September 7, 2018
George M. Silfen, Esq.
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036
Re: 1WS Credit Income Fund (the "Fund")
Registration Statement on Form N-2
File Nos. 333-226768; 811-23368
Dear Mr. Silfen:
We have reviewed the registration statement referenced above that was filed on
August 10, 2018
and have the following comments. Whenever a comment is made in one location, it
is
considered applicable to all similar disclosure appearing elsewhere in the
registration statement.
Additionally, for convenience, we have generally organized our comments using
headings,
defined terms and page numbers found in the registration statement.
Registration Statement
Prospectus
Outside Front Cover
Investment Adviser
1. Disclose that the Fund's investment adviser, 1WS Capital Advisors,
LLC, is a newly
formed investment adviser that has no experience managing a registered
closed-end
investment company that operates as an interval fund.
The Offering
2. The disclosure states that Institutional Class Shares of the Fund are
being offered in an
initial offering at a price of $20 per Share and that the Fund
currently expects that its
Initial Offering will terminate immediately prior to the Fund's
commencement of
operations." However, the disclosure further states that "after the
Initial Offering is
closed, our Shares will be offered on a continuous basis at the NAV
per Share calculated
each day." Please expand the disclosure to clarify whether the Fund
has set a minimum
asset threshold that must be satisfied prior to the commencement of
its operations. Also,
in an appropriate place in the prospectus summary, please disclose the
estimated
minimum dollar amount of capital that must be raised by the Fund which
would enable it
to sustain viable operations with a reasonable chance of attaining its
investment
objective.
3. The disclosure further states that "the Fund has applied for exemptive
relief from the
United States Securities and Exchange Commission (the `SEC') to issue
multiple classes
of Shares (including [ ] Class Shares) and to impose asset-based
distribution fees and
early-withdrawal fees as applicable. Until such exemptive relief is
granted, the Fund will
only offer Institutional Class Shares, and upon receiving the exemptive
relief, the Fund
will also offer [ ] Class Shares." Nevertheless, the pricing table
appearing on the outside
front cover, the "Fees and Expenses" section of the prospectus, as well
as other
disclosures appearing throughout the prospectus, provide specific
information pertaining
to the [ ] Class Shares. Accordingly, in your response letter, please
discuss the Fund's
plans to delay any request to accelerate the effectiveness of its
registration statement,
which contemplates the offering of multiple classes of shares and the
imposition of asset-
based distribution fees and early-withdrawal charges, until such time as
the Fund has
received the required exemptive relief.
4. In your response letter, please confirm that all of the information that
precedes the section
captioned "Table of Contents" will appear on the outside front cover of
the prospectus in
at least 10-point type.
Prospectus Summary
Investment Strategies and Policies (page 3)
5. The disclosure states that the Fund may invest in deferred interest,
pay-in-kind or zero
coupon bonds/notes. In the disclosure, clarify that the higher yields and
interest rates on
these securities reflect the payment deferral and increased credit risk
associated with such
instruments and that such investments may represent a significantly
higher credit risk
than coupon loans. Also clarify that these securities may have unreliable
valuations
because their continuing accruals require continuing judgments about the
collectability of
the deferred payments and the value of any associated collateral. In
addition, disclose
that the deferral of interest on these securities also reduces the
loan-to-value ratio at a
compounding rate.
6. The third paragraph states that the Fund may invest in "other funds."
However, it is not
clear from the disclosure whether the Fund may invest in entities that
are excluded from
the definition of "investment company" under the Investment Company Act
of 1940 (the
"ICA") solely by Section 3(c)(1) or Section 3(c)(7) of the ICA (typically
private equity
funds and hedge funds). In your response letter, please indicate whether
the Fund may
invest in the aforementioned entities. Based on your response, we may
have further
comment.
7. The third paragraph further states that the Fund may enter into credit
default swaps. In
your response letter, please confirm that when the Fund acts as seller of
a credit default
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swap, the Fund will segregate assets equal to the full notional amount
of the reference
obligation.
