UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

SCHEDULE 14A

(RULE 14a-101)

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant    ☒                         Filed by a Party other than the Registrant    ☐

Check the appropriate box:

 

☒		Preliminary Proxy Statement
☐		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
☐		Definitive Proxy Statement
☐		Definitive Additional Materials
☐		Soliciting Material Pursuant to §240.14a-12

TRIANGLE CAPITAL CORPORATION

(Name of Registrant as Specified In Its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

☐		No fee required.
☒		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
		(1)		Title of each class of securities to which transaction applies: N/A
		(2)		Aggregate number of securities to which transaction applies:   N/A
		(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):   The filing fee was determined by multiplying 0.0001245 by the underlying value of the transaction, which is the $981,178,542 in consideration to be received by Triangle Capital Corporation under the terms of the Asset Purchase Agreement.
		(4)		Proposed maximum aggregate value of transaction: $981,178,542
		(5)		Total fee paid: $122,157
☐		Fee paid previously with preliminary materials.
☐		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)		Amount previously paid:
		(2)		Form, Schedule or Registration Statement No.:
		(3)		Filing party:
		(4)		Date Filed:

 

 

 

PRELIMINARY PROXY STATEMENT – SUBJECT TO COMPLETION DATED APRIL 18, 2018

Triangle Capital Corporation

3700 Glenwood Avenue, Suite 530

Raleigh, North Carolina 27612

Dear Stockholders:

You are cordially invited to attend the special meeting (the “Special Meeting”) of the stockholders of Triangle Capital Corporation (the “Company”) to be held at                 on                 , 2018, at                 , local time. Only the Company’s stockholders of record at the close of business on                 , 2018 are entitled to notice of, and to vote at, the Special Meeting, or any adjournment or postponement thereof. Details of the business to be conducted at the Special Meeting are given in the accompanying Notice of Special Meeting of Stockholders and proxy statement. The proxy statement is first being sent to the Company’s stockholders on or about                 , 2018.

At the Special Meeting, the Company’s stockholders are being asked to approve:

 

1.

the Asset Purchase Agreement, dated as of April 3, 2018 (the “Asset Purchase Agreement”), by and between the Company and BSP Asset Acquisition I, LLC (the “Asset Buyer”), and the transactions contemplated thereby, including the sale of substantially all of the Company’s portfolio investments to the Asset Buyer (the “Asset Sale”) for the price, and on the terms, set forth in the Asset Purchase Agreement and described elsewhere in the enclosed proxy statement (the “Asset Sale Proposal”);

 

2.

in accordance with Section 312.03 of the New York Stock Exchange Listed Company Manual, the issuance and sale by the Company to Barings LLC (“Barings”) of up to, under certain circumstances, $150 million worth of shares of common stock, par value $0.001 per share, of the Company (“Company Common Stock” and such issuance and sale, the “Stock Issuance”) pursuant to the terms of the Stock Purchase and Transaction Agreement, dated as of April 3, 2018, by and between the Company and Barings (the “Externalization Agreement” and the transactions contemplated thereby, the “Externalization Transaction” and, together with the Asset Sale, the “Transactions,” and such proposal, the “Stock Issuance Proposal”);

 

3.

the investment advisory agreement (the “Advisory Agreement”), pursuant to which Barings would be appointed as the investment adviser of the Company following the closing of the Asset Sale and effective as of the closing of the Externalization Transaction, as more fully described in the enclosed proxy statement (the “Advisory Agreement Proposal”);

 

4.

a proposal to authorize the Company to be subject to a reduced asset coverage ratio of at least 150% under the Investment Company Act of 1940, as amended (the “Reduced Asset Coverage Ratio” and such proposal, the “Reduced Asset Coverage Ratio Proposal”);

 

5.

on an advisory, non-binding basis, the payment of an estimated $         in the aggregate, subject to the occurrence of certain conditions regarding change of control and termination, in golden parachute payments (the “Executive Payments”), that will or may become payable by the Company to its named executive officers pursuant to their employment and other arrangements with the Company in connection with the Transactions (the “Executive Payments Proposal”); and

 

6.

a proposal to approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Asset Purchase Agreement and related Asset Sale, the Stock Issuance or the Advisory Agreement (the “Adjournment Proposal”).

Stockholder approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are contingent upon each other. If the requisite approvals of the Company’s stockholders are obtained, and the other conditions to closing of the Transactions are satisfied or appropriately waived, on the terms and subject to the conditions set forth in the Asset Purchase Agreement and Externalization Agreement, the following actions will occur:

 

(i)

pursuant to the Asset Purchase Agreement, the Company will sell to the Asset Buyer, and the Asset Buyer will purchase from the Company, the portfolio company investments of the Company held at

December 31, 2017 for an aggregate purchase price equal to approximately $981.2 million in cash, subject to certain adjustments to take into account portfolio activity since December 31, 2017 and certain other matters, as set forth in the Asset Purchase Agreement and described elsewhere in the enclosed proxy statement; and

 

(ii)

following the closing of the Asset Sale, pursuant to the Externalization Agreement, the Company and Barings will effect the following transactions:

 

•

the Company and Barings will enter into the Advisory Agreement and an administration agreement, by and between the Company and Barings, pursuant to which Barings will serve as the Company’s investment adviser and administrator, respectively;

 

•

Barings will make an $85 million, or $1.78 per share of Company Common Stock, cash payment to the holders of record of Company Common Stock as of the date of the closing of the Externalization Transaction, but prior to Barings acquiring $100 million of Company Common Stock in connection with the Stock Issuance;

 

•

the Company will issue shares of Company Common Stock to Barings at the then-current net asset value per share, determined after giving effect to the Asset Sale and the transactions contemplated thereby, in a private placement transaction for an aggregate purchase price of $100 million;

 

•

the Company will commence one or more issuer tender offers, including the commencement of a tender offer immediately following the closing of the Externalization Transaction, pursuant to which the Company will offer to repurchase shares of Company Common Stock in an aggregate amount equal to at least $50 million, at a market price per share up to and including the net asset value per share of the Company Common Stock; and

 

•

Barings will (i) establish a trading plan providing for the purchase by Barings of $50 million worth of shares of Company Common Stock in open market transactions over a two-year period at prices not greater than the net asset value per share of Company Common Stock, and (ii) use any funds remaining under the trading plan after such two-year period to purchase shares of Company Common Stock directly from the Company at the greater of the then-current net asset value per share or the then-current market price per share.

Neither the Asset Sale nor the Externalization Transaction will be completed if the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are not approved. Even if the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved, the Externalization Transaction will not be completed unless the Asset Sale has been completed. The Asset Sale may be completed without completion of the Externalization Transaction only if:

 

•

the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved;

 

•

all other conditions to closing of the Asset Sale have been satisfied or appropriately waived; and

 

•

one or more conditions to the Company’s obligations to complete the Externalization Transaction (other than approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal) have not been satisfied or appropriately waived.

The Board of Directors unanimously recommends that you vote “FOR” the approval of the (i) Asset Sale Proposal, (ii) Stock Issuance Proposal, (iii) Advisory Agreement Proposal, (iv) Reduced Asset Coverage Ratio Proposal, (v) Executive Payments Proposal and (vi) Adjournment Proposal.

Your vote is very important to us. Whether or not you expect to be present in person at the Special Meeting, please sign the enclosed proxy card and return it promptly in the envelope provided, or vote via Internet or telephone. Instructions are provided on the proxy card. Returning the proxy card does not deprive you of your

right to attend the Special Meeting and to vote your shares in person. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” the (i) Asset Sale Proposal and (ii) Advisory Agreement Proposal. Abstentions and broker non-votes will have no effect on the (i) Reduced Asset Coverage Ratio Proposal, (ii) Executive Payments Proposal or (iii) Adjournment Proposal. With respect to the Stock Issuance Proposal, abstentions will have the same effect as a vote “AGAINST” such proposal, however, broker non-votes will have no effect on such proposal.

We look forward to seeing you at the Special Meeting.

 

Raleigh, North Carolina

                , 2018

This proxy statement is first being mailed to stockholders on or about                 , 2018.

Triangle Capital Corporation

3700 Glenwood Avenue, Suite 530

Raleigh, North Carolina 27612

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To be Held at

            , 2018,                 , local time

 

 

Dear Stockholders:

A special meeting (the “Special Meeting”) of the stockholders of Triangle Capital Corporation (the “Company”) will be held at                  , on                 , 2018, at                 , local time to consider and vote on the following proposals:

 

1.

To approve the Asset Purchase Agreement, dated as of April 3, 2018 (the “Asset Purchase Agreement”), by and between the Company and BSP Asset Acquisition I, LLC (the “Asset Buyer”), and the transactions contemplated thereby, including the sale of substantially all of the Company’s portfolio investments to the Asset Buyer for the price, and on the terms, set forth in the Asset Purchase Agreement (the “Asset Sale”), as more fully described in the enclosed proxy statement (the “Asset Sale Proposal”);

 

2.

To approve, in accordance with Section 312.03 of the New York Stock Exchange Listed Company Manual, the issuance and sale by the Company to Barings LLC (“Barings”) of up to, under certain circumstances, $150 million worth of shares of common stock, par value $0.001 per share, of the Company (“Company Common Stock” and such issuance and sale, the “Stock Issuance”) pursuant to the terms of the Stock Purchase and Transaction Agreement, dated as of April 3, 2018, by and between the Company and Barings (the “Externalization Agreement” and the transactions contemplated thereby, the “Externalization Transaction” and, together with the Asset Sale, the “Transactions”), as more fully described in the enclosed proxy statement (the “Stock Issuance Proposal”);

 

3.

To approve the investment advisory agreement (the “Advisory Agreement”) pursuant to which Barings would be appointed as the investment adviser of the Company following the closing of the Asset Sale and effective as of the closing of the Externalization Transaction, as more fully described in the enclosed proxy statement (the “Advisory Agreement Proposal”);

 

4.

To approve a proposal to authorize the Company to be subject to a reduced asset coverage ratio of at least 150% under the Investment Company Act of 1940, as amended (the “Reduced Asset Coverage Ratio”), as more fully described in the enclosed proxy statement (the “Reduced Asset Coverage Ratio Proposal”);

 

5.

To approve on an advisory, non-binding basis, the payment of an estimated $        in the aggregate, subject to the occurrence of certain conditions regarding change of control and termination, in golden parachute payments (the “Executive Payments”), that will or may become payable by the Company to its named executive officers pursuant to their employment and other arrangements with the Company in connection with the Transactions, as more fully described in the enclosed proxy statement (the “Executive Payments Proposal”); and

 

6.

To approve the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Asset Purchase Agreement and related Asset Sale, the Stock Issuance or the Advisory Agreement (the “Adjournment Proposal”).

Stockholder approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are contingent upon each other. If the requisite approvals of the Company’s stockholders are obtained,

and the other conditions to closing of the Transactions are satisfied or appropriately waived, on the terms and subject to the conditions set forth in the Asset Purchase Agreement and Externalization Agreement, the following actions will occur:

 

(i)

pursuant to the Asset Purchase Agreement, the Company will sell to the Asset Buyer, and the Asset Buyer will purchase from the Company, the portfolio company investments of the Company held at December 31, 2017 for an aggregate purchase price equal to approximately $981.2 million in cash, subject to certain adjustments to take into account portfolio activity since December 31, 2017 and certain other matters, as set forth in the Asset Purchase Agreement and described elsewhere in the enclosed proxy statement; and

 

(ii)

following closing of the Asset Sale, pursuant to the Externalization Agreement, the Company and Barings will effect the following transactions:

 

•

the Company and Barings will enter into the Advisory Agreement and an administration agreement, by and between the Company and Barings, pursuant to which Barings will serve as the Company’s investment adviser and administrator, respectively;

 

•

Barings will make an $85 million, or $1.78 per share of Company Common Stock, cash payment to the holders of record of Company Common Stock as of the date of the closing of the Externalization Transaction, but prior to Barings acquiring $100 million of Company Common Stock in connection with the Stock Issuance;

 

•

the Company will issue shares of Company Common Stock to Barings at the then-current net asset value per share, determined after giving effect to the Asset Sale and the transactions contemplated thereby, in a private placement transaction for an aggregate purchase price of $100 million;

 

•

the Company will commence one or more issuer tender offers, including the commencement of a tender offer immediately following the closing of the Externalization Transaction, pursuant to which the Company will offer to repurchase shares of Company Common Stock in an aggregate amount equal to at least $50 million, at a market price per share up to and including the net asset value per share of the Company Common Stock; and

 

•

Barings will (i) establish a trading plan providing for the purchase by Barings of $50 million worth of shares of Company Common Stock in open market transactions over a two-year period at prices not greater than the net asset value per share of Company Common Stock, and (ii) use any funds remaining under the trading plan after such two-year period to purchase shares of Company Common Stock directly from the Company at the greater of the then-current net asset value per share or the then-current market price per share.

