,000 | 1,065,900 | (d) | ||||||||||
Particle Investments Sarl, First Lien Initial Term Loan (3 mo. USD LIBOR + 5.250%) | 5.750 | % | 2/18/27 | 1,038,720 | 1,033,526 | (c)(d) | ||||||||||
Total Technology | 4,112,292 | |||||||||||||||
Transportation — 1.1% | ||||||||||||||||
GlobalTranz Enterprises LLC, First Lien Initial Term | ||||||||||||||||
Loan (1 mo. USD LIBOR + 5.000%) | 5.156 | % | 5/15/26 | 1,271,596 | 1,087,215 | (d) | ||||||||||
Total Senior Loans (Cost — $17,714,627) | 16,131,262 | |||||||||||||||
| Shares | ||||||||||||||||
| Common Stocks — 0.1% | ||||||||||||||||
| Consumer Discretionary — 0.1% | ||||||||||||||||
Automobiles — 0.1% | ||||||||||||||||
Dayco Products LLC | 4,745 | 35,587 | *(c) | |||||||||||||
Dayco Products LLC | 167 | 1,253 | *(c) | |||||||||||||
Total Automobiles | 36,840 | |||||||||||||||
Household Durables — 0.0%†† | ||||||||||||||||
EveryWare Global | 66,667 | 9,333 | *(c) | |||||||||||||
Total Consumer Discretionary | 46,173 | |||||||||||||||
| Energy — 0.0%†† | ||||||||||||||||
Energy Equipment & Services — 0.0%†† | ||||||||||||||||
Paragon Offshore Litigation Trust A | 503 | 151 | (c) | |||||||||||||
Oil, Gas & Consumable Fuels — 0.0%†† | ||||||||||||||||
Montage Resources Corp. | 1,780 | 7,814 | * | |||||||||||||
Total Energy | 7,965 | |||||||||||||||
Total Common Stocks (Cost — $1,787,178) | 54,138 | |||||||||||||||
Total Investments before Short-Term Investments (Cost — $19,501,805) |
| 16,185,400 | ||||||||||||||
| Rate | ||||||||||||||||
| Short-Term Investments — 6.6% | ||||||||||||||||
Dreyfus Government Cash Management, Institutional Shares (Cost — $6,164,328) | 0.019 | % | 6,164,328 | 6,164,328 | ||||||||||||
Total Investments — 23.9% (Cost — $25,666,133) | 22,349,728 | |||||||||||||||
Other Assets in Excess of Liabilities — 76.1% | 71,124,981 | |||||||||||||||
Total Net Assets — 100.0% | $ | 93,474,709 | ||||||||||||||
See Notes to Financial Statements.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 7 |
Schedule of investments (cont’d)
September 30, 2020
Western Asset Corporate Loan Fund Inc.
| † | Securities held by the Fund are subject to a lien, granted to the lenders, to the extent of the borrowing outstanding and any additional expenses. |
| †† | Represents less than 0.1%. |
| * | Non-income producing security. |
| (a) | Interest rates disclosed represent the effective rates on collateralized and uncollateralized senior loans. Ranges in interest rates are attributable to multiple contracts under the same loan. |
| (b) | Senior loans may be considered restricted in that the Fund ordinarily is contractually obligated to receive approval from the agent bank and/or borrower prior to the disposition of a senior loan. |
| (c) | Security is valued using significant unobservable inputs (Note 1). |
| (d) | Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above. |
| (e) | Security is valued in good faith in accordance with procedures approved by the Board of Directors (Note 1). |
| (f) | The coupon payment on this security is currently in default as of September 30, 2020. |
Abbreviation(s) used in this schedule: | ||
| LIBOR | — London Interbank Offered Rate | |
| USD | — United States Dollar | |
See Notes to Financial Statements.
| 8 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Statement of assets and liabilities
September 30, 2020
| Assets: | ||||
Investments, at value (Cost — $25,666,133) | $ | 22,349,728 | ||
Cash | 103,115 | |||
Receivable for securities sold | 78,321,165 | |||
Interest receivable | 203,505 | |||
Deposits held in escrow (Note 2) | 81,937 | |||
Prepaid expenses | 4,568 | |||
Total Assets | 101,064,018 | |||
| Liabilities: | ||||
Payable for securities purchased | 6,543,961 | |||
Distributions payable | 651,877 | |||
Investment management fee payable | 149,024 | |||
Interest expense payable | 10,258 | |||
Directors’ fees payable | 4,979 | |||
Accrued expenses | 229,210 | |||
Total Liabilities | 7,589,309 | |||
| Total Net Assets | $ | 93,474,709 | ||
| Net Assets: | ||||
Par value ($0.001 par value; 9,876,922 shares issued and outstanding; 150,000,000 shares authorized) | $ | 9,877 | ||
Paid-in capital in excess of par value | 124,825,613 | |||
Total distributable earnings (loss) | (31,360,781) | |||
| Total Net Assets | $ | 93,474,709 | ||
| Shares Outstanding | 9,876,922 | |||
| Net Asset Value | $ | 9.46 | ||
See Notes to Financial Statements.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 9 |
For the Year Ended September 30, 2020
| Investment Income: | ||||
Interest | $ | 8,232,984 | ||
Dividends | 65,918 | |||
Total Investment Income | 8,298,902 | |||
| Expenses: | ||||
Investment management fee (Note 2) | 1,112,038 | |||
Interest expense (Note 5) | 892,854 | |||
Transfer agent fees | 418,330 | |||
Legal fees | 212,415 | |||
Audit and tax fees | 61,792 | |||
Commitment fees (Note 5) | 43,064 | |||
Directors’ fees | 35,367 | |||
Shareholder reports | 22,301 | |||
Fund accounting fees | 17,575 | |||
Stock exchange listing fees | 15,045 | |||
Custody fees | 10,537 | |||
Insurance | 2,427 | |||
Miscellaneous expenses | 99,172 | |||
Total Expenses | 2,942,917 | |||
Less: Fee waivers and/or expense reimbursements (Note 2) | (72,951) | |||
Net Expenses | 2,869,966 | |||
| Net Investment Income | 5,428,936 | |||
| Realized and Unrealized Loss on Investments (Notes 1 and 3): | ||||
Net Realized Loss From Investment Transactions | (11,526,291) | |||
Change in Net Unrealized Appreciation (Depreciation) From Investments | (207,886) | |||
| Net Loss on Investments | (11,734,177) | |||
| Decrease in Net Assets From Operations | $ | (6,305,241) | ||
See Notes to Financial Statements.
| 10 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Statements of changes in net assets
| For the Years Ended September 30, | 2020 | 2019 | ||||||
| Operations: | ||||||||
Net investment income | $ | 5,428,936 | $ | 6,627,743 | ||||
Net realized loss | (11,526,291) | (2,264,065) | ||||||
Change in net unrealized appreciation (depreciation) | (207,886) | (1,591,589) | ||||||
Increase (Decrease) in Net Assets From Operations | (6,305,241) | 2,772,089 | ||||||
| Distributions to Shareholders From (Note 1): | ||||||||
Total distributable earnings | (6,339,976) | (6,718,738) | ||||||
Return of capital | (1,345,612) | — | ||||||
Decrease in Net Assets From Distributions to Shareholders | (7,685,588) | (6,718,738) | ||||||
| Fund Share Transactions: | ||||||||
Cost of shares repurchased (62,040 and 0 shares repurchased, respectively) (Note 7) | (616,522) | — | ||||||
Decrease in Net Assets From Fund Share Transactions | (616,522) | — | ||||||
Decrease in Net Assets | (14,607,351) | (3,946,649) | ||||||
| Net Assets: | ||||||||
Beginning of year | 108,082,060 | 112,028,709 | ||||||
End of year | $ | 93,474,709 | $ | 108,082,060 | ||||
See Notes to Financial Statements.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 11 |
For the Year Ended September 30, 2020
| Increase (Decrease) in Cash: | ||||
| Cash Flows from Operating Activities: | ||||
Net decrease in net assets resulting from operations | $ | (6,305,241) | ||
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided (used) by operating activities: | ||||
Purchases of portfolio securities | (276,697,854) | |||
Sales of portfolio securities | 408,218,526 | |||
Net purchases, sales and maturities of short-term investments | 2,970,897 | |||
Payment-in-kind | (28,205) | |||
Net amortization of premium (accretion of discount) | (785,472) | |||
Increase in receivable for securities sold | (68,778,845) | |||
Decrease in interest receivable | 186,280 | |||
Decrease in prepaid expenses | 2,855 | |||
Decrease in payable for securities purchased | (11,028,845) | |||
Increase in investment management fee payable | 50,758 | |||
Increase in Directors’ fees payable | 701 | |||
Decrease in interest expense payable | (382,682) | |||
Increase in accrued expenses | 173,939 | |||
Net realized loss on investments | 11,526,291 | |||
Change in net unrealized appreciation (depreciation) of investments | 207,886 | |||
Net Cash Provided in Operating Activities* | 59,330,989 | |||
| Cash Flows from Financing Activities: | ||||
Distributions paid on common stock (net of distributions payable) | (7,659,866) | |||
Decrease in loan facility borrowings | (51,000,000) | |||
Payment for shares repurchased | (616,522) | |||
Net Cash Used by Financing Activities | (59,276,388) | |||
| Net Increase in Cash and Restricted Cash | 54,601 | |||
Cash and restricted cash at beginning of year | 130,451 | |||
Cash and restricted cash at end of year | $ | 185,052 | ||
| * | Included in operating expenses is cash of $1,309,983 paid for interest and commitment fees on borrowings. |
The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows. |
| September 30, 2020 | ||||
| Cash | $ | 103,115 | ||
| Restricted cash | 81,937 | |||
| Total cash and restricted cash shown in the Statement of Cash Flows | $ | 185,052 | ||
Restricted cash includes the amount reported in Deposits held in escrow on the Statement of Assets and Liabilities.