8. We also note, from the disclosure appearing in the third paragraph, that
the Fund counts
its "indirect investment in debt obligations towards the Fund's
requirement to invest at
least 80% of its assets in debt obligations." In your response letter,
please indicate
whether the Fund will use market value or notional value to value its
investments in
derivatives for purposes of determining whether it has invested at least
80% of its assets
in debt obligations.
9. It appears from the description of the Fund's principal investment
strategies and policies
that a significant portion of the Fund's Managed Assets may be either
directly or
indirectly invested within the mortgage sector. Please disclose the
overall estimated
percentage of the Fund's total assets that are likely to be invested
directly or indirectly
within the mortgage sector.
10. The disclosure states that the Fund's investments may include equity
tranches of CLOs
and CDOs. Please confirm the Fund will follow ASC 325-40 for these
investments.
Advisory Fees (page 5)
11. The disclosure in this section states that the Fund is not obligated to
reimburse waived
expenses beyond three years from the end of the fiscal year in which the
Adviser waived
a fee or reimbursed an expense. The staff believes that any recapture of
a fee waived or
expense reimbursed should occur within three years of the specific
waiver or
reimbursement. See ASC 450-20-25-2 (old FAS 5) and FASB Statement of
Financial
Accounting Concepts No. 6, Elements of Financial Statements, paragraph
36 ("CON
6"). See Also, AAG 8.09.
Dividends and Distributions (page 5)
12. Expand the first paragraph to disclose that there can be no assurances
that the Fund will
achieve any level of distributions to its Shareholders.
Principal Risks (page 7)
13. Please add a separately captioned risk factor to highlight the risks
associated with the
current interest rate environment. For example, highlight the unique
risks associated with
the current historically low interest rate environment, including how
changes to interest
rates might impact the Fund's future borrowings, its net investment
income and
distributions to its Shareholders, the trading prices of its Shares and
its net asset value,
Fund portfolio companies' ability to service interest payment
obligations and principal
loan repayments.
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Securitization of our assets subjects us to various risks. (Page 11)
14. The disclosure states that the Fund may securitize certain of its
investments by selling
certain assets to a SPV. Please inform us if these SPVs will be
consolidated with the
Fund's accounting records.
CDO and CLO risks (page 13)
15. Disclose whether there is any limit on the amount of Fund assets that
may be invested in
the junior debt, residual or equity tranches of CDOs, CLOs and other
structured finance
vehicles.
Investment-Related Risks Derivatives (page 14)
16. Specify in the derivatives risk disclosure whether the Fund may utilize
derivative
instruments for speculative purposes and, if applicable, also disclose
the related special
risks to which the Fund may be exposed.
17. In your response letter, confirm that the prospectus disclosure
describes the types of
derivatives that the Fund is expected to use, the manner in which they
are expected to be
employed by the Fund, and the maximum percentage of Fund assets that are
expected to
be allocated to derivatives. See generally Letter from Barry D. Miller,
Associate
Director, Division of Investment Management, SEC to Karrie McMillan,
General
Counsel, ICI (July 30, 2010).
Risks of Shorting Equity Securities (page 17)
18. The disclosure states that the Fund may engage in short sales. Please
confirm if the Fund
intends to use short sales and, if so, please include an estimate of
dividends and interest
expense on short sales in the fee table.
Use of leverage risk. (page 19)
19. Disclose that drops in asset values may magnify losses or totally
eliminate the Fund's
equity in a leveraged investment.
Our ability to raise additional capital may be limited. (page 20)
20. The disclosure states that "in the future" the Fund may issue preferred
shares. Disclose
whether or not the Fund expects to issue preferred shares within 12
months from the date
of the prospectus. If the Fund expects to issue preferred shares during
this 12-month
period then, under a separately captioned section of the prospectus
summary, briefly
highlight the characteristics of the preferred shares likely to be
issued by the Fund and the
related material risks to holders of its Shares. Additionally, provide
an estimate of the
costs of issuing and servicing preferred shares in a line item
presentation to the Fund's
fee table.
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We have no operating history. (page 21)
21. All of the disclosure presented in the second sentence of the second
paragraph should be
moved to a location outside of the risk factor because it has the
potential to minimize the
impact of the risk being disclosed.