Neither the Asset Sale nor the Externalization Transaction will be completed if the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are not approved. Even if the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved, the Externalization Transaction will not be completed unless the Asset Sale has been completed. The Asset Sale may be completed without completion of the Externalization Transaction only if:

 

•

the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved;

 

•

all other conditions to closing of the Asset Sale have been satisfied or appropriately waived; and

 

•

one or more conditions to the Company’s obligations to complete the Externalization Transaction (other than approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal) have not been satisfied or appropriately waived.

The Board of Directors unanimously recommends that you vote “FOR” the approval of the (i) Asset Sale Proposal, (ii) Stock Issuance Proposal, (iii) Advisory Agreement Proposal, (iv) Reduced Asset Coverage Ratio Proposal, (v) Executive Payments Proposal and (vi) Adjournment Proposal.

 

Only the Company’s stockholders of record at the close of business on                 , 2018 are entitled to notice of, and to vote at, the Special Meeting or any adjournment or postponement thereof.

Thank you for your support of the Company.

 

Raleigh, North Carolina

                , 2018

Your vote is very important to us. Whether or not you expect to be present in person at the Special Meeting, please sign the enclosed proxy card and return it promptly in the envelope provided, or vote via Internet or telephone. Instructions are provided on the proxy card. Returning the proxy card does not deprive you of your right to attend the Special Meeting and to vote your shares in person. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” the (i) Asset Sale Proposal and (ii) Advisory Agreement Proposal. Abstentions and broker non-votes will have no effect on the (i) Reduced Asset Coverage Ratio Proposal, (ii) Executive Payments Proposal or (iii) Adjournment Proposal. With respect to the Stock Issuance Proposal, abstentions will have the same effect as a vote “AGAINST” such proposal, however, broker non-votes will have no effect on such proposal.

TABLE OF CONTENTS

 

PROXY STATEMENT			1
SUMMARY TERM SHEET			1
The Asset Sale			2
Parties to the Asset Purchase Agreement			2
Effect on the Company if the Asset Sale is Completed			3
Effect on the Company if the Asset Sale is Not Completed			3
Purchase Price			4
Use of Proceeds			5
Reasons for the Transactions			5
Opinion of the Financial Advisor			5
Interests of Certain Persons Related to the Company			6
Closing of the Asset Sale			6
Appraisal Rights			6
U.S. Federal Income Tax Consequences of the Asset Sale			6
Required Regulatory Approvals			7
Externalization Transaction; Stock Issuance; Advisory Agreement			7
Parties to the Externalization Agreement			7
Effect on the Company if the Externalization Transaction is Completed			7
Effect on the Company if the Externalization Transaction is Not Completed			9
Consideration to the Company and the Company’s Stockholders			9
The Stock Issuance			9
The Advisory Agreement			10
The Administration Agreement			11
Use of Proceeds			11
U.S. Federal Income Tax Consequences of the Externalization Transaction			11
Interests of Certain Persons Related to the Company			12
Closing of the Externalization Transaction			12
Required Regulatory Approvals			12
Reduced Asset Coverage Ratio			12
The Proposals Relating to the Asset Sale and Externalization Transaction			13
Proposals to be Voted on by the Company’s Stockholders			13
Recommendation of the Board			14
The Special Meeting			14
Date, Time and Place			14
Shares Entitled to Vote			14
Quorum			14
Required Vote			14
Share Ownership of Our Directors and Executive Officers			15
Voting and Proxies			15
QUESTIONS AND ANSWERS			16
FORWARD-LOOKING STATEMENTS			23
RISK FACTORS			24
THE SPECIAL MEETING			30
Time and Location			30
Attending the Special Meeting			30
Proposal to Approve each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Executive Payments Proposal and the Adjournment Proposal			30
Recommendation of the Board			30
Stockholders Entitled to Vote			31
Quorum			31

 

i

Stockholders Holding Shares Through Brokers, Banks or Nominees			31
Granting Authority to Vote to Brokers, Banks or Nominees			31
Voting by Proxy			31
Receiving Multiple Proxy Cards			32
Revocation of Proxy			32
Votes Required to Approve the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Executive Payments Proposal and the Adjournment Proposal			32
Expenses Related to Proxy Solicitation			32
Methods of Proxy Solicitation			33
Other Matters to be Voted On			33
Who to Contact if You Have Questions			33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			34
PROPOSAL 1 – APPROVAL OF THE ASSET PURCHASE AGREEMENT AND THE ASSET SALE			36
THE ASSET SALE			37
Parties to the Asset Purchase Agreement			37
Effect on the Company if the Asset Sale is Completed			38
Effect on the Company if the Asset Sale is Not Completed			38
Purchase Price			38
Use of Proceeds			38
Background of the Transactions			39
Reasons for the Transactions			59
Opinion of the Financial Advisor to the Company			64
Material Financial Analyses			67
Supplemental Financial Information			70
Other Matters			70
Summary of Financial Projections			71
Summary of Company Projections			73
Key Company Projection Assumptions			74
Interests of Certain Persons Related to the Company			74
Closing of the Asset Sale			75
Appraisal Rights			75
U.S. Federal Income Tax Consequences of the Asset Sale			75
Accounting Treatment of the Asset Sale			76
Required Regulatory Approvals			77
HSR Act and U.S. Antitrust Matters			77
Other Regulatory Approvals			77
THE ASSET PURCHASE AGREEMENT			78
Explanatory Note Regarding the Asset Purchase Agreement			78
Assets to be Transferred to the Asset Buyer			78
Assets to be Retained by the Company			79
Liabilities for Which Asset Buyer Will be Responsible			79
Liabilities to be Retained by the Company			79
Purchase Price			80
Closing of the Asset Sale			81
Representations and Warranties			81
Covenants Relating to the Conduct of the Business			83
Additional Covenants			84
Transaction Expenses			89
Conditions to the Asset Sale			89
Termination of the Asset Purchase Agreement			91

 

ii

Termination Fee and Expense Reimbursement			91
Effect of Termination			92
Remedies; Specific Performance			92
Amendment and Waiver			93
Governing Law; Jurisdiction			93
PROPOSAL 2 – APPROVAL OF THE STOCK ISSUANCE			94
THE STOCK ISSUANCE			95
Parties to the Externalization Agreement			95
Triangle Capital Corporation			95
Barings LLC			95
Effect on the Company if the Externalization Transaction, including the Stock Issuance, is Completed			95
Effect on the Company if the Externalization Transaction is Not Completed			96
Consideration			96
Use of Proceeds			97
Background of the Externalization Transaction			97
Interests of Certain Persons Related to the Company			97
Closing of the Externalization Transaction			97
Appraisal Rights			98
U.S. Federal Income Tax Consequences of the Externalization Transaction			98
Required Regulatory Approvals			100
HSR Act and U.S. Antitrust Matters			100
Other Regulatory Approvals			101
THE EXTERNALIZATION AGREEMENT			101
Explanatory Note Regarding the Externalization Agreement			101
General			102
Advisory Agreement			102
Stockholder Payment			102
Initial Stock Issuance			102
Registration Rights Agreement			103
Stock Repurchase Program			104
Trading Plan; Open Market Purchases			104
Management			104
Outstanding Indebtedness			104
Closing			105
Representations and Warranties			105
Covenants Relating to the Conduct of the Business			107
Additional Covenants			108
Regulatory Matters			108
Proxy Statement			108
HSR Matters			108
SBA Matters			108
Access to Information			108
Stockholder Meeting and Board Recommendation			108
Nonsolicitation of Competing Transaction Proposals			109
Employment Matters; Employee Benefit Plans			111
Indemnification			112
Takeover Statutes			112
Litigation			112
Asset Purchase Agreement			113
Transition Matters			113
Pro Forma NAV and ICTI Calculations			113
Conditions to the Externalization Transaction			114
Termination of the Externalization Agreement			115

 

iii

Termination Fee and Expense Reimbursement			116
Effect of Termination			117
Specific Performance; Remedies			117
Amendment and Waiver			117
Governing Law			117
PROPOSAL 3 – APPROVAL OF THE ADVISORY AGREEMENT			118
General			118
Reasons for the Proposed Advisory and Administration Agreements			118
Proposed Externalization of the Company’s Management			119
About the Adviser			120
Terms of the Advisory Agreement			120
Base Management Fee			120
Incentive Fee			120
Income-Based Fee			120
Capital Gains Fee			122
Payment of our expenses			123
Indemnification under Advisory Agreement			125
Duration and Termination of Advisory Agreement			125
Terms of the Administration Agreement			125
Information About New Principal Executive Officers and Directors			126
Principal Executive Officers			127
Directors			127
Information Regarding the Adviser			127
Board Approval of the Advisory Agreement			127
Nature, Extent and Quality of Services to be Provided			128
Investment Performance			128
Expected Costs of Services Provided and Economies of Scale; Anticipated Profitability			128
Comparison of Management Fee and Expense Ratio to Other Business Development Companies			129
Experience of Management Team and Personnel			129
Conclusion			130
Required Vote			130
PROPOSAL 4 – APPROVAL OF THE REDUCED ASSET COVERAGE RATIO			131
Required Vote			134
PROPOSAL 5 – ADVISORY (NON-BINDING) VOTE ON EXECUTIVE COMPENSATION			135
Narrative to Golden Parachute Compensation Table			137
Vote Required and Recommendation of the Company’s Board			138
PROPOSAL 6 – ADJOURNMENT OF THE SPECIAL MEETING			140
FAILURE TO OBTAIN COMPANY STOCKHOLDER APPROVAL			141
HOUSEHOLDING OF SPECIAL MEETING MATERIALS			142
OTHER MATTERS			143
Company Stockholder Proposals			143
Who Is Paying for this Proxy Solicitation?			143
Other Business			143
WHERE YOU CAN FIND MORE INFORMATION			144
MISCELLANEOUS			145

 

Appendix A – Asset Purchase Agreement

Appendix B – Externalization Agreement

Appendix C – Advisory Agreement

Appendix D – Administration Agreement

Appendix E – Opinion of Houlihan Lokey

Appendix F – Form 10-K for the year ended December 31, 2017

 

iv

Triangle Capital Corporation

3700 Glenwood Avenue, Suite 530

Raleigh, North Carolina 27612

PROXY STATEMENT

Special Meeting of Stockholders

SUMMARY TERM SHEET

This summary term sheet highlights selected information included elsewhere in this proxy statement related to the transactions contemplated by (i) the Asset Purchase Agreement, dated as of April 3, 2018 (the “Asset Purchase Agreement”), by and between Triangle Capital Corporation (“we,” “us,” “our” or the “Company”), and BSP Asset Acquisition I, LLC, a Delaware limited liability company (the “Asset Buyer”) and (ii) the Stock Purchase and Transaction Agreement, dated as of April 3, 2018 (the “Externalization Agreement”), by and between the Company and Barings LLC, a Delaware limited liability company (“Barings”). The Company entered into the Asset Purchase Agreement and Externalization Agreement contemporaneously, and closing of the matters contemplated by both agreements is subject to, among other things, approval of the Company’s stockholders of certain matters described elsewhere in this proxy statement. In addition, closing of the Externalization Transaction is conditioned upon, among other things, the prior closing of the Asset Sale; provided, however, that in certain limited circumstances, closing of the Asset Sale could occur without the closing of the Externalization Transaction.

Subject to, and contingent upon, approval by the Company’s stockholders of certain matters pursuant to this proxy statement, and the satisfaction or appropriate waiver of the other conditions to closing under the Asset Purchase Agreement, at the closing, the Asset Buyer will acquire the Company’s investment portfolio as it existed at December 31, 2017, subject to certain adjustments to reflect portfolio activity since that date and the other terms of the Asset Purchase Agreement (the “Asset Sale”).