See Notes to Financial Statements.
| 12 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
| For a common share of capital stock outstanding throughout each year ended September 30: | ||||||||||||||||||||
| 20201 | 20191 | 20181 | 20171 | 20161 | ||||||||||||||||
| Net asset value, beginning of year | $10.87 | $11.27 | $11.37 | $11.53 | $11.73 | |||||||||||||||
| Income (loss) from operations: | ||||||||||||||||||||
Net investment income | 0.55 | 0.67 | 0.64 | 0.71 | 0.71 | |||||||||||||||
Net realized and unrealized loss | (1.19) | (0.39) | (0.09) | (0.03) | (0.04) | |||||||||||||||
Distributions paid to Auction Rate Cumulative Preferred Stockholders from net investment income | — | — | — | — | (0.00) | 2 | ||||||||||||||
Total income (loss) from operations | (0.64) | 0.28 | 0.55 | 0.68 | 0.67 | |||||||||||||||
| Less distributions from: | ||||||||||||||||||||
Net investment income | (0.64) | (0.68) | (0.65) | (0.84) | (0.87) | |||||||||||||||
Return of capital | (0.14) | — | — | — | — | |||||||||||||||
Total distributions | (0.78) | (0.68) | (0.65) | (0.84) | (0.87) | |||||||||||||||
Anti-dilutive impact of repurchase plan | 0.01 | 3 | — | — | — | — | ||||||||||||||
| Net asset value, end of year | $9.46 | $10.87 | $11.27 | $11.37 | $11.53 | |||||||||||||||
| Market price, end of year | $9.26 | $9.49 | $9.94 | $10.87 | $10.70 | |||||||||||||||
Total return, based on NAV4,5 | (5.64) | %6 | 2.59 | % | 4.96 | % | 5.94 | % | 6.36 | % | ||||||||||
Total return, based on Market Price7 | 6.39 | % | 2.48 | % | (2.64) | % | 9.46 | % | 13.48 | % | ||||||||||
| Net assets, end of year (000s) | $93,475 | $108,082 | $112,029 | $113,004 | $114,600 | |||||||||||||||
| Ratios to average net assets: | ||||||||||||||||||||
Gross expenses | 3.03 | %6 | 2.91 | % | 2.61 | % | 2.21 | % | 2.37 | % | ||||||||||
Net expenses8 | 2.95 | 6 | 2.84 | 2.53 | 2.14 | 2.29 | ||||||||||||||
Net investment income | 5.58 | 6.08 | 5.61 | 6.15 | 6.36 | |||||||||||||||
| Portfolio turnover rate | 213 | % | 122 | % | 91 | % | 72 | % | 45 | % | ||||||||||
| Supplemental data: | ||||||||||||||||||||
Loan Outstanding, End of Year (000s) | — | $51,000 | $54,000 | $53,000 | $48,500 | |||||||||||||||
Asset Coverage Ratio for Loan Outstanding9 | — | 312 | % | 307 | % | 313 | % | 336 | % | |||||||||||
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding9 | — | $3,119 | $3,075 | $3,132 | $3,363 | |||||||||||||||
Weighted Average Loan (000s) | $42,067 | 10 | $51,567 | $53,890 | $52,944 | $50,790 | ||||||||||||||
Weighted Average Interest Rate on Loan | 2.16 | %10 | 3.17 | % | 2.46 | % | 1.67 | % | 1.41 | % | ||||||||||
See Notes to Financial Statements.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 13 |
Financial highlights (cont’d)
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | Amount represents less than $0.005 per share. |
| 3 | The repurchase plan was completed at an average repurchase price of $9.94 for 62,040 shares and $616,522 for the year ended September 30, 2020. |
| 4 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
| 5 | The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. |
| 6 | Included in the expense ratios are certain non-recurring legal and transfer agent fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 2.39% and 2.31%, respectively and the total return would have been (5.04)% based on NAV. |
| 7 | The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. |
| 8 | Reflects fee waivers and/or expense reimbursements. |
| 9 | Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period. |
| 10 | Weighted average based on the number of days that the Fund had a loan outstanding. |
See Notes to Financial Statements.
| 14 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
1. Organization and significant accounting policies
Western Asset Corporate Loan Fund Inc. (the “Fund”) was incorporated in Maryland and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s investment objective is to maximize current income consistent with prudent efforts to preserve capital. The Fund invests primarily in floating- or variable-rate collateralized senior loans to corporations, partnerships or other business entities operating in various industries and geographic regions. On October 31, 2019 and April 1, 2020, the Board of Directors of the Fund approved amendments to the Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange Commission’s website at www.sec.gov.
On May 14, 2020, the Fund announced the modification of its investment policy relating to investments in collateralized senior loans. Effective May 14, 2020, under normal market conditions, the Fund invests at least 80% of managed assets in collateralized senior loans. “Managed assets” means net assets of the Fund plus the amount of any borrowings and assets attributable to any preferred stock that may be outstanding. Previously, the Fund, under normal market conditions, invested at least 80% of total assets in collateralized senior loans.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 15 |
Notes to financial statements (cont’d)
been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
| 16 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
| • | Level 1 — quoted prices in active markets for identical investments |
| • | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| • | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:
| ASSETS | ||||||||||||||||
| Description | Quoted Prices (Level 1) | Other Significant Observable Inputs | Significant (Level 3) | Total | ||||||||||||
| Long-Term Investments†: | ||||||||||||||||
Senior Loans: | ||||||||||||||||
Consumer Cyclical | — | $ | 3,569,016 | $ | 2,046,099 | $ | 5,615,115 | |||||||||
Consumer Non-Cyclical | — | 1,907,579 | 2,000,990 | 3,908,569 | ||||||||||||
Energy | — | — | 944,211 | 944,211 | ||||||||||||
Technology | — | 3,078,766 | 1,033,526 | 4,112,292 | ||||||||||||
Other senior loans | — | 1,551,075 | — | 1,551,075 | ||||||||||||
Common Stocks: | ||||||||||||||||
Consumer Discretionary | — | — | 46,173 | 46,173 | ||||||||||||
Energy | $ | 7,814 | — | 151 | 7,965 | |||||||||||
| Total Long-Term Investments | 7,814 | 10,106,436 | 6,071,150 | 16,185,400 | ||||||||||||
| Short-Term Investments† | 6,164,328 | — | — | 6,164,328 | ||||||||||||
| Total Investments | $ | 6,172,142 | $ | 10,106,436 | $ | 6,071,150 | $ | 22,349,728 | ||||||||
| † | See Schedule of Investments for additional detailed categorizations. |
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| Investments in Securities | Balance as of | Accrued premiums/ discounts | Realized gain (loss)1 | Change in unrealized appreciation (depreciation)2 | Purchases | |||||||||||||||
| Senior Loans: | ||||||||||||||||||||
Basic Industry | $ | 2,303,341 | $ | 1,473 | $ | (191,834) | $ | 13,679 | $ | 505,000 | ||||||||||
Capital Goods | 3,565,582 | 2,003 | (358,602) | (22,153) | 1,116,975 | |||||||||||||||
Communications | 1,052,231 | — | (68,250) | (2,231) | 840,000 | |||||||||||||||
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 17 |
Notes to financial statements (cont’d)
| Investments in Securities | Balance as of | Accrued premiums/ discounts | Realized gain (loss)1 | Change in unrealized appreciation (depreciation)2 | Purchases | |||||||||||||||
Consumer Cyclical | $ | 2,288,680 | $ | 8,905 | $ | 643 | $ | (21,088) | $ | 2,902,954 | ||||||||||
Consumer Non-Cyclical | 10,513,211 | 29,636 | (1,093,915) | 22,047 | 2,869,632 | |||||||||||||||
Electric | 490,121 | (12,960) | (52,704) | 60,876 | 28,205 | |||||||||||||||
Energy | 2,026,853 | 4,154 | (84,310) | (358,450) | — | |||||||||||||||
Finance Companies | 410,193 | 775 | (7,166) | (7,202) | — | |||||||||||||||
Financial Other | 8,333,851 | 3,084 | (199,205) | (10,900) | 648,375 | |||||||||||||||
Insurance | 1,414,709 | 438 | 4,978 | (5,172) | 498,738 | |||||||||||||||
REITS | 348,680 | 1,129 | 6,900 | 3,948 | 435,925 | |||||||||||||||
Technology | 4,057,785 | 5,279 | (2,824) | 33,829 | 977,600 | |||||||||||||||
| Common Stocks: | ||||||||||||||||||||
Communication Services | 96,900 | — | (350,509) | 317,563 | — | |||||||||||||||
Consumer Discretionary | 195,958 | — | — | (149,785) | — | |||||||||||||||
Energy | 7,711 | — | (2,772) | (2,520) | — | |||||||||||||||
| Total | $ | 37,105,806 | $ | 43,916 | $ | (2,399,570) | $ | (127,559) | $ | 10,823,404 | ||||||||||
Investments in Securities (cont’d) | Sales | Transfers into Level 3 | Transfers out of Level 3 | Balance as of | Net change in unrealized appreciation (depreciation) for investments in securities still held at September 30, 20202 | |||||||||||||||
| Senior Loans: | ||||||||||||||||||||
Basic Industry | $ | (2,631,659) | — | — | — | — | ||||||||||||||
Capital Goods | (4,303,805) | — | — | — | — | |||||||||||||||
Communications | (1,821,750) | — | — | — | — | |||||||||||||||
Consumer Cyclical | (3,133,995) | — | — | $ | 2,046,099 | $ | (35,319) | |||||||||||||
Consumer Non-Cyclical | (10,339,621) | — | — | 2,000,990 | (26,433) | |||||||||||||||
Electric | (513,538) | — | — | — | — | |||||||||||||||
Energy | (644,036) | — | — | 944,211 | (435,397) | |||||||||||||||
Finance Companies | (396,600) | — | — | — | — | |||||||||||||||
Financial Other | (8,775,205) | — | — | — | — | |||||||||||||||
Insurance | (1,913,691) | — | — | — | — | |||||||||||||||
REITS | (796,582) | — | — | — | — | |||||||||||||||
Technology | (4,038,143) | — | — | 1,033,526 | 55,445 | |||||||||||||||
| 18 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Investments in Securities (cont’d) | Sales | Transfers into Level 3 | Transfers out of Level 3 | Balance as of | Net change in unrealized appreciation (depreciation) for investments in securities still held at September 30, 20202 | |||||||||||||||
| Common Stocks: | ||||||||||||||||||||
Communication Services | $ | (63,954) | — | — | — | — | ||||||||||||||
Consumer Discretionary | — | — | — | $ | 46,173 | $ | (149,784) | |||||||||||||
Energy | (2,268) | — | — | 151 | (126) | |||||||||||||||
| Total | $ | (39,374,847) | — | — | $ | 6,071,150 | $ | (591,614) | ||||||||||||
| 1 | This amount is included in net realized gain (loss) from investment transactions in the accompanying Statement of Operations. |
| 2 | This amount is included in the change in net unrealized appreciation (depreciation) in the accompanying Statement of Operations. Change in unrealized appreciation (depreciation) includes net unrealized appreciation (depreciation) resulting from changes in investment values during the reporting period and the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized. |
(b) Net asset value. The net asset value (“NAV”) of the Fund’s common stock is determined no less frequently than the close of business on the Fund’s last business day of each week (generally Friday) and on the last business day of the month. It is determined by dividing the value of the net assets available to common stock by the total number of shares of common stock outstanding. For the purpose of determining the NAV per share of the common stock, the value of the Fund’s net assets shall be deemed to equal the value of the Fund’s assets less the Fund’s liabilities.
