THL Credit Senior Loan Fund
Notes to Financial Statements (continued) December 31, 2014
3. SENIOR LOANS (continued)
with the same rights and obligations as the assigning Lender. Assignments may, however, be arranged through private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning Lender.
4. BORROWINGS
On October 1, 2014, the Fund amended its existing $70.0 million credit agreement with The Bank of New York Mellon, extending the facility’s expiration date to September 30, 2015 (the “Credit Facility”). In accordance with the 1940 Act, the Fund’s borrowings under the Credit Facility will not exceed 33% of the Fund’s Managed Assets at the time of borrowing. Borrowings under the Credit Facility are secured by the Fund’s assets as collateral. The Credit Facility bears an unused commitment fee on the unused portion of the credit facility (the “Unused Facility Amount”) equal to 0.08% on the total Unused Facility Amount. The per annum rate of interest for borrowing under the Credit Facility is equal to (a) the London Interbank Offered Rate (“LIBOR”) for one, two, three, six or twelve months, as selected by the Fund, plus 1.000% per annum or (b) the greater of (i) the Prime Rate and (ii) 0.50% plus the Federal Funds Effective Rate per annum and is payable monthly. At December 31, 2014, the Fund had borrowings outstanding of $49,000,000 at an average interest rate of 1.17%. Due to the short term nature of the Credit Facility, face value approximates fair value at December 31, 2014. For the year ended December 31, 2014, the average borrowings under the Credit Facility and the average interest rate were $41,383,562 and 1.16%, respectively. As of December 31, 2014, the Fund’s effective leverage represented 26.06% of the Fund’s Managed Assets.
Under the Credit Facility, the Fund has agreed to certain covenants and additional investment limitations while the leverage is outstanding. The Fund agrees to maintain asset coverage of three times over outstanding borrowings.
The Fund utilizes the Credit Facility to increase its assets available for investment. When the Fund leverages its assets, common shareholders bear the fees associated with the Credit Facility and have the potential to benefit from or be disadvantaged by the use of leverage. The investment advisory fee is also increased in dollar terms from the use of leverage. Consequently, the Fund and the Adviser may have differing interest in determining whether to leverage the Fund’s assets. Leverage creates risks that may adversely affect the return for the holders of common shares, including:
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the likelihood of greater volatility of net asset value and market price of common shares;
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fluctuations in the interest rate paid for the use of the credit facility;
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increased operating costs, which may reduce the Fund’s total return;
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the potential for a decline in the value of an investment acquired through leverage, while the Fund’s obligations under such leverage remains fixed; and
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the Fund is more likely to have to sell securities in a volatile market in order to meet asset coverage or other debt compliance requirements.
To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the Fund’s return will be greater than if leverage had not been used; conversely, returns would be lower if the cost of the leverage exceeds the income or capital appreciation derived.
In addition to the risks created by the Fund’s use of leverage, the Fund is subject to the risk that it would be unable to timely, or at all, obtain replacement financing if the Credit Facility is terminated. Were this to happen, the Fund would be required to de-leverage, selling securities at a potentially inopportune time and incurring tax consequences. Further, the Fund’s ability to generate income from the use of leverage would be adversely affected.
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