Subject to, and contingent upon, approval by the Company’s stockholders of certain matters pursuant to this proxy statement, and the satisfaction or appropriate waiver of the other conditions to closing under the Externalization Agreement, including prior consummation of the Asset Sale, the Company and Barings will effect the following transactions pursuant to the terms of the Externalization Agreement (collectively, the “Externalization Transaction” and, together with the Asset Sale, the “Transactions”): (i) the Company and Barings will enter into an investment advisory agreement (the “Advisory Agreement”) and an administration agreement (the “Administration Agreement”) pursuant to which Barings will serve as the Company’s investment adviser and administrator, respectively; (ii) Barings will make an $85 million, or $1.78 per share of Company Common Stock, cash payment to the holders of record of Company Common Stock as of the date of the closing of the Externalization Transaction, but prior to the Stock Issuance; (iii) the Company will issue shares of the Company’s common stock, par value $0.001 per share (the “Company Common Stock”), to Barings in private placement transactions for an aggregate purchase price of up to, under certain circumstances, $150 million (as more specifically described below, the “Stock Issuance”); (iv) the Company will commence one or more issuer tender offers, including the commencement of a tender offer immediately following the closing of the Externalization Transaction, pursuant to which the Company will offer to repurchase at least $50 million of shares of Company Common Stock at a market price per share up to and including the net asset value per share of the Company Common Stock; and (v) Barings will establish a trading plan (the “Trading Plan”) providing for the purchase by Barings of $50 million worth of shares of Company Common Stock in open market transactions at prices not greater than the net asset value per share of Company Common Stock for a two-year period, after which it will use any funds remaining under the Trading Plan to purchase shares of Company Common Stock from the Company at the greater of the then-current net asset value per share or the then-current market price per share.

 

1

The Asset Purchase Agreement is attached as Appendix A to this proxy statement. The Externalization Agreement is attached as Appendix B to this proxy statement. The form of the Advisory Agreement is attached as Appendix C to this proxy statement. The form of the Administration Agreement is attached as Appendix D to this proxy statement. We encourage you to read each of the foregoing agreements carefully and in their entirety.

In connection with the Transactions, the Company is seeking the approval of the Company’s stockholders of (i) the Asset Purchase Agreement and related Asset Sale, (ii) the Stock Issuance, and (iii) the Advisory Agreement. In addition, the closing of the Externalization Transaction is conditioned upon the prior closing of the Asset Sale. Neither the Asset Sale nor the Externalization Transaction will be completed if each of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are not approved. Even if the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved, the Externalization Transaction will not be completed unless the Asset Sale has been completed. The Asset Sale may be completed without completion of the Externalization Transaction only if:

 

•

the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved;

 

•

all other conditions to closing of the Asset Sale have been satisfied or appropriately waived; and

 

•

one or more conditions to the Company’s obligations to complete the Externalization Transaction (other than approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal) have not been satisfied or appropriately waived.

The Company is also seeking the approval of the Company’s stockholders of (i) a proposal to authorize the Company to be subject to a reduced asset coverage ratio of at least 150% (the “Reduced Asset Coverage Ratio”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and (ii) on an advisory, non-binding basis, a proposal relating to the payment of an estimated $         in the aggregate, subject to the occurrence of certain conditions regarding change of control and termination, in golden parachute payments (the “Executive Payments”) that will or may become payable by the Company to its named executive officers pursuant to their employment and other arrangements with the Company, in connection with the closing of the Transactions. However, approval of the Reduced Asset Coverage Ratio and the Executive Payments are not conditions to closing of the Transactions.

This summary term sheet may not contain all of the information that is important to you. To understand the matters described herein more fully and for a more complete description of the legal terms of the transactions contemplated hereby, you should carefully read this entire proxy statement, the appendices to this proxy statement and the documents that we refer to in this proxy statement.

The Asset Sale

Parties to the Asset Purchase Agreement

The parties to the Asset Purchase Agreement are the Company and the Asset Buyer.

The Company is a specialty finance company that provides customized financing to lower middle market companies located primarily in the United States. It offers a wide variety of debt and equity investment structures including first lien, unitranche, second lien, and mezzanine with equity components. The Company’s investment objective is to seek attractive returns by generating current income from debt investments and capital appreciation from equity related investments. The Company has elected to be treated as a business development company (“BDC”) under the 1940 Act and to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”).

The Company’s principal executive offices are located at 3700 Glenwood Avenue, Suite 530, Raleigh, North Carolina 27612, and our telephone number is (919) 719-4770.

 

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The Asset Buyer is a newly formed Delaware limited liability company managed by Benefit Street Partners L.L.C. (“BSP”). The Asset Buyer was formed in connection with and for the sole purpose of effecting the Asset Sale, and is backed by various affiliated funds of BSP (the “BSP Funds”) through equity commitment letters between the BSP Funds and Asset Buyer under which (i) the BSP Funds are obligated to fund the purchase price in the event the conditions to the closing under the Asset Purchase Agreement are satisfied or appropriately waived and (ii) the Company has certain third-party beneficiary rights.

BSP is a leading credit-focused alternative asset management firm with over $24 billion in assets under management as of February 28, 2018. Established in 2008, the BSP platform manages funds for institutions, high-net-worth and retail investors across various strategies including private/opportunistic debt, liquid loans, high yield, special situations, long-short liquid credit and commercial real estate debt. These complementary strategies leverage the proprietary sourcing, analytical, operational and compliance capabilities that encompass BSP’s robust institutional platform. BSP has over 160 total employees and over 90 investment professionals as of March 31, 2018. BSP is headquartered in New York with additional offices in Charlotte, Houston and Providence. BSP is in partnership with Providence Equity Partners L.L.C., a leading global private equity firm with more than $54 billion in capital under management. BSP’s principal executive offices are located at 9 West 57th Street, Suite 4920, New York, New York 10019, and its telephone number is (212) 588-6770.

Effect on the Company if the Asset Sale is Completed

If the Asset Purchase Agreement and Asset Sale are approved by the Company’s stockholders, and the other conditions to closing of the Asset Sale are satisfied or appropriately waived, the Company will sell, convey, assign and transfer to the Asset Buyer, and the Asset Buyer will purchase, acquire and accept from the Company, the Company’s portfolio company investments (the “Investments”) held at December 31, 2017, as set forth on a “Purchased Loan Schedule” and a “Purchased Equity Interest Schedule” attached to the Asset Purchase Agreement (collectively, the “Investments Schedule”), for a purchase price of approximately $981.2 million in cash, subject to certain adjustments to take into account portfolio activity and certain other matters since December 31, 2017.

Concurrently with the consummation of the Asset Sale, the Company will:

 

•

repay outstanding indebtedness under its Third Amended and Restated Credit Agreement, dated May 4, 2015, by and among, the Company, Branch Banking and Trust Company, ING Capital LLC, BB&T Capital Markets, Fifth Third Bank and the lenders listed therein (the “Credit Agreement”);

 

•

repay (or provide funds to the indenture trustee to provide for the repayment of) all principal and accrued interest due on its 6.375% Notes due December 15, 2022 and 6.375% Notes due March 15, 2022 (collectively, the “Notes”); and

 

•

unless the United States Small Business Administration (the “SBA”) consents to the SBA-guaranteed debentures (the “SBA Debentures”) of the Company’s small business investment company (“SBIC”) subsidiaries remaining outstanding, the Company will repay, or make appropriate arrangements for the repayment of, all principal and accrued and unpaid interest thereon on the SBA Debentures of the Company’s SBIC subsidiaries (as directed by the SBA).

See the section entitled “Summary Term Sheet – Externalization Transaction/Stock Issuance/Advisory Agreement” for a detailed discussion of the transactions that will occur, as well as our related intended plan of business operations, immediately following the Asset Sale.

Effect on the Company if the Asset Sale is Not Completed

If the Asset Sale is not completed, the Company will not enter into the Advisory Agreement or effect any of the other transactions contemplated by the Externalization Agreement and we will seek to continue our focus on conducting our business as an internally managed BDC and may consider and evaluate other strategic alternatives.

 

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Purchase Price

In connection with the Asset Sale, the Asset Buyer will pay the Company a purchase price (the “Purchase Price”) equal to:

 

(i)

an amount in cash equal to $981,178,542; plus

 

(ii)

the purchase price of (a) any loan originated (and not subsequently sold or transferred) to a portfolio company identified in the Investments Schedule (each, an “Existing Portfolio Company”) or to an affiliate of an Existing Portfolio Company and (b) the increase in principal on a loan reflected in the Investments Schedule (a “Purchased Loan”), in each case between 5:00 p.m. (New York time) on December 31, 2017 (the “Cut-off Time”) and 5:00 p.m. (New York time) on the second business day immediately prior to the closing date (the “Closing Cut-off Time”); plus

 

(iii)

the aggregate increase in principal attributable to the capitalization of interest between the Cut-off Time and the Closing Cut-off Time with respect to a Purchased Loan that is recognized as payment-in-kind (“PIK”) interest income in the Company’s consolidated financial statements; plus

 

(iv)

the aggregate amount of original issue discount amortization and deferred fee income amortization between April 1, 2018 and the Closing Cut-off Time with respect to a Purchased Loan that is recognized as income in the Company’s consolidated financial statements; plus

 

(v)

the aggregate purchase price paid by the Company or its subsidiaries for any equity interest reflected on the Investments Schedule (a “Purchased Equity Interest”) acquired from an Existing Portfolio Company or from an affiliate of an Existing Portfolio Company (and not sold or transferred) by the Company or its subsidiaries between the Cut-off Time and the Closing Cut-off Time; minus

 

(vi)

any principal proceeds received by the Company or its subsidiaries on any Purchased Loan between the Cut-off Time and the Closing Cut-off Time; minus

 

(vii)

the aggregate proceeds received by the Company or its subsidiaries that are attributable to the redemption of, sale of, or return of capital on, any Purchased Equity Interest between the Cut-off Time and the Closing Cut-off Time; plus

 

(viii)

the aggregate amount of accrued but unpaid interest (including uncapitalized PIK interest earned), dividends, penalties, fees, charges and other amounts on the Investments as of the Closing Cut-off Time, as determined in accordance with generally accepted accounting principles in the United States (“GAAP”); minus

 

(ix)

the Company’s consolidated net interest margin on the Investments, defined as (A) total investment income, less investment income on cash and cash equivalents, less investment income on new investments made after the Cut-off Time; less (B) total interest expense (including the amortization of deferred financing fees but excluding unused commitment fees under the Credit Agreement for the period from May 16, 2018 through the Closing Cut-off Time, and excluding any interest expense on new investments), in each case, as determined in accordance with GAAP, for the period commencing on April 1, 2018 and ending on the Closing Cut-off Time; plus

 

(x)

a monthly servicing fee payable to the Company by the Asset Buyer equal to $875,000 per calendar month for the period beginning April 1, 2018, payable on a pro rata basis through the Closing Cut-off Time, with the total amount not to exceed $3,062,500.

Based on the purchase price adjustments outlined in items (ii), (iii), (v), (vi), (vii) and (viii) above, we estimate the purchase price in connection with the Asset Sale would be approximately $936.5 million as of March 31, 2018. The reduction in purchase price is attributable to cash proceeds received by the Company for the repayment of Purchased Loans and redemption of Purchased Equity Interests since December 31, 2017, partially offset by the purchase price of new Purchased Loans and Purchased Equity Interests made during the quarter, and the increase in purchase price attributable to capitalized interest and accrued but unpaid interest and fees. The net reduction in purchase price, however, is offset by cash proceeds that are retained by the Company and therefore does not impact the net asset value of the Company.

 

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Use of Proceeds

If the Asset Sale and other matters described herein are completed, the Company will use the proceeds therefrom to repay the Credit Agreement, the Notes and, if required by the SBA, the SBA Debentures. If the SBA permits Asset Buyer to assume the SBA Debentures in connection with the Asset Sale, the Purchase Price in the Asset Sale would be reduced by the amounts so assumed by Asset Buyer. The Company will also use proceeds from the Asset Sale to pay costs and expenses incurred in connection with the Transactions and to make any Executive Payments and other severance payments to its employees which are triggered in connection with the closing of the Transactions. The remaining proceeds will be invested by the Company over time, as directed by Barings, in its capacity as the investment adviser to the Company after closing of the Externalization Transaction, in accordance with the Advisory Agreement, or as otherwise determined by the Company’s Board of Directors (the “Board”).