(c) Senior loans. Senior Loans generally are arranged through private negotiations between a borrower and several financial institutions (“Lenders”) represented in each case by one or more such Lenders acting as agent of the Lenders. On behalf of the Lenders, the agent will be primarily responsible for negotiating the loan agreement that establishes the relative terms and conditions of the Senior Loan and rights of the borrower and the Lenders. Also, an agent typically administers the terms of the loan agreement and is responsible for the monitoring of collateral and collection of principal and interest and fee payments from the borrower and the apportionment of these payments to the credit of all investors which are parties to the loan agreement. The Fund may act as one of the group of Lenders in a Senior Loan, and purchase assignments and participations in Senior Loans from third parties. Senior Loans are subject to credit risks, including the risk of nonpayment of scheduled interest or loan payments.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 19 |
Notes to financial statements (cont’d)
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
(d) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.
(e) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.
(f) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Trade date for senior and subordinated loans purchased in the “primary market” is considered the date on which the credit agreement is executed. Trade date for senior and subordinated loans purchased in the “secondary market” is the date on which the transaction is entered into. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Certain fees received from issuers of the underlying loans, such as consent, amendment and upfront fees (collectively, “consent fees”) are generally recorded as a basis adjustment to the cost of loans held and accreted over the life of the loan. The cost of investments sold is determined by use of the specific identification method.
(g) Distributions to shareholders. Distributions to common shareholders from net investment income of the Fund, if any, are declared and paid on a monthly basis. Distributions to common shareholders of net realized gains, if any, are declared at least annually. Distributions to common shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(h) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
| 20 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
(i) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of September 30, 2020, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(j) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the Fund had no reclassifications.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company, LLC (“Western Asset”) is the Fund’s subadviser. As of July 31, 2020, LMPFA and Western Asset are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (“Franklin Resources”). Prior to July 31, 2020, LMPFA and Western Asset were wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”). As of July 31, 2020, Legg Mason is a subsidiary of Franklin Resources.
LMPFA provides administrative and oversight services to the Fund. The Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of the Fund’s average daily net assets plus assets attributable to Preferred Stock, if any, plus proceeds of any outstanding borrowings used for leverage.
Pursuant to Rule 15a-4 under the Investment Company Act of 1940, as amended (the “1940 Act”), management fees for the period August 1, 2020 through September 30, 2020 were placed in escrow pending shareholder approval of new management and subadvisory agreements (the “New Agreements”) in connection with the acquisition of Legg Mason by Franklin Resources (the “Transaction”). These amounts are reported in Deposits held in escrow and Investment management fee payable on the Statement of Assets and Liabilities. As previously announced, the Fund did not receive the requisite vote required by the 1940 Act to approve the New Agreements, proposed in connection with the Transaction, at the special meeting of stockholders of the Fund held on July 6, 2020. The closing of the Transaction on July 31, 2020 resulted in the automatic termination of the Fund’s then- current management and subadvisory agreements. In order to allow the Fund’s manager and subadviser to continue to manage the Fund, the Fund’s Board approved interim management and subadvisory agreements for the Fund in accordance with Rule 15a-4 that took effect upon consummation of the Transaction and will continue for no longer than 150 days.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 21 |
Notes to financial statements (cont’d)
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund.
LMPFA agreed to a waiver in the amount of 0.05% of the investment advisory fee that is paid to it by the Fund. The waiver will extend through May 31, 2021.
During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.
During the year ended September 30, 2020, fees waived and/or expenses reimbursed amounted to $72,951.
As of July 31, 2020, all officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund. Prior to July 31, 2020, all officers and one Director of the Fund were employees of Legg Mason and did not receive compensation from the Trust.
3. Investments
During the year ended September 30, 2020, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $ | 276,697,854 | ||
| Sales | 408,218,526 |
At September 30, 2020, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Cost | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Depreciation | |||||||||||||
| Securities | $ | 25,716,106 | $ | 367,279 | $ | (3,733,657) | $ | (3,366,378) | ||||||||
4. Derivative instruments and hedging activities
During the year ended September 30, 2020, the Fund did not invest in derivative instruments.
5. Loan
During the reporting period, the Fund had a revolving credit agreement with Toronto- Dominion Bank (“Credit Agreement”), which allowed the Fund to borrow up to an aggregate amount of $60,000,000. The Credit Agreement terminated on October 1, 2020. The Fund paid a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.25%, except that the commitment fee was 0.15% in the event that the
| 22 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
aggregate outstanding principal balance of the loan was equal to or greater than 75% of $60,000,000. The interest on the loan was calculated at a variable rate based on LIBOR plus any applicable margin. Securities held by the Fund were subject to a lien, granted to Toronto-Dominion Bank, to the extent of the borrowing outstanding and any additional expenses. The Fund’s Credit Agreement contained customary covenants that, among other things, may have limited the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may have been subject to early termination under certain conditions and may contain other provisions that could limit the Fund’s ability to utilize borrowing under the agreement. Interest expense related to this loan for the year ended September 30, 2020 was $892,854. For the year ended September 30, 2020, the Fund incurred commitment fees of $43,064. For the year ended September 30, 2020, based on the number of days during the reporting period that the Fund had an outstanding balance under the Credit Agreement, the Fund had an average daily loan balance outstanding of $42,066,667 and the weighted average interest rate was 2.16%. At September 30, 2020, the Fund did not have any borrowings outstanding per this Credit Agreement.
6. Distributions subsequent to September 30, 2020
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
| Record Date | Payable Date | Amount | ||||||
| 9/23/2020 | 10/1/2020 | $ | 0.0660 | |||||
| 10/23/2020 | 11/2/2020 | $ | 0.0660 | |||||
| 11/20/2020 | 11/30/2020 | $ | 0.0660 | |||||
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts.
During the year ended September 30, 2020, the Fund repurchased and retired 0.62% of its common shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 8.51% for the year ended September 30, 2020. Shares repurchased and the corresponding dollar amount are included in the Statement of Changes in Net Assets. The anti-dilutive impact of these share repurchases is included in the Financial Highlights.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 23 |
Notes to financial statements (cont’d)
Since the commencement of the stock repurchase program through September 30, 2020, the Fund repurchased 62,040 shares or 0.62% of its common shares outstanding for a total amount of $616,522.
8. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended September 30, was as follows:
| 2020 | 2019 | |||||||
| Distributions paid from: | ||||||||
| Ordinary income | $ | 6,339,976 | $ | 6,718,738 | ||||
| Tax return of capital | 1,345,612 | — | ||||||
| Total distributions paid | $ | 7,685,588 | $ | 6,718,738 | ||||
As of September 30, 2020, the components of distributable earnings (loss) on a tax basis were as follows:
| Deferred capital losses* | $ | (27,279,734) | ||
| Other book/tax temporary differences(a) | (714,669) | |||
| Unrealized appreciation (depreciation)(b) | (3,366,378) | |||
| Total distributable earnings (loss) — net | $ | (31,360,781) |
| * | These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains. |
| (a) | Other book/tax temporary differences are attributable to the difference between cash and accrual basis distributions paid and book/tax differences in the timing of the deductibility of various expenses. |
| (b) | The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the difference between book and tax amortization methods for premiums on fixed income securities and book/tax differences in the treatment of consent fee income. |
9. Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. Plans are underway to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.
| 24 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
10. Subsequent event
On July 7, 2020, the Fund announced that the Fund’s Board of Directors approved a plan of liquidation and dissolution (the “Plan”) of the Fund, subject to stockholder approval of the Plan in accordance with Maryland law. On November 13, 2020, a special meeting of stockholders was held, where stockholders voted to approve the Plan. It is expected that the effective date of the liquidation will be November 20, 2020 and the transfer agent will close the books of the Fund on that date (the “Liquidation Date”). The proportionate interests of stockholders in the assets of the Fund will be fixed on the basis of their respective holdings at the close of business on the Liquidation Date. It is expected that prior to the opening of business on November 23, 2020, the Fund will cease trading on the New York Stock Exchange. The Fund will then liquidate and distribute its remaining net assets on or about Monday, November 30, 2020.
| Western Asset Corporate Loan Fund Inc. 2020 Annual Report | 25 |
Report of independent registered public
accounting firm
To the Board of Directors and Shareholders of Western Asset Corporate Loan Fund Inc.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Western Asset Corporate Loan Fund Inc. (the “Fund”) as of September 30, 2020, the related statements of operations and cash flows for the year ended September 30, 2020, the statement of changes in net assets for each of the two years in the period ended September 30, 2020, including the related notes, and the financial highlights for each of the four years in the period ended September 30, 2020 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of September 30, 2020, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period ended September 30, 2020 and the financial highlights for each of the four years in the period ended September 30, 2020 in conformity with accounting principles generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended September 30, 2016 and the financial highlights for each of the periods ended on or prior to September 30, 2016 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated November 21, 2016 expressed an unqualified opinion on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of September 30, 2020 by correspondence with the custodian, agent banks, and brokers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
November 19, 2020
We have served as the auditor of one or more investment companies in the Franklin Templeton Group of Funds since 1948.
| 26 | Western Asset Corporate Loan Fund Inc. 2020 Annual Report |
Board approval of new management and
new subadvisory agreements (unaudited)
Background
On March 9, 2020, during a telephonic meeting of the Boards of Directors (each, a “Board” and each Board member, a “Director” or a “Board Member”) of the closed-end funds under the Board’s purview (each, a “Fund” and together, the “Funds”), Board Members discussed with management of Legg Mason, Inc. (“Legg Mason”) and certain representatives of Franklin Resources, Inc. and its subsidiaries (together, “Franklin Templeton”) the acquisition of Legg Mason by Franklin Templeton (the “Transaction”) and Franklin Templeton’s plans and intentions regarding the Funds and Legg Mason’s asset management business, including the preservation and continued investment autonomy of the investment advisory businesses conducted by Legg Mason’s separate investment advisory subsidiaries and the combination of Legg Mason’s and Franklin Templeton’s distribution resources. The Board of each Fund was advised that the Transaction, if completed, would constitute a change of control under the Investment Company Act of 1940, as amended (the “1940 Act”), that would result in the termination of the current management agreement between each Fund and Legg Mason Partners Fund Advisor, LLC (the “Manager”) (the “Current Management Agreements”) and the current subadvisory agreements with each Fund’s subadviser or subadvisers (each, a “Subadviser” and together, the “Subadvisers”) (the “Current Subadvisory Agreements”).