Our Adviser and its affiliates, including our officers and some of our
directors, will face conflicts
of interest... (page 22)
22. Please add a cross-reference to the section to the prospectus that
expands upon the actual
and potential conflicts of interest that may arise and that highlights
the policies and
procedures that the Fund has adopted to identify, address and resolve
conflicts of interest.
Fees and Expenses (page 23)
23. We note that most of the information in the fee table and Example is
incomplete. Please
provide us with the details of the Fund's fees, expenses and Example
presentation as soon
as they are available.
24. We note the absence of the "Acquired Fund Fees & Expenses" line item
from the Fund's
fee table. Please confirm to us in your response letter that the Fund
will not in the
upcoming year make investments in an "Acquired Fund" (as defined in
Instruction 10 to
Item 3 of Form N-2) at the level that triggers the need for the
additional line item of
Acquired Fund Fees & Expenses. If no such additional line item is
required, please
indicate in your response letter that any applicable Acquired Fund Fees
& Expenses is
nonetheless included in "Other Expenses" or that the Fund does not
intend to invest in an
Acquired Fund.
25. Reference is made to the disclosure presented in footnote (2). Please
inform us of the
Fund's accounting treatment for offering costs and include references to
the appropriate
accounting guidance.
26. Footnote (3) states that presentation of Annual Expenses "assumes that
the Fund sells $[
] worth of Shares during the Fund's first twelve months and that the
Fund's net offering
proceeds from such sales equal $[ ]." In your response letter, discuss
the reasonableness
of the particular level of Shares sold that will ultimately be selected
and disclosed in
footnote (3) forming the basis of the assumption. Also, in the response
letter, the Fund
should undertake to update the fee table and expense example if at any
time during the
continuous offering period it reasonably appears that the Fund will not
be able to sell the
assumed amount of its Shares during the first twelve months after
effectiveness if such
shortfall in sales materially impacts the current fee table and expense
example
presentation.
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27. In footnote (4) briefly explain how derivatives will be valued for
purposes of determining
"gross assets" in the calculation of management fees. Also, expand the
disclosure to
provide a precise definition of "average [daily] gross assets of the
Fund."
28. Please make clear, in a footnote to the fee table that all of the fees
and expenses of any
subsidiary or SPV that the Fund expects to form during the next 12
months period are
included in the "Total Gross Annual Expenses" line item presentation.
Risk Factors (page 28)
29. Expand the first paragraph to state that this section describes the
principal risk factors
associated with investment in the Fund specifically, as well as those
factors generally
associated with investment in a fund with investment objectives,
investment policies,
capital structure or trading markets similar to the Fund's. See Item
8.3.a. of Form N-2. In
this regard, add any additional risk factors as appropriate.
If a borrower or obligor is unable to make payments...(page 30)
30. Expand the risk factor disclosure highlighting the principal risks of
enforcing security
interests in collateral underlying loans, as well as liquidating
collateral, located in the
non-U.S. jurisdictions in which the Fund may principally invest. Also
highlight any
material risks pertaining to the liquidation of the underlying
collateral, as well as any
heightened risk of the insufficiency of the underlying collateral to
fully discharge a non-
U.S. borrower's obligations to a lender.
We may be exposed to geographic concentration risk (page 30)
31. If a material amount of the Fund's investments are expected to be
exposed to the risks of
any non-U.S. country or other geographic region, separate risk
disclosure pertaining to
any such non-U.S. country or geographic region should be included in the
prospectus.
Securitization of our assets subjects us to various risks (page 33)
32. The disclosure on pages 33-35 states that the Fund may securitize its
assets, including
through the use of SPVs, and that the Fund may also conduct a registered
offering of
asset-backed securities.
33. With respect to any SPV or any wholly-owned entities that the Fund may
use, please
provide details in your response letter regarding the choice of form of
entity and
jurisdiction of organization. Also, please confirm the following:
a. that the Fund will comply with the provisions of the Investment
Company Act of
1940 (the "ICA") governing investment policies (Section 8) and capital
structure and
leverage (Section 18) on an aggregate basis with its wholly-owned
entities.