Reasons for the Transactions

In recommending that the Company’s stockholders approve the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal, the Board considered the terms of the Asset Purchase Agreement, the Externalization Agreement, the Advisory Agreement and the other transactions and agreements relating thereto, as well as a wide range of other available strategic alternatives and proposals. As part of its evaluation, the Board considered the financial terms, risks, timing and uncertainties of alternatives available to the Company, as well as financial information prepared by the Company’s senior management. The Board consulted with outside financial and legal advisors and the Company’s senior management, and considered a number of reasons, including, among others:

 

•

the aggregate cash consideration to be received in connection with the Asset Sale;

 

•

the Asset Sale completely monetizes the Company’s investment portfolio for cash at a price close to the most recently determined fair value of the investment portfolio, thereby eliminating the market’s perception of risk in, and the volatility associated with, the Company’s existing investment portfolio;

 

•

the Asset Sale and Externalization Transaction, considered together, will both monetize the Company’s entire investment portfolio and provide a cash payment directly to the Company’s stockholders and represent, after estimated transaction expenses and estimated severance, approximately 103% of the net asset value of the Company as of December 31, 2017;

 

•

the Company’s stockholders will receive $85 million in cash directly from Barings in the Externalization Transaction;

 

•

the Company will receive $100 million from Barings in connection with the Initial Stock Issuance (as defined herein); and

 

•

after the closing of the Transactions, Barings will provide an additional $50 million of capital support for Company Common Stock through periodic stock repurchases.

See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – Reasons for the Transactions” for more information.

Opinion of the Financial Advisor

On April 3, 2018, Houlihan Lokey Capital, Inc. (“Houlihan Lokey”), orally rendered its opinion to the Company’s Board (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the Company’s Board dated April 3, 2018), as to, as of April 3, 2018, the fairness, from a financial point of view, to the Company of the consideration to be received by it in the Asset Sale pursuant to the Asset Purchase Agreement.

Houlihan Lokey’s opinion was directed to the Company’s Board (in its capacity as such) and only addressed the fairness, from a financial point of view, to the Company of the consideration to be received

 

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by it in the Asset Sale pursuant to the Asset Purchase Agreement and did not address any other aspect or implication of the Asset Sale, any related transaction or any agreement, arrangement or understanding entered into in connection therewith or otherwise, including, without limitation, the Externalization Agreement. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Appendix E to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in connection with the preparation of its opinion. However, neither Houlihan Lokey’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Company’s Board, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the Asset Sale or otherwise.

See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – Opinion of the Financial Advisor” for more information.

Interests of Certain Persons Related to the Company

Company stockholders should be aware that the Company’s executive officers and directors may have interests in the Asset Sale and the other transactions described herein that are different from, or in addition to, those of the Company’s stockholders generally. The Board was aware of these interests and considered them, among other matters, in approving the Asset Purchase Agreement, and in making its recommendation that Company stockholders vote “FOR” the proposal to approve the Asset Sale. See “Proposal 5 – Advisory (Non-Binding) Vote on Executive Compensation.”

Closing of the Asset Sale

Unless otherwise mutually agreed by the Company and the Asset Buyer, the closing of the transactions contemplated by the Asset Purchase Agreement (the “Asset Closing”) will take place no later than the fifth business day following the satisfaction or waiver of all of the conditions to the Asset Closing (as set forth in the Asset Purchase Agreement and as described in the section of this proxy statement captioned “The Asset Purchase Agreement — Conditions to the Asset Sale”), other than conditions that by their terms are to be satisfied at the Asset Closing and subject to the satisfaction or waiver of such conditions.

Appraisal Rights

Pursuant to Section 3-202(c)(1) of the Maryland General Corporation Law (the “MGCL”), there are no appraisal or dissenters’ rights that apply to the execution, delivery and performance of the Asset Purchase Agreement or the consummation of the Asset Sale. Further, pursuant to the charter of the Company, as amended, supplemented, corrected and/or restated through the date hereof, no stockholder is entitled to appraisal rights unless the Board shall determine that such rights apply to the Asset Sale. The Board has made no such determination.

U.S. Federal Income Tax Consequences of the Asset Sale

The following discussion is a general summary of the anticipated United States (“U.S.”) federal income tax consequences of the Asset Sale to U.S. stockholders. The following discussion is based upon the Code, its legislative history, currently applicable and proposed Treasury Regulations under the Code and published rulings and decisions, all as currently in effect as of the date of this proxy statement, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and non-U.S. laws, or federal laws other than those pertaining to income tax, are not addressed in this proxy statement. The following discussion has no binding effect on the Internal Revenue Service (the “IRS”) or the courts.

 

6

The Asset Sale will be treated for U.S. federal income tax purposes as a taxable sale of certain of the Company’s assets in exchange for cash. The Asset Sale is a taxable transaction for the Company for U.S. federal income tax purposes, and the Company anticipates that it will realize a loss for U.S. federal income tax purposes in connection with the Asset Sale.

The Asset Sale is not a stockholder-level action, and our U.S. and non-U.S. stockholders, in their capacities as such, are not expected to realize any gain or loss for U.S. federal income tax purposes solely as a result of the Asset Sale.

See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – U.S. Federal Income Tax Consequences of the Asset Sale” for more information.

Required Regulatory Approvals

Under the Asset Purchase Agreement, each of Asset Buyer and the Company agreed, if required, to file with the U.S. Department of Justice (the “DOJ”) and the Federal Trade Commission (the “FTC”) a notification and report form relating to Asset Sale pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) as soon as reasonably practicable following the execution and delivery of the Asset Purchase Agreement. However, subsequent to the date of the Externalization Agreement and Asset Purchase Agreement, each of the Asset Buyer, Barings and the Company confirmed that no filings under the HSR Act are required in connection with closing of the Externalization Transaction and Asset Sale.

For more information regarding the Asset Purchase Agreement, please see the section of this proxy statement captioned “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – Required Regulatory Approvals.”

Externalization Transaction; Stock Issuance; Advisory Agreement

Parties to the Externalization Agreement

The parties to the Externalization Agreement are the Company and Barings.

See above under the heading “Summary Term Sheet – The Asset Sale – Parties to the Asset Purchase Agreement” for a description of the Company.

Barings, a wholly owned subsidiary of Massachusetts Mutual Life Insurance Company, is a leading global asset management firm, with over $304 billion of assets under management as of December 31, 2017. Barings’ primary investment capabilities include fixed income, private credit, real estate, equity, and alternative investments. Barings employs over 1,800 associates globally, including more than 650 investment professionals. Barings’ Global Private Finance Group will manage the Company. This group is part of the firm’s $220 billion Global Fixed Income Platform that invests in liquid, private, and structured credit. This group has been investing in the U.S. private debt market for over 25 years and manages private funds and separately managed accounts, along with multiple public vehicles.

Effect on the Company if the Externalization Transaction is Completed

Assuming the Company receives stockholder approval of certain matters pursuant to the terms of this proxy statement and subject to, and contingent upon, the consummation of the Asset Sale, and the satisfaction or appropriate waiver of the other conditions to closing under the Externalization Agreement (the “Externalization Closing”):

 

(i)

the Company and Barings will enter into the Advisory Agreement and the Administration Agreement pursuant to which Barings will serve as the Company’s investment adviser and administrator, respectively, following the Externalization Closing;

 

7

(ii)

Barings will pay $85 million, or $1.78 per share of Company Common Stock, in cash to holders of record of Company Common Stock as of the date of the Externalization Closing, but prior to the Initial Stock Issuance (the “Stockholder Payment Record Date” and such payment, the “Stockholder Payment”);

 

(iii)

Barings will purchase shares of Company Common Stock directly from the Company at the then-current net asset value, determined after giving effect to the Asset Sale and the transactions contemplated thereby, in a private placement transaction for an aggregate purchase price of $100 million at the time of the Externalization Closing (“Initial Stock Issuance”);

 

(iv)

effective as of the Externalization Closing, the Board will approve and authorize the use of not less than $50 million of proceeds from the Initial Stock Issuance for the Company to implement one or more issuer tender offers, including the commencement of a tender offer immediately following the closing of the Transactions, pursuant to which the Company will offer to repurchase for cash its outstanding shares of Company Common Stock at a market price per share up to and including the net asset value per share of the Company Common Stock (the “Company Repurchase Plan”);

 

(v)

effective as of Externalization Closing, Barings will enter into the Trading Plan providing for the purchase by Barings of $50 million worth of shares of Company Common Stock in open market transactions over a two-year period at prices not greater than the net asset value per share of Company Common Stock (the “Open Market Purchases”); and

 

(vi)

in the event that Barings does not make Open Market Purchases of at least $50 million prior to the end of the two-year period described above, Barings will purchase shares of Company Common Stock directly from the Company at the greater of the then-current net asset value per share of Company Common Stock and the then-current market price per share of the Company Common Stock on the New York Stock Exchange (the “NYSE”), in an aggregate amount equal to (i) $50 million, minus (ii) the aggregate dollar amount of the Open Market Purchases made by Barings (the “Subsequent Stock Issuance”).

The completion of the Externalization Transaction will result in the Company converting from an internally managed BDC to an externally managed BDC that is managed by Barings. The Stockholder Payment, together with the consideration to be paid by Barings in connection with the Stock Issuance and the Open Market Purchases, results in a total financial commitment by Barings with respect to the Externalization Transaction of $235 million.

Barings, in its capacity as the investment adviser to the Company after the Externalization Closing, expects to invest the cash proceeds from the Asset Sale in syndicated senior secured loans, bonds and other fixed income securities. Over time, Barings expects to transition the Company’s portfolio to Barings-originated loans, relying on Barings’ existing Securities and Exchange Commission (the “SEC”) exemptive relief (the “Exemptive Relief”). Barings expects the Company will begin paying quarterly dividends to its stockholders as soon as is practicable after the Externalization Closing. There can be no assurance regarding the timing of the closing of the transactions.

The Externalization Agreement is attached hereto as Appendix B. The form of the Advisory Agreement is attached hereto as Appendix C. The form of the Administration Agreement is attached hereto as Appendix D. We encourage you to read the Externalization Agreement, the Advisory Agreement and Administration Agreement carefully and in their entirety.

For more information regarding the Externalization Agreement, the Stock Issuance, the Advisory Agreement, the Open Market Purchases and related matters, see the section of this proxy statement captioned “Proposal 2 – Approval of the Stock Issuance – The Externalization Agreement.”

 

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See the section entitled “Summary Term Sheet – The Asset Sale” for a detailed discussion of the transactions that will occur as a result of the Asset Sale and the related impact on the Company following closing of the Asset Sale and Externalization Transaction.

Effect on the Company if the Externalization Transaction is Not Completed

If neither the Externalization Transaction nor the Asset Sale is completed, or if only the Asset Sale is completed, the Company will not enter into the Advisory Agreement or effect the Stock Issuance or the other transactions contemplated by the Externalization Agreement, and we will seek to continue our focus on conducting our business as an internally managed BDC and may consider and evaluate other strategic alternatives.

Consideration to the Company and the Company’s Stockholders

As described above under “– Effect on the Company if the Externalization Transaction is Completed,” at the closing of the Externalization Transaction, Barings will (i) make the Stockholder Payment in an amount equal to $85 million, or $1.78 per share of Company Common Stock, to holders of record of Company Common Stock as of the Stockholder Payment Record Date and (ii) purchase shares of Company Common Stock at net asset value, determined after giving effect to the Asset Sale and the transactions contemplated thereby, in the Initial Stock Issuance for an aggregate purchase price of $100 million. In addition, in the event Barings does not acquire at least $50 million of Company Common Stock in Open Market Purchases, Barings will be required to purchase additional shares of Company Common Stock in the Subsequent Stock Issuance.