At meetings held on April 1, 2020 the Board of each Fund, including a majority of the Board Members who are not “interested persons” of the Fund or the Manager as defined in the 1940 Act (the “Independent Board Members”), approved the new management agreement between each Fund and the Manager (each, a “New Management Agreement”) and each new subadvisory agreement between each Fund’s Manager and its Subadviser or Subadvisers relating to the Fund (each, a “New Subadvisory Agreement”).1 (The New Management Agreement for a Fund and the New Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the “New Agreements,” the Current Management Agreement for a Fund and the Current Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the “Current Agreements,” and the Manager and the Subadviser or Subadvisers for a Fund are referred to, collectively, as the “Advisers.”)
At these meetings, which included meetings of the full Board of each Fund and separate meetings of the Independent Board Members, the Board considered, among other things, whether it would be in the best interests of each Fund and its respective shareholders to approve the New Agreements, and the anticipated impacts of the Transaction on the Funds and their shareholders. To assist the Board of each Fund in its consideration of the New
| 1 | This meeting was held telephonically in reliance on an exemptive order issued by the Securities and Exchange Commission on March 13, 2020. Reliance on the exemptive order is necessary and appropriate due to circumstances related to current or potential effects of COVID-19. All Board Members participating in the telephonic meeting were able to hear each other simultaneously during the meeting. Reliance on the exemptive order requires Board Members, including a majority of the Independent Board Members, to ratify actions taken pursuant to the exemptive order by vote cast at the next in-person meeting. |
| Western Asset Corporate Loan Fund Inc. | 27 |
Board approval of new management and new subadvisory agreements (unaudited) (cont’d)
Agreements, Franklin Templeton provided materials and information about Franklin Templeton, including its financial condition and asset management capabilities and organization, Legg Mason provided materials and information about Legg Mason, including performance and expense comparison data and profitability information by Fund and with respect to the Legg Mason fund complex as a whole, and Franklin Templeton and Legg Mason provided materials and information about the proposed Transaction between Legg Mason and Franklin Templeton.
Before and during the April 1, 2020 meetings, the Board of each Fund sought certain information as it deemed necessary and appropriate. In connection with their consideration of the New Agreements, the Independent Board Members worked with their independent legal counsel to prepare requests for additional information that were submitted to Franklin Templeton and Legg Mason. The requests for information of the Board of each Fund sought information relevant to the Board’s consideration of the New Agreements and other anticipated impacts of the Transaction on the Funds and their shareholders. Franklin Templeton and Legg Mason provided documents and information in response to these requests for information. Following their review of this information, the Independent Board Members requested additional information from Franklin Templeton and Legg Mason. Franklin Templeton and Legg Mason provided further information in response to these requests, which the Board of each Fund reviewed. Senior management representatives from Franklin Templeton and Legg Mason participated in a portion of each of these meetings and addressed various questions raised by the Board of each Fund.
At the April 1, 2020 meeting of the Board of each Fund, representatives of Legg Mason and Franklin Templeton made presentations to, and responded to questions from, the Board. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Agreements.
Board Approval of New Management Agreements and New Subadvisory Agreements
Each Fund’s Board’s evaluation of the New Agreements reflected the information provided specifically in connection with their review of the New Agreements, as well as, where relevant, information that was previously furnished to the Board in connection with the most recent renewal of the Current Agreements at in-person meetings held on November 14, 2019 and at other Board meetings throughout the prior year. Among other things, the Board Members considered:
| (i) | the reputation, experience, financial strength and resources of Franklin Templeton and its investment advisory subsidiaries; |
| 28 | Western Asset Corporate Loan Fund Inc. |
| (ii) | that Franklin Templeton has informed the Board of each Fund that it intends to maintain the investment autonomy of the Legg Mason investment advisory subsidiaries; |
| (iii) | that Franklin Templeton and Legg Mason have informed the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and have represented that there are not expected to be any changes in the portfolio management personnel managing the Funds as a result of the Transaction; |
| (iv) | that Franklin Templeton and Legg Mason have informed the Board of each Fund regarding transition plans, including Legg Mason’s provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention mechanisms for certain personnel following the closing; |
| (v) | that there are not expected to be any changes to any Fund’s custodian or other service providers as a result of the Transaction; |
| (vi) | that Franklin Templeton has informed the Board of each Fund that it has no present intention to alter currently effective expense waivers and reimbursements after their expiration, and, while it reserves the right to do so in the future, it would consult with the applicable Fund’s Board before making any changes; |
| (vii) | that Franklin Templeton does not expect to propose any changes to the investment objective(s) of any Fund or any changes to the principal investment strategies of any Fund as a result of the Transaction; |
| (viii) | the potential benefits to Fund shareholders from being part of a combined fund family with Franklin Templeton-sponsored funds and access to a broader array of investment opportunities; |
| (ix) | that Franklin Templeton and Legg Mason will each derive benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered; |
| (x) | the fact that each Fund’s contractual management fee rates will remain the same and will not increase by virtue of the New Agreements; |
| (xi) | the terms and conditions of the New Agreements, including that each New Agreement is identical to its corresponding Current Agreement except for their respective dates of execution, effectiveness and termination; |
| Western Asset Corporate Loan Fund Inc. | 29 |
Board approval of new management and
new subadvisory agreements (unaudited) (cont’d)
| (xii) | the support expressed by the current senior management team at Legg Mason for the Transaction and Legg Mason’s recommendation that the Board of each Fund approve the New Agreements; |
| (xiii) | that the Current Agreements, except in the case of newer Funds, are the product of multiple years of review and negotiation and information received and considered by the applicable Fund’s Board in the exercise of their business judgment during those years, and that within the past six-months the Board of each Fund had performed a full review of and approved the Current Agreements as required by the 1940 Act and had determined in the exercise of the Board Members’ business judgment that each applicable Adviser had the capabilities, resources and personnel necessary to provide the services provided to each Fund, and that the management and subadvisory fees paid by or in respect of the Fund, taking into account any applicable agreed-upon fee reductions, represented reasonable compensation to the applicable Adviser in light of the services provided, the costs to the Adviser of providing those services, the fees and other expenses paid by similar funds, and such other matters as the Board Members considered relevant in the exercise of their business judgment, and represented an appropriate sharing between Fund shareholders and the Advisers of any economies of scale in the management of the Fund at current and anticipated asset levels; |
| (xiv) | that the Current Agreements were considered and approved as recently as November 2019, except in the case of one Fund, which is currently in the initial term of its agreement; |
| (xv) | that the Funds will not bear the costs of obtaining shareholder approval of the New Agreements, including proxy solicitation costs, legal fees and the costs of printing and mailing the proxy statement, regardless of whether the Transaction is consummated; and |
| (xvi) | that under the a definitive agreement between Legg Mason and Franklin Templeton (the “Transaction Agreement”), Franklin Templeton has acknowledged that Legg Mason had entered into the Transaction Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act, and that, in furtherance of the foregoing, Franklin Templeton agreed to use reasonable best efforts to conduct its business so that (a) for a period of not less than three years after the closing of the Transaction no more than 25% of the members of the Board of any Fund shall be “interested persons” (as defined in the 1940 Act) of any investment adviser for a Fund, and (b) for a period of not less than two years after the closing, neither Franklin Templeton nor any of its affiliates shall impose an “unfair burden” (within the meaning of the 1940 Act, including any interpretations or no-action letters of the Securities and Exchange Commission) on any Fund as a result of the transactions contemplated by the Transaction Agreement or any express or implied terms, conditions or understandings applicable thereto. |
| 30 | Western Asset Corporate Loan Fund Inc. |
Certain of these considerations are discussed in more detail below.
In their deliberations, the Board Members considered information received in connection with the most recent approval or continuation of each Current Agreement in addition to information provided by Franklin Templeton and Legg Mason in connection with their evaluation of the terms and conditions of the New Agreements. In connection with the most recent approval or continuation of each Current Agreement, and in connection with their review of each New Agreement, the Board Members did not identify any particular information that was all-important or controlling, and each Board Member may have attributed different weights to the various factors. The Board Members evaluated all information available to them on a Fund-by-Fund basis with respect to their consideration of the Current Agreements and the New Agreements, and their determinations were made separately in respect of each Fund.
The information provided and presentations made to the Board of each Fund encompassed each Fund and all other Funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions rendered by the Manager for each Fund, both of which functions are encompassed by the New Management Agreement for the Fund, as well as the advisory functions rendered by the Subadviser(s) pursuant to the New Subadvisory Agreement(s) for the Fund. The Independent Board Members of each Fund considered the New Management Agreement and the New Subadvisory Agreement(s) separately in the course of their review. In doing so, they considered the respective roles and compensation of the Manager and the Subadviser(s) in providing services to the Fund.