6
b. that each of the separate investment advisory contracts that the
wholly-owned entities
will enter into with the Adviser will comply with provisions of the ICA
relating to
investment advisory contracts (Section 15). The investment advisory
agreement between
the Adviser and the wholly-owned entities are material contracts that
should be included
as exhibits to the registration statement if entered into during the
offering period.
Because the Fund and the wholly-owned entities would have the same
adviser for
purposes of complying with Section 15(c), the reviews of the Fund's and
the wholly-
owned entities' investment advisory agreements may combined.
c. that the wholly-owned entities will comply with the provisions
relating to affiliated
transactions and custody (ICA Section 17). Identify the custodian of the
wholly-owned
entities.
34. Additionally, in your response letter, please provide us with more
detail regarding the
registered offerings of asset-backed securities which the Fund may
conduct.
Plan of Distribution (page 58)
35. The disclosure contained in the penultimate paragraph should instead be
presented under
a caption entitled "Additional Financial Intermediary Compensation."
Also, expand the
disclosure to state the maximum permissible amount of the additional
compensation that
could be paid. Further clarify that the Adviser also benefits when the
payment of
additional compensation results in increased assets under management and
a
corresponding increase in its management fees.
36. In footnote (3) to the pricing table that appears on the outside front
cover of the
prospectus, provide a cross-reference to the section captioned
"Additional Financial
Intermediary Compensation."
Determination of Net Asset Value (page 61)
37. In your response letter, please inform the staff whether the Fund's
Board of Trustees will
review and approve in advance the valuation methodology of any
independent valuation
firm it uses and confirm that the Fund's Board of Trustees will
regularly review the
historical accuracy of its fair value methodologies. See Release No.
IC-26299;
"Compliance Programs of Investment Companies and Investment Advisers,"
(December
17, 2003).
Dividend Reinvestment Plan (page 63)
38. Disclose that reinvested dividends increase the Fund's total gross
assets on which a
management fee is payable to Fund's Adviser.
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APPENDIX A
Adviser Performance Information/Portfolio Manager Performance Information (page
A-1)
39. Revise the heading of this section, and related narrative disclosure, to
make clear whether
Appendix A presents the performance information of the Fund's Adviser or
that of the
Fund's portfolio manager.
40. In this regard, we note that the disclosure states that "the investment
adviser of 1WS
Credit Income Fund (the "Fund") is 1WS Capital Advisors, LLC, which is
controlled by
its sole managing member, One William Street Capital Management, L.P.
(collectively,
the `Adviser'). The Fund has no operating history. The Adviser, using
the same
personnel as those managing the Fund, manages [ ] and [ ] (the `Other
Investment
Vehicles') each of which has a substantially similar investment program
to that of the
Fund. This Appendix contains investment performance information for [ ]
and [ ] (from
inception)."
41. Please note that the performance information must include all accounts
and investment
companies advised by the Adviser or the portfolio manager, as the case
may be, with
substantially similar investment objectives, policies and investment
strategies as the
Fund. See Nicholas-Applegate Mutual Funds (pub. avail. Aug. 6, 1996).
Accordingly,
please expand the disclosure to clarify that all such accounts and
investment companies
have been included in the performance information.
42. The disclosure should also clarify, if true, that the performance
information is presented
net of all fees and expenses, including custodial fees. In the
alternative, the Fund should
disclose that performance information is shown net of all fees and
expenses except for
custodial fees.
43. If the actual fees/expenses of the accounts and investment companies
included in the
performance information are lower than the Fund's fees/expenses, the
disclosure should
state that the use of the Fund's expense structure would have lowered
the performance
results.
44. Disclose the method of performance calculation used in the presentation
of the
performance information. If the standardized SEC method is not used to
calculate the
performance information, the Fund should disclose how the performance
was calculated
and that the method differs from the standardized SEC method.
45. The caption appearing above the performance table should be changed to
"Average
Annual Total Returns."