The Stock Issuance

At the Externalization Closing, Barings will purchase shares of Company Common Stock directly from the Company in a private placement transaction for an aggregate purchase price of $100 million, at the then-current net asset value per share determined after giving effect to the Asset Sale and the transactions contemplated thereby. In addition, effective as of closing, Barings will enter into the Trading Plan relating to the Open Market Purchases. In the event that Barings does not make Open Market Purchases of at least $50 million prior to the end of the two-year term of the Trading Plan, Barings will purchase shares of Company Common Stock directly from the Company at the greater of the then-current net asset value per share of Company Common Stock and the then-current market price per share of the Company Common Stock on the NYSE, in an aggregate amount equal to (i) $50 million, minus (ii) the aggregate dollar amount of the Open Market Purchases made by Barings during the term of the Trading Plan.

As a result of the foregoing, Barings will acquire $100 million of Company Common Stock, at the then- current net asset value per share determined after giving effect to the Asset Sale and the transactions contemplated thereby, at the Externalization Closing (subject to a de minimis reduction for any fractional share that results from application of the formula determining the number of shares to be so issued). While the number of shares of Company Common Stock to be issued in the Initial Stock Issuance would be determined based on circumstances existing as of the Externalization Closing, if the Initial Stock Issuance had been made as of                 , 2018, assuming a net asset value per share of $13.43 (our net asset value per share as of December 31, 2017), the number of shares of Company Common Stock acquired by Barings would have represented approximately     % of the issued and outstanding Company Common Stock as of such date. In addition, Barings could be obligated to acquire additional shares of Company Common Stock directly from the Company, subject to a maximum of $50 million, in the Subsequent Stock Issuance. The Subsequent Stock Issuance is contingent and, depending upon the level of Open Market Purchases made during the two-year period following closing of the Externalization Transaction, might not occur or might be made in amounts substantially below the $50 million maximum. However, if the maximum $50 million Subsequent Stock Issuance had been made as of                 , 2018, assuming a $         price per share as of such date, such Subsequent Stock Issuance, coupled with the Initial Stock Issuance (assuming it had been made as of the same day), would have resulted in Barings owning approximately     % of the issued and outstanding Company Common Stock as of such date.

 

9

Section 312.03 of the NYSE Listed Company Manual requires stockholder approval prior to any issuance of common stock, or of securities convertible into common stock, in any transaction or series of related transactions if (i) the common stock to be issued has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock, or (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock. Since the number of shares of Company Common Stock to be issued in the Stock Issuance may be equal to or in excess of the 20% of the number of shares of Company Common Stock outstanding before the Stock Issuance, the Company is seeking approval of the Company’s stockholders of the issuance and sale by the Company to Barings of up to, under certain circumstances, $150 million worth of shares of Company Common Stock pursuant to the Externalization Agreement in accordance with Section 312.03 of the NYSE Listed Company Manual.

The approval by the Company’s stockholders of the Stock Issuance is a condition to closing under the Externalization Agreement. For more information regarding the Stock Issuance, please see the section of this proxy statement captioned “Proposal 2 – Approval of the Stock Issuance – The Externalization Agreement – Initial Stock Issuance.”

The Advisory Agreement

At closing of the Externalization Transaction, the Company and Barings will enter into the Advisory Agreement and the Administration Agreement pursuant to which Barings will serve as the Company’s investment adviser and administrator, respectively.

Under the terms of the Advisory Agreement, Barings will manage the investment and reinvestment of our assets, and, without limiting the generality of the foregoing, (i) determine the composition of the portfolio of the Company, the nature and timing of the changes therein and the manner of implementing such changes; (ii) identify, evaluate and negotiate the structure of the investments made by the Company; (iii) execute, close, service and monitor the investments that the Company makes; (iv) determine the securities and other assets that the Company will purchase, retain or sell; (v) perform due diligence on prospective portfolio companies; and (vi) provide the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds. Barings’ services under the Advisory Agreement are not exclusive, and it may furnish similar services to other entities.

Under the Advisory Agreement, the Company would pay Barings as compensation for the investment advisory and management services consisting of two components: (i) a base management fee (the “Base Management Fee”) and (ii) an incentive fee (the “Incentive Fee”). The Base Management Fee under the Advisory Agreement will be 1.0% of gross assets for the period commencing on the date of the Advisory Agreement through December 31, 2018; 1.125% of gross assets for the period commencing on January 1, 2019 through December 31, 2019; and 1.375% of gross assets for all periods thereafter. “Gross assets” includes any investments made with borrowings, but excludes any cash or cash equivalents. The Incentive Fee payable under the Advisory Agreement will consist of two parts: (1) a portion based on the Company’s pre-incentive fee net investment income (the “Income-Based Fee”) and (2) a portion based on the net capital gains received on the Company’s portfolio of securities on a cumulative basis for each calendar year, net of all realized capital losses and all unrealized capital depreciation for that same calendar year (the “Capital Gains Fee”). The Income-Based Fee will be 20% of the Company’s pre-incentive fee net investment income during the immediately preceding quarter with a 2% per quarter (8% annualized) hurdle rate. However, beginning for each quarter ending on or after January 1, 2020, the Income-Based Fee will also be subject to a three-year look-back as further described in this proxy statement under the section captioned “Proposal 3 – Approval of the Advisory Agreement.” The Capital Gains Fee will be 20%, which will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement), commencing with the calendar year ending on December 31, 2018.

 

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The approval by the Company’s stockholders of the Advisory Agreement is a condition to closing under the Externalization Agreement. For more information regarding the Advisory Agreement, please see the section of this proxy statement captioned “Proposal 3 – Approval of the Advisory Agreement – Terms of the Advisory Agreement.”

The Administration Agreement

Upon effectiveness of the Advisory Agreement, the Company will enter into an Administration Agreement with Barings. Under the terms of the Administration Agreement, Barings has agreed to perform (or oversee, or arrange for, the performance of) the administrative services necessary for the operation of the Company, including, but not limited to, office facilities, equipment, clerical, bookkeeping and record keeping services at such office facilities and such other services as Barings, subject to review by the Board, will from time to time determine to be necessary or useful to perform its obligations under the Administration Agreement. Barings will also, on behalf of the Company and subject to the Board’s approval, arrange for the services of, and oversee, custodians, depositories, transfer agents, dividend disbursing agents, other stockholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable.

The Company will reimburse Barings for the costs and expenses incurred by it in performing its obligations and providing personnel and facilities under the Administration Agreement.

For more information regarding the Administration Agreement, please see the section of this proxy statement captioned “Proposal 3 – Approval of the Advisory Agreement – Terms of the Administration Agreement.”

Use of Proceeds

If the Externalization Transaction is completed, the Company will use not less than $50 million to repurchase Company Common Stock through the Company Repurchase Plan. Any remaining proceeds from the Initial Stock Issuance and, if applicable, the Subsequent Stock Issuance, will be invested by the Company over time, as directed by Barings, in its capacity as the investment adviser to the Company after closing of the Externalization Transaction, in accordance with the Advisory Agreement, or will be utilized for other corporate purposes, as determined by the Company’s Board.

U.S. Federal Income Tax Consequences of the Externalization Transaction

The following discussion is a general summary of the anticipated U.S. federal income tax consequences of the Externalization Transaction to U.S. stockholders. The following discussion is based upon the Code, its legislative history, currently applicable and proposed Treasury Regulations under the Code and published rulings and decisions, all as currently in effect as of the date of this proxy statement, and all of which are subject to change, possibly with retroactive effect. Tax considerations under state, local and non-U.S. laws, or federal laws other than those pertaining to income tax, are not addressed in this proxy statement. The following discussion has no binding effect on the IRS or the courts.

In connection with the Externalization Transaction, Barings will pay the Stockholder Payment directly to the Company’s stockholders. The U.S. federal tax treatment of the Stockholder Payment is uncertain in many respects. However, the Company anticipates that the Stockholder Payment will be treated as ordinary income to stockholders. The Company’s stockholders will not realize any other income, gain or loss in connection with the Externalization Transaction.

The Company does not expect to recognize income or gain in connection with the Externalization Transaction.

See “Proposal 2 – Approval of the Stock Issuance – U.S. Federal Income Tax Consequences of the Externalization Transaction” for more information.

 

11

Interests of Certain Persons Related to the Company

Company stockholders should be aware that the Company’s executive officers and directors may have interests in the Externalization Transaction and the other transactions described herein that are different from, or in addition to, those of the Company’s stockholders generally. The Board was aware of these interests and considered them, among other matters, in approving the Externalization Agreement, and in making its recommendation that the Company’s stockholders vote “FOR” the proposal to approve the matters to be voted upon in connection with the Externalization Transaction. See “Proposal 5 – Advisory (Non-Binding) Vote on Executive Compensation.”

Closing of the Externalization Transaction

Unless otherwise mutually agreed by the Company and Barings, the Externalization Closing will take place no later than three (3) business days following the satisfaction or waiver of all of the conditions to closing of the Externalization Transaction (as set forth in the Externalization Agreement and as described in the section of this proxy statement captioned “The Externalization Agreement – Conditions to the Externalization Transaction”), other than conditions that by their terms are to be satisfied at the closing of the Externalization Transaction and subject to the satisfaction or waiver of such conditions. The closing of the Asset Sale is a condition precedent to the Externalization Closing.

Required Regulatory Approvals

Under the Externalization Agreement, each of Barings and the Company agreed, if required, to file with the DOJ and the FTC a notification and report form relating to Externalization Transaction pursuant to the HSR Act as soon as reasonably practicable following the execution and delivery of the Externalization Agreement. However, subsequent to the date of the Externalization Agreement and of the Asset Purchase Agreement, each of Asset Buyer, Barings and the Company confirmed that no filings under the HSR Act are required in connection with closing of the Asset Sale and the Externalization Transaction.

For more information regarding the Externalization Agreement, please see the section of this proxy statement captioned “The Externalization Agreement.”

Reduced Asset Coverage Ratio

The Company is a closed-end investment company that has elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to meet a minimum asset coverage ratio, reflecting the value of our total assets to our total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, under the 1940 Act. Prior to March 23, 2018, Section 61(a) of the 1940 Act did not permit a BDC to issue senior securities unless, at the time of issuance, such BDC had an asset coverage ratio of at least 200%, taking into account such issuance of senior securities (the “Asset Coverage Ratio”). However, on March 23, 2018, the Small Business Credit Availability Act (the “SBCA”) was signed into law and permits BDCs to be subject to an Asset Coverage Ratio of at least 150% if certain conditions are satisfied as set forth in the SBCA.

The SBCA provides that in order for a BDC whose common stock is traded on a national securities exchange to be subject to an Asset Coverage Ratio of at least 150%, the BDC must obtain either: (i) approval of the required majority of its non-interested directors who have no financial interest in the Reduced Asset Coverage Ratio Proposal (as defined herein), which would become effective one year after the date of such approval, or (ii) stockholder approval (of more than 50% of the votes cast for the proposal at the Special Meeting at which a quorum is present) of the Reduced Asset Coverage Ratio Proposal, which would become effective on the first day after the date of such stockholder approval.

 

12

On April 3, 2018, our Board determined that the Reduced Asset Coverage Ratio Proposal is in the best interests of the Company and its stockholders, and is recommending that the Company’s stockholders vote in favor of the proposal to reduce the Company’s Asset Coverage Ratio requirement to at least 150% for purposes of Sections 18(a)(1) and 18(a)(2) of the1940 Act. If this proposal is approved by stockholders at the Special Meeting, the Company would become subject to an Asset Coverage Ratio of at least 150% the day after the Special Meeting.

See “Proposal 4 – Approval of the Reduced Asset Coverage Ratio” for more information.

The Proposals Relating to the Asset Sale and Externalization Transaction

Proposals to be Voted on by the Company’s Stockholders

In connection with the Asset Sale and Externalization Transaction, the Board, pursuant to this proxy statement, is submitting the following proposals to the Company’s stockholders for approval:

 

(i)

Proposal 1 – the Asset Purchase Agreement and related Asset Sale (the “Asset Sale Proposal”);

 

(ii)

Proposal 2 – the Stock Issuance (the “Stock Issuance Proposal”);

 

(iii)

Proposal 3 – the Advisory Agreement (the “Advisory Agreement Proposal”);

 

(iv)

Proposal 4 – a proposal to authorize the Company to be subject to the Reduced Asset Coverage Ratio (the “Reduced Asset Coverage Ratio Proposal”);

 

(v)

Proposal 5 – on an advisory, non-binding basis, the payment of the Executive Payments, that will or may become payable by the Company to its named executive officers pursuant to their employment and other arrangements with the Company in connection with the Transactions (the “Executive Payments Proposal”); and

 

(vi)

Proposal 6 – the adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Asset Purchase Agreement and related Asset Sale, the Stock Issuance or the Advisory Agreement (the “Adjournment” and such proposal, the “Adjournment Proposal”).