The Independent Board Members were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Board Members of each Fund received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the New Agreements for the Fund. The Independent Board Members of each Fund, including Western Asset Corporate Loan Fund Inc. (the “Western Asset Fund”), reviewed the proposed approval of the New Agreements for the Fund on multiple occasions with their independent legal counsel in private sessions at which no representatives of Franklin Templeton, Legg Mason, or the Manager or Subadviser(s) for the Fund were present.
Nature, Extent and Quality of the Services under the New Agreements
The Board of each Fund received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser(s) under the Current Agreements. In evaluating the nature, quality and extent of the services to be provided by the Advisers under the New Agreements, the Board Members considered,
| Western Asset Corporate Loan Fund Inc. | 31 |
Board approval of new management and
new subadvisory agreements (unaudited) (cont’d)
among other things, the expected impact, if any, of the Transaction on the operations, facilities, organization and personnel of each Adviser, and that Franklin Templeton and Legg Mason have advised the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and that there are not expected to be any changes in portfolio management personnel as a result of the Transaction. In this regard, the Board of each Fund took into account that Franklin Templeton and Legg Mason have informed the Board regarding Legg Mason’s provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention mechanisms for certain personnel following the closing. The Board of each Fund has received information at regular meetings throughout the past year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. Each Fund’s Board’s evaluation of the services provided by the Manager and the Subadviser(s) took into account the Board Members’ knowledge gained as Board Members of other Funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the Subadviser(s), and the quality of the Manager’s administrative and other services. The Board of each Fund observed that the scope of services provided by the Manager and the Subadviser(s), and the undertakings required of the Manager and Subadviser(s) in connection with those services, including maintaining and monitoring their own and the Fund’s compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board of each Fund has received and reviewed on a regular basis information from the Manager and the Subadviser(s) regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act, and took that information into account in its evaluation of the New Agreements. The Board of each Fund also considered the risks associated with the Fund borne by the Advisers and their affiliates (such as entrepreneurial, operational, reputational, litigation and regulatory risk), as well as the risk management processes of the Manager and Subadviser(s).
The Board of each Fund considered information provided by Franklin Templeton regarding its business and operating structure, scale of operation, leadership and reputation, distribution capabilities, and financial condition (pre- and post-closing).
The Board of each Fund also reviewed the qualifications, backgrounds and responsibilities of the senior personnel of the Manager and the Subadviser(s) and the team of investment professionals primarily responsible for the day-to-day portfolio management of the Fund. The Board of each Fund noted in particular that following the Transaction, Franklin Templeton is expected to have resources that will provide it with substantial capacity to
| 32 | Western Asset Corporate Loan Fund Inc. |
invest across the business. The Board of each Fund also considered the financial resources of Legg Mason and Franklin Templeton and the importance of having a Fund manager with, or with access to, significant organizational and financial resources.
The Board also considered the benefits to each Fund of being part of a larger combined organization with greater financial resources following the Transaction, particularly during periods of market disruptions and volatility. In addition, the Board also considered Franklin Templeton’s significant experience in dealing with issues unique to the management of closed-end funds.
The Board of each Fund also considered the policies and practices of the Manager and the Subadvisers regarding the selection of brokers and dealers and the execution of portfolio transactions for the Fund.
The Board of each Fund received performance information for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider of investment company data, based on classifications provided by Thomson Reuters Lipper (“Lipper”). The Board of each Fund was provided with a description of the methodology used to determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board of each Fund has found the Broadridge data generally useful they recognized its limitations, including that the data may vary depending on the end date selected and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. It was also noted that the Board of each Fund has received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board of each Fund considered the Fund’s performance in light of overall financial market conditions. Where a Fund’s performance was below the median during one or more specified periods, the Fund’s Board noted the explanations from the Advisers concerning the Fund’s relative performance versus the peer group for the various periods
Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members of each Fund determined that the Transaction was not expected to affect adversely the nature, extent and quality of services provided by each Adviser and that the Transaction was not expected to have an adverse effect on the ability of the Advisers to provide those services, and the Board of each Fund, including the Western Asset Fund, concluded that, overall, the nature, extent and quality of services expected to be provided, including performance, under the New Agreements for the Fund were sufficient for approval.
| Western Asset Corporate Loan Fund Inc. | 33 |
Board approval of new management and
new subadvisory agreements (unaudited) (cont’d)
Management Fees and Expense Ratios
The Board of each Fund considered that it had reviewed the Fund’s management fee and total expense ratio at the November 2019 contract renewal meeting. The Board of each Fund considered that the New Management Agreement does not change any Fund’s management fee rate or the computation method for calculating such fees, and that there is no present intention to alter expense waiver and reimbursement arrangements that are currently in effect. The Board of each Fund noted that by their terms none of the current expense waiver and reimbursement arrangements would expire before December 2020 and that Franklin Templeton had indicated that it would consult with the applicable Fund’s Board before making any changes to the Fund’s current expense waiver and reimbursement arrangements.
The Board of each Fund reviewed and considered the contractual management fee and the actual management fees paid by the Fund to the Manager in light of the nature, extent and quality of the management and subadvisory services to be provided by the Manager and the Subadviser(s). The Board of each Fund also noted that the compensation paid to the Subadviser(s) is the responsibility and expense of the Manager, or in some cases another Subadviser, and not the Fund. In addition, the Board of each Fund received and considered information provided by Broadridge comparing the contractual management fee and the actual management fee for the Fund, as well as the total actual expenses for the Fund, with those of funds in both the relevant expense group and a broader group of funds, each selected by Broadridge based on classifications provided by Lipper. It was noted that, while the Board of each Fund has found the Broadridge data generally useful, it recognized its limitations, including that the data may vary depending on the selection of the peer group. The Board of each Fund also considered the overall management fee, the fees of each Subadviser and the portion of the management fee retained by the Manager after payment of the subadvisory fees, in each case in light of the services rendered for those amounts.
The Board of each Fund also received an analysis of Legg Mason complex-wide management fees for Funds with a similar strategy provided by the Manager, which, among other things, set out a framework of fees based on asset classes.
The Board of each Fund reviewed information regarding fees charged by the Manager and/or the Subadviser(s) to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Manager reviewed with the Board of each Fund the differences in services provided to these different types of accounts, including that the Fund is provided with certain administrative services, office facilities, and Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board of each Fund considered the fee comparisons in light of the differences in management of these different types of accounts and the differences in associated risks borne by the Advisers.
| 34 | Western Asset Corporate Loan Fund Inc. |
In evaluating the costs of the services to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, whether management fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members determined that the Transaction would not increase the total fees payable by any Fund for management services.
Taking all of the above into consideration, as well as the factors identified below, the Board of each Fund, including the Western Asset Fund, determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services to be provided to the Fund under the New Agreements.
Profitability and Economies of Scale
The Board of each Fund received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board of each Fund also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board of each Fund received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been previously reviewed by an outside consultant. The profitability of the Manager and its affiliates was considered by each Fund’s Board not to be excessive in light of the nature, extent and quality of the services provided to the Fund, including the Western Asset Fund.
The Board of each Fund received and considered information concerning whether the Advisers realize economies of scale as the Fund’s assets grow. In conjunction with their most recent or prior deliberations concerning the Current Agreements, the Board Members have noted that advisory or management fee reductions had been implemented for certain Funds, as well as expense limitations, and that after taking those reductions and expense limitations into account, the Board Members had determined that the total fees for management services, and administrative services for the applicable Funds, were reasonable in light of the services provided to the Funds, including the Western Asset Fund, and that any economies of scale were being shared appropriately.
The Board Members noted that Franklin Templeton and Legg Mason expected to realize cost savings from the Transaction based on synergies of operations, primarily at the holding company distribution level, as well as to benefit from possible growth of the Funds resulting from enhanced distribution capabilities. The Board of each Fund took into account that cost synergies were not the primary driver of the Transaction. However, they noted that other factors could also affect profitability and potential economies of scale, and that it was not possible to predict with any degree of certainty how the Transaction would affect the Advisers’ profitability from their relationship with the Funds, nor to quantify at this time any
| Western Asset Corporate Loan Fund Inc. | 35 |
Board approval of new management and
new subadvisory agreements (unaudited) (cont’d)
possible future economies of scale. The Board Members noted they will have the opportunity to periodically re-examine such profitability and any economies of scale going forward.
Other Benefits to the Advisers
The Board of each Fund considered other benefits received by the Manager, the Subadviser(s) and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders. In light of the costs of providing investment management and other services to the Funds and the ongoing commitment of the Manager and the Subadviser(s) to the Funds, the Board of each Fund considered that the ancillary benefits that the Manager, the Subadviser(s) and their affiliates received as a result of their relationship with the Fund, including the Western Asset Fund, were reasonable. In evaluating the fall-out benefits to be received by the Advisers under the New Agreements, the Board Members considered whether the Transaction would have an impact on the fall-out benefits received by virtue of the Current Agreements.
The Board of each Fund considered that Franklin Templeton may derive reputational and other benefits from its ability to use the Legg Mason investment affiliates’ names in connection with operating and marketing the Funds. The Board of each Fund considered that the Transaction, if completed, would significantly increase Franklin Templeton’s assets under management and expand Franklin Templeton’s investment capabilities.
Conclusion
After consideration of the factors described above as well as other factors, and in the exercise of their business judgment, the Board Members, including the Independent Board Members, concluded that the New Agreements, including the fees payable thereunder, were fair and reasonable to each Fund and that entering into the New Agreements for each Fund, including the Western Asset Fund, was in the best interests of the Fund’s shareholders, and they voted to approve the New Agreements for each Fund and to recommend that the Fund’s shareholders approve the New Agreements.
| 36 | Western Asset Corporate Loan Fund Inc. |
Additional shareholder information (unaudited)
Results of special meeting of shareholders
On July 6, 2020, a special meeting of shareholders was held for the following purposes: 1) to approve a new management agreement between the Fund and its investment manager; and 2) to approve a new subadvisory agreement with respect to the Fund’s subadviser. The following table provides the number of votes cast for or against, as well as the number of abstentions and broker non-votes as to each matter voted on at the special meeting of shareholders.
| Item Voted On | Voted For | Voted Against | Abstentions | Broker Non-Votes | ||||||||||||
| To Approve a New Management Agreement with Legg Mason Partners Fund Advisor, LLC | 3,212,659 | 3,508,477 | 382,645 | 0 | ||||||||||||
| To Approve a New Subadvisory Agreement with Western Asset Management Company, LLC | 3,926,089 | 286,469 | 478,951 | 0 | ||||||||||||
| To Authorize the Proxyholders to decline to attend the Meeting if they believe that Proposal No. 1 is less likely to be approved if your shares are not represented at the Meeting | 2,377,383 | 34,891 | 0 | 0 | ||||||||||||
| Western Asset Corporate Loan Fund Inc. | 37 |
Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset Corporate Loan Fund Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.