46. Briefly disclose the relevance of each index selected.
47. Briefly disclose, in plain English, the meaning and significance of
"Compound ROR" and
"Cumulative ROR."
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48. In your response letter, represent that the Fund has the records
necessary to support the
calculation of the performance information presented in Appendix A, as
required by rule
204-2(a)(16) under the Investment Advisers Act.
Statement of Additional Information
Fundamental Investment Restrictions of the Fund (page SAI-5)
49. We note that fundamental investment restriction (7) states that "the
Fund's ABS, MBS
and structured Credit Investments pursuant to the Fund's principal
investment strategies
are not subject to" the limitation on the amount of Fund assets that may
be invested in
any particular industry or group of industries." The staff believes that
the Fund's position
as currently worded conflicts with Section 8(b) (1) (E) of the ICA by
allowing the Fund
to reserve freedom of action to concentrate. The staff does not believe
that it is consistent
with Section 13(a) of the ICA to categorically exclude ABS, MBS and
structured Credit
Investments from counting as investments in any industry or group of
industries, because
concentrated investments in those securities can expose investors to
risks common to one
industry. The staff takes the position that every investment - other
than investments in
government securities, domestic bank deposit instruments or tax exempt
securities issued
by governments or their political subdivisions (excluding private
activity municipal debt
securities) - is an investment in some industry or group of industries.
50. Accordingly, the Fund must determine which industry classification or
classifications
reasonably apply with respect to each ABS, MBS and structured Credit
Investment
issuance for concentration purposes. Toward this end, the Fund could
consider the nature
of an asset-backed security's underlying receivables (e.g., auto loans,
aircraft leases, etc.)
to determine its industry classification for purposes of the Fund's
concentration policy.
The Fund could also reasonably choose to classify its ABS investments in
a single
industry for concentration purposes. Similarly, the Fund could consider
the nature of a
mortgage-backed security's underlying mortgages (e.g., private
commercial mortgages,
private residential mortgages, etc.) as separate industries towards
which investments in
those securities would be counted for concentration purposes.
51. Please revise fundamental investment restriction (7) and consider adding
supplemental
explanatory narrative in the "Summary of 1940 Act Restrictions on
Certain Activities"
section of the SAI to conform to this position. Also, make any necessary
conforming
changes to the Investment Strategies and Policies section of the
prospectus.
Information About Each Board Member's Experience, Qualifications, Attributes or
Skills (page
SAI-8)
52. Please expand the presentation to ensure that the information presented
for each trustee
clearly and briefly identifies the specific experience, qualifications,
attributes, or skills
that led to the conclusion that the person should serve as a trustee for
the Fund at the time
9
that the disclosure is made, in light of the Fund's business and
structure. See Item 18.17
of Form N-2.
53. Please disclose all of the other information required by Item 18 of Form
N-2 in the next
submission of the prospectus.
Signatures
54. Prior to effectiveness of the registration statement, the Fund must have
a board of trustees
whose composition complies with the applicable provisions of the ICA.
Also, please
note the signature requirements of Section 6(a) of the Securities Act,
which requires that
the registration statement be signed by a majority of the Fund's Board
of Trustees, in
addition to certain of its principal officers.
Closing
We note that portions of the filing are incomplete. We may have additional
comments on such
portions when you complete them, on disclosures made in response to this
letter, on information
supplied supplementally, or on exhibits added.
Response to this letter should be in the form of a revised submission and
should be accompanied
by a supplemental letter that includes your responses to each of these
comments. Where no
change will be made in the filing in response to a comment, please indicate
this fact in your
supplemental letter and briefly state the basis for your position.
Please advise us if you have submitted or expect to submit an exemptive
application or no-action
request in connection with the registration statement.
You should review and comply with all applicable requirements of the federal
securities laws in
connection with the preparation and distribution of a preliminary prospectus.
In closing, we remind you that the Trust and its management are responsible for
the accuracy and
adequacy of their disclosures, notwithstanding any review, comments, action or
absence of
action by the staff.
Should you have any questions regarding this letter, please contact me at (202)
551-6964.
Sincerely,
/s/ Dominic Minore
Dominic Minore
Senior Counsel
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