Only the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal (collectively, the “Required Approvals”) are conditions to closing of the Transactions. If the Required Approvals are obtained, but approvals of the Reduced Asset Coverage Ratio and the Executive Payments are not approved, the Company will complete the Transactions notwithstanding failure to obtain approvals of the Reduced Asset Coverage Ratio and the Executive Payments.

Neither the Asset Sale nor the Externalization Transaction will be completed if the Required Approvals are not obtained. Even if the Required Approvals are obtained, the Externalization Transaction will not be completed unless the Asset Sale has been completed. The Asset Sale may be completed without completion of the Externalization Transaction only if:

 

•

the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are approved;

 

•

all other conditions to closing of the Asset Sale have been satisfied or appropriately waived; and

 

•

one or more conditions to the Company’s obligations to complete the Externalization Transaction (other than approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal) have not been satisfied or appropriately waived.

For more information regarding the Asset Purchase Agreement and the Asset Sale, please see the section of this proxy statement captioned “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale.”

For more information regarding the Stock Issuance and the related Externalization Agreement, please see the section of this proxy statement captioned “Proposal 2 – Approval of the Stock Issuance.”

For more information regarding the Advisory Agreement, please see the section of this proxy statement captioned “Proposal 3 – Approval of the Advisory Agreement.”

 

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For more information regarding the Reduced Asset Coverage Ratio, please see the section of this proxy statement captioned “Proposal 4 – Approval of the Reduced Asset Coverage Ratio.”

For more information regarding the Executive Payments, please see the section of this proxy statement captioned “Proposal 5 – Advisory (Non-Binding) Vote on Executive Payments.”

For more information regarding the Adjournment, please see the section of this proxy statement captioned “Proposal 6 – Adjournment of the Special Meeting.”

Recommendation of the Board

The Board has unanimously determined that the Asset Purchase Agreement and the Externalization Transaction and the transactions contemplated thereby (including the Stock Issuance and the Company’s entry into the Advisory Agreement) are advisable and in the best interests of the Company and its stockholders.

The Board unanimously recommends that you vote “FOR” the (i) Asset Sale Proposal, (ii) Stock Issuance Proposal, (iii) Advisory Agreement Proposal, (iv) Reduced Asset Coverage Ratio Proposal, (v) Executive Payments Proposal, and (vi) Adjournment Proposal.

The Special Meeting

Date, Time and Place

The Special Meeting will be held on                 , 2018, at                 , local time, at                 .

Shares Entitled to Vote

If you are a holder of Company Common Stock, you are entitled to one vote at the Special Meeting for each share of Company Common Stock that you held as of the close of business on                 , 2018 (the “Record Date”).

Quorum

As of the Record Date, there were                 shares of Company Common Stock outstanding and entitled to vote at the Special Meeting. The presence at the Special Meeting, in person or by proxy, of the holders of shares of Company Common Stock entitled to cast a majority of all the votes entitled to be cast will constitute a quorum at the Special Meeting.

Required Vote

Asset Sale Proposal: Approval of the Asset Purchase Agreement and Asset Sale requires the affirmative vote of the holders of a majority of the shares of outstanding Company Common Stock entitled to vote at the Special Meeting.

Stock Issuance Proposal: Approval of the Stock Issuance requires the affirmative vote of a majority of the votes cast on this proposal at the Special Meeting.

Advisory Agreement Proposal: Approval of the Advisory Agreement requires the affirmative vote of the lesser of (i) 67% or more of the shares of Company Common Stock present at the Special Meeting entitled to vote at such meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy at the Special Meeting, and (ii) a majority of the outstanding shares of Company Common Stock.

 

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Reduced Asset Coverage Ratio Proposal: Approval of the Reduced Asset Coverage Ratio requires the affirmative vote of a majority of the votes cast on this proposal at the Special Meeting.

Executive Payments Proposal: Approval of the Executive Payments requires the affirmative vote of a majority of the votes cast on this proposal at the Special Meeting.

Adjournment Proposal: Approval of the Adjournment requires the affirmative vote of a majority of the votes cast on this proposal at the Special Meeting.

Share Ownership of Our Directors and Executive Officers

As of the Record Date, our directors and executive officers beneficially owned and were entitled to vote, in the aggregate,                 shares of Company Common Stock, representing approximately     % of the combined voting power of the shares of Company Common Stock outstanding on the Record Date.

Voting and Proxies

Any Company stockholder of record entitled to vote may submit a proxy by returning a signed proxy card by mail in the accompanying prepaid reply envelope or by granting a proxy electronically over the Internet or by telephone, or may vote in person by appearing at the Special Meeting. If you are a beneficial owner and you hold your shares of Company Common Stock in “street name” through a bank, broker or other nominee, you should instruct your bank, broker or other nominee as to how you wish to vote your shares of Company Common Stock using the instructions provided by your bank, broker or other nominee. Under applicable stock exchange rules, banks, brokers or other nominees have the discretion to vote on routine matters. The proposals to be considered at the Special Meeting are non-routine matters, and banks, brokers and other nominees cannot vote on these proposals without your instructions. Therefore, it is important that you cast your vote or instruct your bank, broker or nominee as to how you wish to vote your shares.

If you are a stockholder of record, you may change your vote or revoke your proxy at any time before it is voted at the Special Meeting by (i) signing another proxy card with a later date and returning it prior to the Special Meeting, (ii) submitting a new proxy electronically over the Internet or by telephone after the date of the earlier submitted proxy, (iii) delivering a written notice of revocation to our Secretary or (iv) attending the Special Meeting and voting in person by ballot.

If you hold your shares of Company Common Stock in “street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your vote. You may also vote in person at the Special Meeting if you obtain a “legal proxy” from your bank, broker or other nominee.

 

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QUESTIONS AND ANSWERS

The following questions and answers address some commonly asked questions regarding the Asset Purchase Agreement, the Externalization Agreement, the Stock Issuance, Advisory Agreement and the Special Meeting. These questions and answers may not address all of the questions that are important to you. We encourage you to read carefully the more detailed information contained elsewhere in this proxy statement, the appendices to this proxy statement and the documents we refer to in this proxy statement.

 

Q:	Why did you send me this proxy statement?

 

A:	We sent you this proxy statement and the enclosed proxy card because the Board is soliciting your proxy to vote at the Special Meeting.

 

Q:	Where is the proxy statement available?

 

A:	This proxy statement, the Notice of Special Meeting of Stockholders and other documents of the Company on file with the SEC are available at www.tcap.com.

 

Q:	When and where will the Special Meeting take place?

 

A:	The Special Meeting will take place at                 , on                 , 2018, at                 , local time. See “The Special Meeting” for more information.

 

Q:	What is the purpose of the Special Meeting?

 

A:

At the Special Meeting, you will be asked to vote on each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal. See “The Special Meeting” for more information.

 

Q:	Who is entitled to vote?

 

A:	Holders of Company Common Stock as of the close of business on the Record Date are entitled to notice of, and to vote at, the Special Meeting and any postponements or adjournments of the Special Meeting. See “The Special Meeting” for more information.

 

Q:	What is the quorum required for the Special Meeting?

 

A:	The presence at the Special Meeting, in person or by proxy, of the holders of shares of Company Common Stock entitled to cast a majority of all the votes entitled to be cast will constitute a quorum at the Special Meeting. See “The Special Meeting” for more information.

 

Q:	Why are the Company’s stockholders being asked to vote on the Asset Purchase Agreement?

 

A:

Because the Company is transferring its assets, Section 3-105 of the MGCL requires the Company stockholder vote to approve the Asset Sale and the terms of the Asset Purchase Agreement and the Externalization Agrement require the Company stockholder vote to approve the Asset Purchase Agreement and the Asset Sale. Section 3-105 generally requires the transfer of assets to be approved by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter unless otherwise provided for by the company’s charter. However, as permitted under the MGCL, the Company’s charter requires that a transfer of assets be approved by the lower standard of the affirmative vote of the holders of a majority of shares of the Company’s then outstanding common stock.

 

16

Q:	Why are the Company’s stockholders being asked to vote on the Stock Issuance Proposal?

 

A:

The Company Common Stock is listed on the NYSE and we are subject to the NYSE rules and regulations. Section 312.03 of the NYSE Listed Company Manual requires stockholder approval prior to any issuance of common stock, or of securities convertible into common stock, in any transaction or series of related transactions if (i) the common stock to be issued has, or will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock, or (ii) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

Stockholders of the Company are being asked to approve the Stock Issuance proposal because it is required under Section 312.03 of the NYSE Listed Company Manual and by the terms of the Externalization Agreement and Asset Purchase Agreement because the number of shares of Company Common Stock to be issued in the Stock Issuance may be equal to or in excess of the 20% of the number of shares of Company Common Stock outstanding before the Stock Issuance.

 

Q:	Why are the Company’s stockholders being asked to vote on the Advisory Agreement?

 

A:

Stockholders of the Company are being asked to approve the Advisory Agreement pursuant to which Barings will become the investment adviser of the Company because it is required by the 1940 Act and the terms of the Externalization Agreement and Asset Purchase Agreement. The 1940 Act makes it unlawful for any person or entity to serve as an investment adviser to a BDC, except pursuant to a written contract that has been approved by a majority vote of the BDC’s stockholders and that continues in effect for not more than two years, unless its continuance is approved at least annually by the board of directors or a majority vote of the stockholders. If approved by stockholders, the Advisory Agreement will have an initial term of two years and be subject to annual renewal thereafter.

 

Q:	Who will be the Company’s investment adviser if the Advisory Agreement is approved?

 

A:

If the Advisory Agreement is approved by the Company’s stockholders, Barings, a leading global asset management firm with over $304 billion of assets under management as of December 31, 2017, will be the Company’s investment adviser. For more information on Barings, see “Proposal 2 – Approval of the Stock Issuance – The Stock Issuance – Parties to the Externalization Agreement – Barings LLC.”

 

Q:	Why are the Company’s stockholders being asked to vote on the Reduced Asset Coverage Ratio Proposal?

 

A:

On March 23, 2018, an amendment to Section 61(a) of the 1940 Act was signed into law that permits BDCs such as the Company to decrease their asset coverage ratio to 150% from 200% upon approval from the board of directors (subject to a one-year waiting period) or stockholders (effective the day after stockholder approval). Stockholders of the Company are being asked to approve the Reduced Asset Coverage Ratio Proposal because our Board believes that having the flexibility to incur additional leverage will provide benefits in the form of increased returns to our stockholders. See “Proposal 4 – Approval of the Reduced Asset Coverage Ratio” for more information.

 

Q:	Why are the Company’s stockholders being asked to vote on the Executive Payments Proposal?

 

A:	In accordance with SEC rules, the Company is required to conduct a stockholder advisory vote to approve the Executive Payments Proposal.

 

Q:	Why are the Company’s stockholders being asked to vote on the Adjournment Proposal?

 

A:

While the chairman of the Special Meeting may adjourn the Special Meeting in his discretion, and may adjourn the Special Meeting at the request of Asset Buyer or Barings, stockholders of the Company are also being asked to approve the Adjournment Proposal in order to allow the Company to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Asset Sale Proposal, the Stock Issuance Proposal or the Advisory Agreement Proposal.

 

17

Q:	If the proposals are approved, what will the Company’s stockholders receive in connection with the Transactions?

 

A:

Based on the number of shares of Company Common Stock estimated to be issued and outstanding as of the Externalization Closing, the Company’s stockholders will receive a cash payment from Barings in the amount of $1.78 per share of Company Common Stock held by them at the closing of the Transactions.

 

Q:	Will the ownership of the Company by its current stockholders change if the proposals are approved and the Transactions are consummated?