The Fund’s annual proxy statement includes additional information about Directors and is available, without charge, upon request by calling the Fund at 1-888-777-0102.
| Independent Directors† | ||
| Robert D. Agdern | ||
| Year of birth | 1950 | |
| Position(s) held with Fund1 | Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class III | |
| Term of office1 and length of time served | Since 2015 | |
| Principal occupation(s) during the past five years | Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002 to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | None | |
| Carol L. Colman | ||
| Year of birth | 1946 | |
| Position(s) held with Fund1 | Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class I | |
| Term of office1 and length of time served | Since 2006 | |
| Principal occupation(s) during the past five years | President, Colman Consulting Company (consulting) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | None | |
| 38 | Western Asset Corporate Loan Fund Inc. |
| Independent Directors† (cont’d) | ||
| Daniel P. Cronin | ||
| Year of birth | 1946 | |
| Position(s) held with Fund1 | Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class II | |
| Term of office1 and length of time served | Since 2006 | |
| Principal occupation(s) during the past five years | Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | None | |
| Paolo M. Cucchi | ||
| Year of birth | 1941 | |
| Position(s) held with Fund1 | Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class III | |
| Term of office1 and length of time served | Since 2001 | |
| Principal occupation(s) during the past five years | Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014) at Drew University | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | None | |
| William R. Hutchinson | ||
| Year of birth | 1942 | |
| Position(s) held with Fund1 | Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class III | |
| Term of office1 and length of time served | Since 1998 | |
| Principal occupation(s) during the past five years | President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | Director (since 1994) and formerly, Non-Executive Chairman of the Board (December 2009 to April 2020), Associated Banc Corp. (banking) | |
| Western Asset Corporate Loan Fund Inc. | 39 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Independent Directors† (cont’d) | ||
| Eileen A. Kamerick | ||
| Year of birth | 1958 | |
| Position(s) held with Fund1 | Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class II | |
| Term of office1 and length of time served | Since 2013 | |
| Principal occupation(s) during the past five years | Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership Fellow (since 2016) and financial expert Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and University of Iowa law schools (since 2007); formerly, Senior Advisor to the Chief Executive Officer and Executive Vice President and Chief Financial Officer of ConnectWise, Inc. (software and services company) (2015 to 2016); Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | Trustee of AIG Funds and Anchor Series Trust (since 2018); Hochschild Mining plc (precious metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (2003 to 2016) | |
| Nisha Kumar | ||
| Year of birth | 1970 | |
| Position(s) held with Fund1 | Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II | |
| Term of office1 and length of time served | Since 2019 | |
| Principal occupation(s) during the past five years | Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign Relations | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 24 | |
| Other board memberships held by Director during the past five years | Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia Tigers Fund, Inc. (2016 to 2018) | |
| 40 | Western Asset Corporate Loan Fund Inc. |
| Interested Director and Officer | ||
| Jane Trust, CFA2 | ||
| Year of birth | 1962 | |
| Position(s) held with Fund1 | Director, Chairman, President and Chief Executive Officer, Class I | |
| Term of office1 and length of time served | Since 2015 | |
| Principal occupation(s) during the past five years | Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 150 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (“Legg Mason & Co.”); Senior Vice President of LMPFA (2015) | |
Number of portfolios in fund complex overseen by Director (including the Fund) | 147 | |
Other board memberships held by Director during the past five years | None | |
| Additional Officers | ||
| Fred Jensen* | ||
Legg Mason 620 Eighth Avenue, 47th Floor, New York, NY 10018 | ||
| Year of birth | 1963 | |
| Position(s) held with Fund1 | Chief Compliance Officer | |
| Term of office1 and length of time served | Since 2020 | |
| Principal occupation(s) during the past five years | Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of Compliance, Legg Mason Office of the Chief Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013); formerly, Chief Compliance Officer of The Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker- dealer) (2000 to 2003) | |
| Jenna Bailey | ||
Legg Mason 100 First Stamford Place, 5th Floor, Stamford, CT 06902 | ||
| Year of birth | 1978 | |
| Position(s) held with Fund1 | Identity Theft Prevention Officer | |
| Term of office1 and length of time served | Since 2015 | |
| Principal occupation(s) during the past five years | Senior Compliance Analyst of Franklin Templeton (since 2020); Identity Theft Prevention Officer of certain funds associated with Legg Mason & Co. or its affiliates (since 2015); formerly, Compliance Officer of Legg Mason & Co. (2013 to 2020); Assistant Vice President of Legg Mason & Co. (2011 to 2020) | |
| Western Asset Corporate Loan Fund Inc. | 41 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Additional Officers (cont’d) | ||
| George P. Hoyt** | ||
Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1965 | |
| Position(s) held with Fund1 | Secretary and Chief Legal Officer | |
| Term of office1 and length of time served | Since 2020 | |
| Principal occupation(s) during the past five years | Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2020);formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (2006 to 2020) | |
| Thomas C. Mandia | ||
Legg Mason 100 First Stamford Place, 6th Floor, Stamford, CT 06902 | ||
| Year of birth | 1962 | |
| Position(s) held with Fund1 | Assistant Secretary | |
| Term of office1 and length of time served | Since 2006 | |
| Principal occupation(s) during the past five years | Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds associated with Legg Mason & Co. or its affiliates (since 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment advisers); formerly, Managing Director and Deputy General Counsel of Legg Mason & Co. (2005 to 2020) | |
| Christopher Berarducci | ||
Legg Mason 620 Eighth Avenue, 47th Floor, New York, NY 10018 | ||
| Year of birth | 1974 | |
| Position(s) held with Fund1 | Treasurer and Principal Financial Officer | |
| Term of office1 and length of time served | Since 2019 | |
| Principal occupation(s) during the past five years | Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain funds associated with Legg Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co. | |
| 42 | Western Asset Corporate Loan Fund Inc. |
| Additional Officers (cont’d) | ||
| Jeanne M. Kelly | ||
Legg Mason 620 Eighth Avenue, 47th Floor, New York, NY 10018 | ||
| Year of birth | 1951 | |
| Position(s) held with Fund1 | Senior Vice President | |
| Term of office1 and length of time served | Since 2007 | |
| Principal occupation(s) during the past five years | U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM (2013 to 2015) | |
| † | Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended (the “1940 Act”). |
| * | Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer. |
| ** | Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer. |
| 1 | The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2022, year 2020 and year 2021, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year, to hold office until their successors are duly elected and qualified. |
| 2 | Ms. Trust is an “interested person” of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its affiliates. |
| Western Asset Corporate Loan Fund Inc. | 43 |
Annual chief executive officer and principal financial officer certifications (unaudited)
The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the Certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
| 44 | Western Asset Corporate Loan Fund Inc. |
Other shareholder communications regarding accounting matters (unaudited)
The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 47th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
| Western Asset Corporate Loan Fund Inc. | 45 |
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stock- holders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date;
| 46 | Western Asset Corporate Loan Fund Inc. |
otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
| Western Asset Corporate Loan Fund Inc. | 47 |
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended September 30, 2020:
| Record date: | Monthly | Monthly | ||
| Payable date: | October 2019 through December 2019 | January 2020 through September 2020 | ||
| Qualified Interest Income* | 75.00% | 50.00% | ||
| Tax Return of Capital | — | 26.10% |
| * | The following percentages of the ordinary income distributions paid by the Fund represent Interest-related dividends eligible for exemption from U.S. withholding tax for non resident aliens and foreign corporations. |
| 48 | Western Asset Corporate Loan Fund Inc. |
Western Asset
Corporate Loan Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive
Officer
Christopher Berarducci
Treasurer and Principal Financial
Officer
Fred Jensen*
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
George P. Hoyt**
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
| * | Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer. |
| ** | Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer. |
Western Asset Corporate
Loan Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
Western Asset Management Company,
LLC
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock
Exchange Symbol
TLI
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| • | Personal information included on applications or other forms; |
| • | Account balances, transactions, and mutual fund holdings and positions; |
| • | Bank account information, legal documents, and identity verification documentation; |
| • | Online account access user IDs, passwords, security challenge question responses; and |
| • | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
| • | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to government regulators; |
| • | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds; |
| • | Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
| • | The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
| • | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
| NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Funds at 1-888-777-0102.
Revised April 2018
| NOT PART OF THE ANNUAL REPORT |
Western Asset Corporate Loan Fund Inc.
Western Asset Corporate Loan Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Corporate Loan Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
FD01804 11/20 SR20-4011
| ITEM 2. | CODE OF ETHICS. |
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Directors of the registrant has determined that Eileen A. Kamerick, a member of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert” and that she is independent for purposes of this item.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
(a) Audit Fees. The aggregate fees billed in the previous fiscal years ending September 30, 2019 and September 30, 2020 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $61,172 in September 30, 2019 and $58,825 in September 30, 2020.
(b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $3,000 in September 30, 2019 and $0 in September 30, 2020.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Corporate Loan Fund Inc. (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Period
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $0 in September 30, 2019 and $0 in September 30, 2020. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
(d) All Other Fees. The aggregate fees for other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Western Asset Corporate Loan Fund Inc. were $0 in September 30, 2019 and $0 in September 30, 2020.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Corporate Loan Fund Inc. requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre—approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Western Asset Corporate Loan Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for September 30, 2019 and September 30, 2020; Tax Fees were 100% and 100% for September 30, 2019 and September 30, 2020; and Other Fees were 100% and 100% for September 30, 2019 and September 30, 2020.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Corporate Loan Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Corporate Loan Fund Inc. during the reporting period were $429,912 in September 30, 2019 and $701,092 in September 30, 2020.
(h) Yes. Western Asset Corporate Loan Fund Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Western Asset Corporate Loan Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
b) Not applicable
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES |
Western Asset Management Company, LLC
Proxy Voting Policies and Procedures
BACKGROUND
An investment adviser is required to adopt and implement policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). The authority to vote the proxies of our clients is established through investment management agreements or comparable documents. In addition to SEC requirements governing advisers, long-standing fiduciary standards and responsibilities have been established for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the investment manager.
POLICY
As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)- 6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
PROCEDURE
Responsibility and Oversight
The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| 1. | Proxies are reviewed to determine accounts impacted. |
| 2. | Impacted accounts are checked to confirm Western Asset voting authority. |
| 3. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
| 4. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
| 5. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into the account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| 6. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering, and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
| a. | A copy of Western Asset’s policies and procedures. |
| b. | Copies of proxy statements received regarding client securities. |
| c. | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
| d. | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
| e. | A proxy log including: |
| 1. | Issuer name; |
| 2. | Exchange ticker symbol of the issuer’s shares to be voted; |
| 3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| 4. | A brief identification of the matter voted on; |
| 5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| 6. | Whether a vote was cast on the matter; |
| 7. | A record of how the vote was cast; and |
| 8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest.
Issues to be reviewed include, but are not limited to:
| 1. | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| 2. | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| 3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
| I. | Board Approved Proposals |
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
| 1. | Matters relating to the Board of Directors |
Western Asset votes proxies for the election of the company’s nominees for directors and for board- approved proposals on other matters relating to the board of directors with the following exceptions:
| a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| d. | Votes are cast on a case-by-case basis in contested elections of directors. |
| 2. | Matters relating to Executive Compensation |
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
| a. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
| b. | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
| c. | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| d. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
| 3. | Matters relating to Capitalization |
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
| a. | Western Asset votes for proposals relating to the authorization of additional common stock. |
| b. | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
| c. | Western Asset votes for proposals authorizing share repurchase programs. |
| 4. | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions |
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
| 5. | Matters relating to Anti-Takeover Measures |
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
| a. | Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans. |
| b. | Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions. |
| 6. | Other Business Matters |
Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
| a. | Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws. |
| b. | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
| II. | Shareholder Proposals |
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
| a. | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
| b. | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals. |
| c. | Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
| III. | Voting Shares of Investment Companies |
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
| 1. | Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
| 2. | Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
| IV. | Voting Shares of Foreign Issuers |
In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
| 1. | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management. |
| 2. | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
| 3. | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
| 4. | Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights. |
RETIREMENT ACCOUNTS
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
Western Asset Management Company Limited
Proxy Voting and Corporate Actions Policy
NOTE: Below policy relating to Proxy Voting and Corporate Actions is a global policy for all Western Asset affiliates. As compliance with the Policy is monitored by Western Asset Pasadena affiliate, the Policy has been adopted from US Compliance Manual and therefore all defined terms are those defined in the US Compliance Manual rather than UK Compliance Manual.
As a fixed income only manager, the occasion to vote proxies is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
RESPONSIBILITY AND OVERSIGHT
The Western Asset Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
CLIENT AUTHORITY
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
PROXY GATHERING
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
PROXY VOTING
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| • | Proxies are reviewed to determine accounts impacted. |
| • | Impacted accounts are checked to confirm Western Asset voting authority. |
| • | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
| • | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
| • | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| • | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
TIMING
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
RECORDKEEPING
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
| • | A copy of Western Asset’s policies and procedures. |
| • | Copies of proxy statements received regarding client securities. |
| • | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
| • | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
| • | A proxy log including: |
| o | Issuer name; |
| o | Exchange ticker symbol of the issuer’s shares to be voted; |
| o | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| o | A brief identification of the matter voted on; |
| o | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| o | Whether a vote was cast on the matter; |
| o | A record of how the vote was cast; and |
| o | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
DISCLOSURE
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
CONFLICT OF INTEREST
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
| • | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| • | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| • | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
VOTING GUIDELINES
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
BOARD APPROVAL PROPOSALS
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
Matters relating to the Board of Directors – Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
| • | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| • | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| • | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| • | Votes are cast on a case-by-case basis in contested elections of directors. |
Matters relating to Executive Compensation – Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by- case basis on board-approved proposals relating to executive compensation, except as follows:
| • | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
| • | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
| • | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| • | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
Matters relating to Capitalization – The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board- approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
| • | Western Asset votes for proposals relating to the authorization of additional common stock; |
| • | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits); |
| • | Western Asset votes for proposals authorizing share repurchase programs; |
| • | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions; |
| • | Western Asset votes these issues on a case-by-case basis on board-approved transactions; |
Matters relating to Anti-Takeover Measures – Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
| • | Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans; |
| • | Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions. |
Other Business Matters – Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
| • | Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws; |
| • | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
SHAREHOLDER PROPOSALS
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
| • | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans; |
| • | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals; |
| • | Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
VOTING SHARES OF INVESTMENT COMPANIES
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
| • | Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios; |
| • | Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
VOTING SHARES OF FOREIGN ISSUERS
In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
| • | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management; |
| • | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees; |
| • | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated; |
| • | Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights. |
RETIREMENT ACCOUNTS
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary.
Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
CORPORATE ACTIONS
Western Asset must pay strict attention to any corporate actions that are taken with respect to issuers whose securities are held in client accounts. For example, Western Asset must review any tender offers, rights offerings, etc., made in connection with securities owned by clients. Western Asset must also act in a timely manner and in the best interest of each client with respect to any such corporate actions.
Western Asset Management Company Ltd (“WAMJ”) Proxy Voting Policies and Procedures
POLICY
As a fixed income only manager, the occasion to vote proxies for WAMJ is very rare. However, the Firm has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, WAMJ will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
PROCEDURE
Responsibility and Oversight
The WAMJ Legal and Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Operations (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority, WAMJ will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if WAMJ becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If WAMJ personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| a. | Proxies are reviewed to determine accounts impacted. |
| b. | Impacted accounts are checked to confirm WAMJ voting authority. |
| c. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
| d. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and WAMJ obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle), WAMJ seeks voting instructions from an independent third party. |
| e. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, WAMJ may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| f. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
WAMJ personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
WAMJ maintains records of proxies. These records include:
| a. | A copy of WAMJ’s policies and procedures. |
| b. | Copies of proxy statements received regarding client securities. |
| c. | A copy of any document created by WAMJ that was material to making a decision how to vote proxies. |
| d. | Each written client request for proxy voting records and WAMJ’s written response to both verbal and written client requests. |
| e. | A proxy log including: |
| 1. | Issuer name; |
| 2. | Exchange ticker symbol of the issuer’s shares to be voted; |
| 3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| 4. | A brief identification of the matter voted on; |
| 5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| 6. | Whether a vote was cast on the matter; |
| 7. | A record of how the vote was cast; and |
| 8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in WAMJ’s offices.
Disclosure
WAMJ’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
| 1. | Whether Western (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| 2. | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| 3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
WAMJ’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
| 1b. | Board Approved Proposals |
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, WAMJ generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
| 1. | Matters relating to the Board of Directors |
WAMJ votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
| a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| d. | Votes are cast on a case-by-case basis in contested elections of directors. |
| 2. | Matters relating to Executive Compensation |
WAMJ generally favors compensation programs that relate executive compensation to a company’s long- term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
| a. | Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for stock option plans that will result in a minimal annual dilution. |
| b. | WAMJ votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
| c. | WAMJ votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| d. | Except where the firm is otherwise withholding votes for the entire board of directors, WAMJ votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
| 3. | Matters relating to Capitalization |
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, WAMJ votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where WAMJ is otherwise withholding votes for the entire board of directors.
| a. | WAMJ votes for proposals relating to the authorization of additional common stock. |
| b. | WAMJ votes for proposals to effect stock splits (excluding reverse stock splits). |
| c. | WAMJ votes for proposals authorizing share repurchase programs. |
| 4. | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions WAMJ votes these issues on a case-by-case basis on board-approved transactions. |
| 5. | Matters relating to Anti-Takeover Measures |
WAMJ votes against board-approved proposals to adopt anti-takeover measures except as follows:
| a. | WAMJ votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans. |
| b. | WAMJ votes on a case-by-case basis on proposals to adopt fair price provisions. |
| 6. | Other Business Matters |
WAMJ votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
| a. | WAMJ votes on a case-by-case basis on proposals to amend a company’s charter or bylaws. |
| b. | WAMJ votes against authorization to transact other unidentified, substantive business at the meeting. |
| 2b. | Shareholder Proposals |
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. WAMJ votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
| a. | WAMJ votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
| b. | WAMJ votes for shareholder proposals that are consistent with WAMJ’s proxy voting guidelines for board-approved proposals. |
| c. | WAMJ votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
| 3b. | Voting Shares of Investment Companies |
WAMJ may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
| o | WAMJ votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
| o | WAMJ votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
| 4b. | Voting Shares of Foreign Issuers |
In the event WAMJ is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
| 1. | WAMJ votes for shareholder proposals calling for a majority of the directors to be independent of management. |
| 2. | WAMJ votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
| 3. | WAMJ votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
WAMJ votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.
Western Asset Management Company Pte. Ltd. (“WAMS”)
Compliance Policies and Procedures
Proxy Voting
WAMS has adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and the applicable laws and regulations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts.
While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration the Firm’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent the Firm deems appropriate).
In exercising its voting authority, WAMS will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (other than Western Asset affiliated companies) regarding the voting of any securities owned by its clients.