 

A:

Although the Company’s current stockholders will continue to hold the same number of shares of Company Common Stock in the Company both before and after the consummation of the Transactions, the current ownership interest of the Company’s current stockholders in the Company (as a percentage of the outstanding shares) will decrease as a result of the Company’s issuance of shares of Company Common Stock to Barings in connection with the Stock Issuance. While the number of shares of Company Common Stock to be issued to Barings in the Stock Issuance would be determined based on circumstances existing as of the time of the sale thereof, it is expected that Barings will own approximately 15% of the outstanding Company Common Stock after the completion of the Initial Stock Issuance. In addition, after giving effect to the Company Repurchase Plan to be implemented by the Company, the trading plan to be implemented by Barings and, if applicable, the Subsequent Stock Issuance, it is estimated that Barings’ ownership could reach up to approximately 24% of the issued and outstanding Company Common Stock.

 

Q:	Will the Company continue to be a publicly traded BDC after closing of the Transactions?

 

A:

Yes. After the closing of the Transactions, the Company will continue to be a BDC and its shares of common stock will continue to be listed on the NYSE, although the ticker symbol will change to “BBDC.” The Company’s stockholders will continue to own the same amount and type of shares in the same Company.

 

Q:	Will the Company’s name change?

 

A:	Yes. In accordance with the provisions of the MGCL, the Board will approve articles of amendment to change the Company’s name to “Barings BDC, Inc.,” subject to and in conjunction with the Externalization Closing.

 

Q:	What are the Base Management Fees payable by the Company under the Advisory Agreement?

 

A:

The Base Management Fee under the Advisory Agreement will be 1.0% of gross assets for the period commencing on the date of the Advisory Agreement through December 31, 2018; 1.125% of gross assets for the period commencing on January 1, 2019 through December 31, 2019; and 1.375% of gross assets for all periods thereafter. “Gross assets” includes any investments made with borrowings, but excludes any cash or cash equivalents.

 

Q:	What are the Incentive Fees payable by the Company under the Advisory Agreement?

 

A:

The Incentive Fee payable under the Advisory Agreement will consist of two parts: (1) the Income-Based Fee and (2) the Capital Gains Fee. The Income-Based Fee will be 20% of the Company’s pre-incentive fee net investment income during the immediately preceding quarter with a 2% per quarter (8% annualized) hurdle rate. However, beginning for each quarter ending on or after January 1, 2020, the Income-Based Fee will also be subject to a three-year look-back as further described in this proxy statement under the section captioned “Proposal 3 – Approval of the Advisory Agreement.” The Capital Gains Fee will be 20%, which will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement), commencing with the calendar year ending on December 31, 2018.

 

18

Q:	How will the Company’s operating costs associated with the management of its investment portfolio differ on a go-forward basis under the Advisory Agreement?

 

A:

Because the Company is currently internally managed by its executive officers under the supervision of its Board, it incurs the operating costs associated with employing investment and portfolio management professionals. If the Transactions are consummated and Barings becomes the Company’s external investment adviser, the Company will be responsible for paying Barings the investment advisory fees set forth in the Advisory Agreement in connection with Barings’ management of the Company’s investment portfolio.

 

Q:	What is the approximate size of the Company’s investable cash portfolio expected to be immediately following the completion of the Transactions?

 

A:	It is expected that the Company will have approximately $600 million to $615 million in cash to deploy in accordance with the investment strategies described elsewhere herein immediately following the completion of the Transactions.

 

Q:

Given the approximately $981.2 million cash consideration that the Asset Buyer is paying the Company in connection with the Asset Sale, why is the Company’s investable cash portfolio only expected to be approximately $600 million to $615 million immediately following the closing of the Transactions?

 

A:	The Company will use the proceeds from the Asset Sale to repay outstanding indebtedness, estimated transaction expenses, and severance expenses in connection with the Asset Sale, and will use at least $50 million of the proceeds from the Initial Stock Issuance for the Company Repurchase Plan.

 

Q:	How does Barings intend to deploy the cash that the Company is expected to have on its balance sheet immediately following the completion of the Transactions and how long is such deployment likely to take?

 

A:

Barings intends to invest a substantial portion of the cash that the Company is expected to have on its balance sheet immediately following the completion of the Transactions in a liquid, non-investment grade debt portfolio, within 90 days thereof. Barings will then work to transition the Company’s liquid debt portfolio into a private senior secured debt portfolio within the following two years.

 

Q:	How are the Transactions expected to impact the Company’s quarterly dividend distributions?

 

A:

The Company expects to discontinue paying a quarterly dividend starting with the second quarter of 2018 and begin paying quarterly dividends to its stockholders as soon as is practicable after the closing of the Transactions, initially based on the investment income generated by its liquid, non-investment grade debt portfolio and then based on the investment income generated by its private senior secured debt portfolio.

 

Q:	What dividend yield is the Company targeting to pay its common stockholders once it recommences paying quarterly dividends and when its portfolio is fully invested in private senior secured debt?

 

A:

Barings believes that its liquid debt portfolio strategy and the Company’s prudent use of leverage will allow the Company to pay a minimum 6% dividend yield on Company Common Stock (based on the net asset value per share thereof) commencing as soon as is practicable after the closing of the Transactions. There can be no assurance that the Company will attain the target dividend yield.

Barings believes that its private senior secured debt strategy and the Company’s prudent use of leverage will allow the Company to pay a minimum dividend yield of 8% on Company Common Stock (based on the net asset value per share thereof) once its portfolio is fully invested in private senior secured debt. There can be no assurance that the Company will attain the target dividend yield.

 

19

Q:	What vote is required to approve the Asset Sale Proposal?

 

A:	The affirmative vote of the holders of a majority of the shares of outstanding Company Common Stock entitled to vote at the Special Meeting, in person or represented by proxy, at which a quorum is present will be required to approve the Asset Sale Proposal.

 

Q:	What vote is required to approve the Stock Issuance Proposal?

 

A:	The affirmative vote of the holders of at least a majority of the votes cast by holders of the shares of Company Common Stock present at the Special Meeting, in person or represented by proxy, if a quorum is present, will be required to approve the Stock Issuance Proposal.

 

Q:	What vote is required to approve the Advisory Agreement Proposal?

 

A:

The affirmative vote of the holders of at least a “majority of the outstanding voting securities” (as defined in the 1940 Act) will be required to approve the Advisory Agreement Proposal. Under the 1940 Act, a “majority of the outstanding voting securities” means the affirmative vote of the lesser of (a) 67% or more of the shares of the Company present or represented by proxy at the Special Meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy at the Special Meeting or (b) more than 50% of the outstanding shares of the Company.

 

Q:	What vote is required to approve the Reduced Asset Coverage Ratio Proposal?

 

A:	The affirmative vote of the holders of at least a majority of the votes cast by holders of the shares of Company Common Stock present at the Special Meeting, in person or represented by proxy, if a quorum is present, will be required to approve the Reduced Asset Coverage Ratio Proposal.

 

Q:	What vote is required to approve the Executive Payments Proposal?

 

A:	The affirmative vote of the holders of at least a majority of the votes cast by holders of the shares of Company Common Stock present at the Special Meeting, in person or represented by proxy, if a quorum is present, will be required to approve the Executive Payments Proposal.

 

Q:	What vote is required to approve the Adjournment Proposal?

 

A:	The affirmative vote of the holders of at least a majority of the votes cast by holders of the shares of Company Common Stock present at the Special Meeting, in person or represented by proxy, if a quorum is present will be required to approve the Adjournment Proposal.

 

Q:	Are the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal contingent upon each other?

 

A:

Yes. Stockholder approval of the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal are contingent upon each other. As a result, if one of these proposals is not approved by the Company’s stockholders, the other proposals will not be implemented, and neither the Asset Sale nor the Externalization Transaction will be consummated.

 

Q:	What are the effects of not voting or abstaining?

 

A:

Abstentions and broker non-votes will have the same effect as a vote “AGAINST” each of the Asset Sale Proposal and the Advisory Agreement Proposal. Abstentions and broker non-votes will have no effect on the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal or the Adjournment Proposal. With respect to the Stock Issuance Proposal, abstentions will have the same effect as a vote “AGAINST” such proposal, however, broker non-votes will have no effect on such proposal.

 

20

Q:	What if I want to change my vote or revoke my proxy?

 

A:	A registered Company stockholder may change his, her or its vote, or revoke his, her or its proxy at any time before it is voted at the Special Meeting by:

 

•

signing another proxy card with a later date and returning it to us prior to the Special Meeting;

 

•

submitting a new proxy electronically over the Internet or by telephone as indicated on the proxy card after the date of the earlier submitted proxy;

 

•

delivering a written notice of revocation to our Secretary; or

 

•

attending the Special Meeting and voting in person by ballot.

If you hold your shares of Company Common Stock in “street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your vote. You may also vote in person at the Special Meeting if you obtain a “legal proxy” from your bank, broker or other nominee.

 

Q:	Are there any expenses associated with collecting the Company stockholder vote?

 

A:

The Company, the Asset Buyer and Barings will share certain expenses equally, including the expenses of preparing, filing, printing and mailing of proxy statements required to be distributed the Company’s stockholders and the costs of the proxy solicitor. See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Purchase Agreement – Transaction Expenses” for more information.

 

Q:	Where can I find the voting results?

 

A:

Voting results will be reported in a press release or Current Report on Form 8-K, which we will file with the SEC within four business days following the Special Meeting. All reports that the Company files with the SEC are publicly available when filed. For more information, please see the section of this proxy statement captioned “Where You Can Find More Information.”

 

Q:	If my shares are held in “street name” by my bank, broker or other nominee, will my bank, broker or other nominee vote my shares for me?

 

A:

Your bank, broker or other nominee will only be permitted to vote your shares held in street name if you instruct them how to vote. You should follow the procedures on the voting instruction card provided by your bank, broker or other nominee regarding the voting of your shares. The failure to instruct your bank, broker or other nominee how to vote your shares will have the same effect as voting “AGAINST” each of the Asset Sale Proposal and the Advisory Agreement Proposal.

 

Q:	What does it mean if I receive more than one proxy card?

 

A:	If your shares are registered differently or in more than one account, you will receive more than one proxy card. Please sign and return all proxy cards to ensure that all of your shares are voted.

 

Q:	Who can help answer my other questions?

 

A:	If you have any questions concerning the Special Meeting or the accompanying proxy statement, would like additional copies of the accompanying proxy statement or need help voting your shares of Company Common Stock, please contact Alliance Advisors LLC:

200 Broadacres Drive, 3^rd Floor

Bloomfield, NJ 07003

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Q:	How does the Board recommend that I vote?

 

A:	The Board unanimously recommends that you vote “FOR” each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal.

 

Q:	Do I have appraisal rights in connection with the Asset Sale and the other transactions described herein?

 

A:

Pursuant to Section 3-202(c)(1) of the MGCL and the charter of the Company, as amended, supplemented, corrected and/or restated through the date hereof, there are no appraisal or dissenters’ rights that apply to the execution, delivery and performance of the Asset Purchase Agreement or the consummation of the Asset Sale. Further, pursuant to the charter of the Company, as amended, supplemented, corrected and/or restated through the date hereof, no stockholder is entitled to appraisal rights unless the Board shall determine that such rights apply to the Asset Sale. The Board has made no such determination.

 

Q:	Are there any risks relating to the Asset Sale and the other transactions described herein?

 

A:	Yes. You should carefully read the sections of this proxy statement captioned “Forward-Looking Statements” and “Risk Factors,” and the section captioned “Risk Factors” in the Company’s most recent Annual Report on Form 10-K, which is included as Appendix F to this proxy statement.

 

Q:	What are the U.S. federal income tax consequences of the Asset Sale and the Externalization Transaction to U.S. Company stockholders resident in the United States?

 

A:

The Asset Sale will be treated for U.S. federal income tax purposes as a sale of the Company’s assets in exchange for cash. The Asset Sale is a taxable transaction for the Company for U.S. federal income tax purposes. The Company expects to realize a net loss on the Asset Sale. The Asset Sale is not a stockholder-level action, and our U.S. and non-U.S. stockholders, in their capacities as such, are not expected to realize any gain or loss for U.S. federal income tax purposes solely as a result of the Asset Sale.