Procedure
Responsibility and Oversight
The Western Asset Legal and Compliance Department is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research and portfolio managers are determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipients for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded to their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| 1. | Proxies are reviewed to determine accounts impacted. |
| 2. | Impacted accounts are checked to confirm Western Asset voting authority. |
| 3. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. [See conflicts of interest section of these procedures for further information on determining material conflicts of interest.] |
| 4. | If a material conflict of interest exists, (4.1) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (4.2) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
| 5. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into the account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| 6. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (4) or (5) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
| • | A copy of Western Asset’s policies and procedures. |
| • | Copies of proxy statements received regarding client securities. |
| • | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
| • | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
| • | A proxy log including: |
| ○ | Issuer name; |
| ○ | Exchange ticker symbol of the issuer’s shares to be voted; |
| ○ | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| ○ | A brief identification of the matter voted on; |
| ○ | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| ○ | Whether a vote was cast on the matter; |
| ○ | A record of how the vote was cast; and |
Whether the vote was cast for or against the recommendation of the issuer’s management team. Records are maintained in an easily accessible plan for five years, the first two in Western Asset’s offices.
Disclosure
Western Asset’s proxy policies are described in the firm’s Part 2A of Form ADV. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
| • | Whether Western (or, to the extent required to be considered by applicable law, it affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| • | Whether Western or an officer or director of Western or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| • | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part 1 deals with proposals which have been approved and are recommended by a company’s board of directors; Part 2 deals with proposals submitted by shareholders for inclusion in proxy statements; Part 3 addresses issues relating to voting shares of investment companies; and Part 4 addresses unique considerations pertaining to foreign issuers.
Part 1 - Board Approved Proposals
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
| • | Matters relating to the Board of Directors. |
Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
| – | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| – | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| – | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| – | Votes are cast on a case-by-case basis in contested elections of directors. |
| • | Matters relating to Executive Compensation. |
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
| – | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
| – | Western Asset votes against stock option plans or proposals that permit replacing or re-pricing of underwater options. |
| – | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| – | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less result in dilution of 10% or less. |
| • | Matters relating to Capitalization. |
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstance of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
| – | Western Asset votes for proposals relating to the authorization of additional common stock. |
| – | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
| – | Western Asset votes for proposals authorizing share repurchase programs. |
| • | Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions. Western Asset votes these issues on a case-by-case basis on board-approved transactions. |
| • | Matters relating to Anti-Takeover Measures. Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows: |
| – | Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder right plans. |
| – | Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions. |
| • | Other Business Matters. Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting. |
| – | Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws. |
| – | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
Part 2 - Shareholder Proposals SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy voting statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to changes some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
| • | Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans. |
| • | Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals. |
| • | Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors. |
Part 3 - Voting Shares of Investment Companies Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts 1 and 2 above are voted in accordance with those guidelines.
| • | Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios. |
| • | Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g. proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided. |
Part 4 - Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held in non-U.S. issuers –i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance disclosure foreign issuers and therefore apply only where applicable.
| • | Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management. |
| • | Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees. |
| • | Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated. |
| • | Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have pre-emptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have pre-emptive rights. |
Retirement Accounts
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (1) the right to vote proxies has been reserved to a named fiduciary of the client, and (2) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1): | ||||||||||
| NAME AND ADDRESS | �� | LENGTH OF TIME SERVED | PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS | ||||||
S. Kenneth Leech
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2014 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co- Chief Investment Officer of Western Asset from 2013-2014. | ||||||||
Ryan Kohan
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 | Since 2019 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Portfolio Manager with Western Asset since 2019. Formerly, Mr. Kohan was a Portfolio Manager for Sound Point, a privately-owned credit asset manager for the last five years. | ||||||||
Michael C. Buchanan
Western Asset 385 East | Since 2012 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Deputy Chief Investment Officer of Western Asset; employed by Western Asset as an investment professional for at least the past five years; Managing Director and head of U.S. Credit Products from 2003-2005 at Credit Suisse Asset Management | ||||||||
(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the fund’s portfolio managers for the fund. Unless noted otherwise, all information is provided as of September 30, 2020.
Other Accounts Managed by Portfolio Managers
The table below identifies the number of accounts (other than the fund) for which the fund’s portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories:
registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
| Name of PM | Type of Account | Number of Accounts Managed | Total Assets Managed | Number of Accounts Managed for which Advisory Fee is Performance- Based | Assets Managed for Advisory Fee is | |||||
S. Kenneth Leech | Other Registered Investment Companies | 101 | $174.2 billion | None | None | |||||
Other Pooled Vehicles | 226 | $80.1 billion | 10 | $1.4 billion | ||||||
Other Accounts | 635 | $225.5 billion | 25 | $15.2 billion | ||||||
Ryan Kohan | Other Registered Investment Companies | 2 | $5 million | None | None | |||||
Other Pooled Vehicles | 8 | $1.9 billion | 2 | $415 million | ||||||
Other Accounts | 5 | $6.0 billion | 1 | $349 million | ||||||
Michael C. Buchanan | Other Registered Investment Companies | 36 | $20.0 billion | None | None | |||||
Other Pooled Vehicles | 64 | $21.4 billion | 5 | $775 million | ||||||
Other Accounts | 163 | $73.7 billion | 10 | $7.0 billion |
(a)(3): Investment Professional Compensation
With respect to the compensation of the investment professionals, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Potential Conflicts of Interest
The subadviser has adopted compliance policies and procedures to address a wide range of potential conflicts of interest that could directly impact client portfolios. For example, potential conflicts of interest may arise in connection with the management of multiple portfolios (including portfolios managed in a personal capacity). These could include potential conflicts of interest related to the knowledge and timing of a portfolio’s trades, investment opportunities and broker selection. Portfolio managers are privy to the size, timing, and possible market impact of a portfolio’s trades.
It is possible that an investment opportunity may be suitable for both a portfolio and other accounts managed by a portfolio manager, but may not be available in sufficient quantities for both the portfolio and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a portfolio and another account. A conflict may arise where the portfolio manager may have an incentive to treat an account preferentially as compared to a portfolio because the account pays a performance-based fee or the portfolio manager, the subadviser or an affiliate has an interest in the account. The subadviser has adopted procedures for allocation of portfolio transactions and investment opportunities across multiple client accounts on a fair and equitable basis over time. Eligible accounts that can participate in a trade generally share the same price on a pro-rata allocation basis, taking into account differences based on factors such as cash availability, investment restrictions and guidelines, and portfolio composition versus strategy.
With respect to securities transactions, the subadviser determines which broker or dealer to use to execute each order, consistent with their duty to seek best execution of the transaction. However, with respect to certain other accounts (such as pooled investment vehicles that are not registered investment companies and other accounts managed for organizations and individuals), the subadviser may be limited by the client with respect to the selection of brokers or dealers or may be instructed to direct trades through a particular broker or dealer. In these cases, trades for a portfolio in a particular security may be placed separately from, rather than aggregated with, such other accounts. Having separate transactions with respect to a security may temporarily affect the market price of the security or the execution of the transaction, or both, to the possible detriment of a portfolio or the other account(s) involved. Additionally, the management of multiple portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. The subadviser’s team approach to portfolio management and block trading approach seeks to limit this potential risk.
The subadviser also maintains a gift and entertainment policy to address the potential for a business contact to give gifts or host entertainment events that may influence the business judgment of an employee. Employees are permitted to retain gifts of only a nominal value and are required to make reimbursement for entertainment events above a certain value. All gifts (except those of a de minimis value) and entertainment events that are given or sponsored by a business contact are required to be reported in a gift and entertainment log which is reviewed on a regular basis for possible issues.
Employees of the subadviser have access to transactions and holdings information regarding client accounts and the subadviser’s overall trading activities. This information represents a potential conflict of interest because employees may take advantage of this information as they trade in their personal accounts. Accordingly, the subadviser maintains a Code of Ethics that is compliant with Rule 17j-1 under the Investment Company Act of 1940, as amended, and Rule 204A-1 under the Investment Advisers Act of 1940, to address personal trading. In addition, the Code of Ethics seeks to establish broader principles of good conduct and fiduciary responsibility in all aspects of the subadviser’s business. The Code of Ethics is administered by the Legal and Compliance Department and monitored through the subadviser’s compliance monitoring program.
The subadviser may also face other potential conflicts of interest with respect to managing client assets, and the description above is not a complete description of every conflict of interest that could be deemed to exist. The subadviser also maintains a compliance monitoring program and engages independent auditors to conduct a SOC1/ISAE 3402 audit on an annual basis. These steps help to ensure that potential conflicts of interest have been addressed.
(a)(4): Investment Professional Securities Ownership
The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of September 30, 2020.
| Portfolio Manager(s) | Dollar Range of Portfolio Securities Beneficially Owned | |||
|
| |||
S. Kenneth Leech | A | |||
Michael C. Buchanan Ryan Kohan | A A | |||
Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS |
| (a) | (b) | (c) | (d) | |||||||||||||
Period | | Total Number of Shares | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | ||||
October 1 through October 31 | 0 | 0 | 0 | 993,896 | ||||||||||||
November 1 through November 30 | 0 | 0 | 0 | 993,896 | ||||||||||||
December 1 through December 31 | 36,297 | $ | 9.95 | 36,297 | 957,599 | |||||||||||
January 1 through January 31 | 25,743 | $ | 9.92 | 25,743 | 931,856 | |||||||||||
February 1 through February 29 | 0 | 0 | 0 | 931,856 | ||||||||||||
March 1 through March 31 | 0 | 0 | 0 | 931,856 | ||||||||||||
April 1 through April 30 | 0 | 0 | 0 | 931,856 | ||||||||||||
May 1 through May 31 | 0 | 0 | 0 | 931,856 | ||||||||||||
June 1 through June 30 | 0 | 0 | 0 | 931,856 | ||||||||||||
July 1 through July 31 | 0 | 0 | 0 | 931,856 | ||||||||||||
August 1 through August 31 | 0 | 0 | 0 | 931,856 | ||||||||||||
September 1 through September 30 | 0 | 0 | 0 | 931,856 | ||||||||||||
Total | ||||||||||||||||
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the
“Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
Not applicable.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
| ITEM 12. | DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 13. | EXHIBITS. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Western Asset Corporate Loan Fund Inc. | ||
| By: | /s/ Jane Trust | |
| Jane Trust | ||
| Chief Executive Officer | ||
| Date: | November 25, 2020 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ Jane Trust | |
| Jane Trust | ||
| Chief Executive Officer | ||
| Date: | November 25, 2020 | |
| By: | /s/ Christopher Berarducci | |
| Christopher Berarducci | ||
| Principal Financial Officer | ||
| Date: | November 25, 2020 | |