In connection with the Externalization Transaction, Barings will pay the Stockholder Payment directly to the Company’s stockholders. The U.S. federal tax treatment of the Stockholder Payment is uncertain in many respects. However, the Company anticipates that the Stockholder Payment will be treated as ordinary income to stockholders. The Company’s stockholders will not realize any other income, gain or loss in connection with the Externalization Transaction. See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – U.S. Federal Income Tax Consequences of the Asset Sale” and “Proposal 2 – Approval of the Stock Issuance – U.S. Federal Income Tax Consequences of the Externalization Transaction” for more information.

 

Q:	When are the Transactions expected to occur?

 

A:

We currently expect the Transactions to be completed in June or July 2018. However, the exact timing of Asset Closing and Externalization Closing cannot be predicted because they are subject to the closing conditions specified in the Asset Purchase Agreement and the Externalization Agreement, as the case may be, many of which conditions are outside of our control.

 

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FORWARD-LOOKING STATEMENTS

Some of the statements in this proxy statement may include forward-looking statements that reflect current views with respect to future events and financial performance, and the Company may make related oral, forward-looking statements on or following the date hereof. Statements that include the words “should,” “would,” “expect,” “intend,” “plan,” “believe,” “project,” “anticipate,” “seek,” “will,” and similar statements of a future or forward-looking nature identify forward-looking statements in this material or similar oral statements for purposes of the U.S. federal securities laws or otherwise. Because forward-looking statements, such as the date that the parties expect the proposed transaction to be completed, include risks and uncertainties, actual results may differ materially from those expressed or implied and include, but are not limited to, those discussed in the Company’s filings with the SEC, and (i) the satisfaction or waiver of certain closing conditions specified in the definitive agreements relating to the Asset Sale and/or the Externalization Transaction, (ii) the parties’ ability to successfully consummate the Asset Closing and/or the Externalization Closing, and the timings thereof, (iii) that the Asset Sale and/or the Externalization Transaction may disrupt current plans and operations of the Company and (iv) the possibility that competing offers or acquisition proposals related to the Asset Sale and/or the Externalization Transaction will be made and, if made, could be successful. Additional risks and uncertainties specific to the Company include (i) the costs and expenses that the Company and its subsidiaries have, and may incur, in connection with the Asset Sale, Externalization Transaction and Executive Payments, (ii) the impact that any litigation relating to the Asset Sale, Externalization Transaction and Executive Payments may have on the Company and its subsidiaries, (iii) that our projections with respect to dividends may prove to be incorrect, (iv) our ability to invest our portfolio of cash in a timely manner, (v) the market performance of our portfolio, and (vi) negative effects of entering into the Asset Purchase Agreement and/or the Externalization Agreement on the trading volume and market price of the Company’s Common Stock. Information regarding risks, uncertainties and other factors that could cause actual results to differ from the results in these forward-looking statements are discussed under the section of this proxy statement captioned “Risk Factors.”

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this proxy statement and elsewhere, including the risk factors included herein and in the “Risk Factors” section of the Company’s most recent Annual Report on Form 10-K, which is included as Appendix F to this proxy statement. The forward-looking statements in this proxy statement represent the Company’s views as of the date of this proxy statement. The Company anticipates that subsequent events and developments will cause its views to change. However, while it may elect to update these forward-looking statements at some point in the future, it has no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing the Company’s views as of any date subsequent to the date of this material.

 

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RISK FACTORS

In addition to the other information contained in this proxy statement and the risk factors cited in the “Risk Factors” section of the Company’s most recent Annual Report on Form 10-K, which is included as Appendix F to this proxy statement, you should also consider the following risk factors when deciding whether to vote to approve the proposals described in this proxy statement.

Our executive officers and directors may have interests in the Transactions other than, or in addition to, the interests of our stockholders generally.

Members of the Board and our executive officers may have interests in the Transactions that are different from, or are in addition to, the interests of our stockholders generally. Specifically, certain of our executive officers may receive the Executive Payments in connection with the consummation of the Transactions. The Board was aware of these interests and considered them, among other matters, in approving the Transactions.

The failure to complete the Transactions may result in a decrease in the market value of the Company Common Stock.

The Transactions are each subject to a number of contingencies, including approval by our stockholders and other closing conditions. As a result, we cannot assure you that the Transactions will be completed. If the Transactions are not completed for any other reason, the market price of the Company Common Stock may decline.

If the Transactions are not consummated, there may not be any other offers from potential acquirers.

If the Transactions are not consummated, we may seek another strategic transaction. Although we have had such discussions with various parties in the past, these parties may no longer have an interest in a strategic transaction with the Company, or be willing to offer a reasonable purchase price or other consideration in connection therewith.

If we do not complete the Transactions, we will continue to face challenges and uncertainties in our ability to achieve business success.

During the second half of 2017, our investment portfolio declined by 5.9% from a fair value standpoint and the market price of the Company Common Stock fell by 46.1%. In addition, the Company Common Stock began, and continues, to trade at a substantial discount to the net asset value thereof due to, among other things, likely market perceptions relating to the risk and volatility in our investment portfolio. If the Company Common Stock continues to trade below its net asset value, we will generally not be able to issue additional shares of Company Common Stock at its market price in order to fund our business without first obtaining the approval of our stockholders and our independent directors. As a result, we will continue to face these and other challenges to our business if we do not complete the Transactions.

The Company could have indemnification obligations to the Asset Buyer and the directors or officers of the Company.

Under the terms of the Asset Purchase Agreement, the Company has agreed to indemnify and hold harmless the Asset Buyer from certain pre-closing liabilities. Additionally, under the terms of the Externalization Agreement the Company has agreed to indemnify directors and officers who are the subject of claims based on the fact that such person is or was a director or officer of the Company and pertaining to any matter existing or occurring in connection with the approval of the Externalization Agreement and the consummation of certain transactions contemplated therein. Uncertainty with respect to the outcome of the obligations could result in a delay in the Company’s Board making any determination with respect to future dividends and could otherwise have a material adverse impact on the Company and its subsidiaries following the consummation of the Transactions.

 

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Under certain circumstances, a termination fee may be payable by the Company upon termination of the Asset Purchase Agreement and/or the Externalization Agreement.

The Asset Purchase Agreement and Externalization Agreement provide for the payment by the Company of the Termination Fee (as defined herein) of $18 million and Externalization Termination Fee (as defined herein) of $6 million, respectively, if the Asset Purchase Agreement or the Externalization Agreement, as the case may be, is terminated under certain circumstances, including termination to pursue an Asset Sale Superior Proposal (as defined herein) or an Externalization Transaction Superior Proposal (as defined herein, as the case may be).

The Asset Purchase Agreement and Externalization Agreement limit the Company’s ability to pursue alternatives to the Asset Sale and the Externalization Transaction.

The Asset Purchase Agreement contains provisions that limit the Company’s ability to actively solicit, discuss or negotiate competing third-party proposals for strategic transactions. These provisions, which are typical for transactions of this type, and include the Termination Fee and Externalization Termination Fee payable under certain circumstances, might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition even if it were prepared to pay consideration with a higher price than that proposed in connection with the Transactions or might result in a potential competing acquiror proposing to pay a lower price to acquire the Company than it might otherwise have proposed to pay.

The Transactions are subject to closing conditions, including stockholder approvals, that, if not satisfied or appropriately waived, will result in the Asset Sale and the Externalization Transaction not being completed, which may result in material adverse consequences to the Company’s business and operations.

The Transactions are subject to closing conditions, including certain approvals of stockholders, that, if not satisfied, will prevent the Asset Sale and the Externalization Transaction from being completed. The closing condition that the Company’s stockholders approve the Asset Sale and certain other proposals described herein may not be waived under applicable law and must be satisfied for the Asset Sale and the Externalization Transaction to be completed. The Company currently expects that all directors and executive officers of the Company will vote their shares of Company Common Stock in favor of the proposals presented at the Special Meeting. If the Company’s stockholders do not approve the Asset Purchase Agreement, the Asset Sale and certain other proposals described herein, the resulting failure of the Transactions could have a material adverse impact on the Company’s business and operations. In addition to the required approvals of stockholders, the Transactions are subject to a number of other conditions beyond the Company’s control that may prevent, delay or otherwise materially adversely affect their completion, including the Company’s stockholders approving the Advisory Agreement Proposal. See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Purchase Agreement – Conditions to the Asset Sale” and “Proposal 2 – Approval of the Stock Issuance – The Externalization Agreement – Conditions to the Externalization Transaction” for more information for more information. The Company cannot predict whether and when these other conditions will be satisfied.

The Company will be subject to operational uncertainties and contractual restrictions while the Asset Sale and Externalization Transaction are pending.

Uncertainty about the effect of the Asset Sale and Externalization Transaction may have an adverse effect on the Company while the Asset Sale and Externalization Transaction are pending. These uncertainties may impair the Company’s ability to retain and motivate key personnel until the Asset Sale and Externalization Transaction are consummated and could cause those that deal with the Company to seek to change their existing relationships with the Company. Retention of certain employees may be challenging during the pendency of the Asset Sale and Externalization Transaction, as certain employees may experience uncertainty about their future following completion of the Asset Sale and Externalization Transaction. In addition, the Asset Purchase Agreement and Externalization Agreement impose limitations on the Company with respect to actions that it might otherwise pursue if the Transactions were not pending, which may result in the Company not pursuing certain business opportunities that may arise prior to the completion of the Transactions.

 

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Barings may exercise significant influence over us in connection with its ownership of Company Common Stock.

Following the closing of the Transactions and the related transactions described herein (including the Initial Stock Issuance, implementation of the Company Repurchase Plan, the trading plan under which Barings might purchase shares of Company Common Stock and, if applicable, the Subsequent Stock Issuance), Barings is expected to beneficially own between 15% to 24% of the outstanding Company Common Stock. As a result, Barings may be able to significantly influence the outcome of matters submitted for stockholder action after the closing of the Transactions, including approval of significant corporate transactions, such as amendments to our governing documents, business combinations, consolidations and mergers. Barings will have substantial influence on us and could exercise its influence in a manner that conflicts with the interests of other stockholders. The presence of a significant stockholder may also have the effect of making it more difficult for a third party to acquire us or for the Board to discourage a third party form seeking to acquire us following the closing of the Transactions.

If the Transactions do not close, the Company will not benefit from the expenses incurred in its pursuit.

The Transactions may not be completed. If the Transactions are not completed, the Company will have incurred substantial expenses for which no ultimate benefit will have been received. The Company has incurred out-of-pocket expenses in connection with the Transactions for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Transactions are not completed. In addition, in the event the Asset Purchase Agreement and/or Externalization Agreement are terminated under certain circumstances, the Company may be required to pay a Termination Fee, a Tail Termination Fee or an Externalization Agreement Termination Fee (each as defined below), or may be required to reimburse Asset Buyer and/or Barings for their out-of-pocket expenses incurred in connection with the Asset Sale and Externalization Agreement, respectively, subject to certain limits.

The Company may waive one or more conditions to the Transactions without resoliciting stockholder approval.

Certain conditions to the Company’s obligations to complete the Transactions may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of the Company, the Asset Buyer and/or Barings, as the case may be. In the event that any such waiver does not require resolicitation of stockholders, the parties to the Transactions will have the discretion to complete the Transactions without seeking further stockholder approval. The conditions requiring the approval of the Company’s stockholders, however, cannot be waived. See “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Purchase Agreement – Conditions to the Asset Sale” and “Proposal 2 – Approval of the Stock Issuance – The Externalization Agreement – Conditions to the Externalization Transaction” for more information.

We have not yet identified the portfolio companies we will invest in after the closing of the Transactions.

After the closing of the Transactions, we expect our portfolio to initially consist of approximately $600 million to $615 million in cash. Barings (solely in its capacity as our investment adviser the (“Adviser”) under the Advisory Agreement), has not yet identified potential investments for our portfolio that we will acquire after the closing of the Transactions. The Adviser will select our investments and our stockholders will have no input with respect to investment decisions. As a result, we will be subject to all of the business risks and uncertainties associated with the origination of new investments, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially or become worthless.

We may not be able to pay you dividends and our dividends may not grow over time.

We intend to recommence paying quarterly dividends to our stockholders as soon as is practicable after the closing of the Transactions. We cannot assure you that we will achieve investment results that will allow us to do

 

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so or to pay a specified level of cash dividends or year-to-year increases in cash dividends. Our ability to pay dividends might be adversely affected by, among other things, Barings’ inability to successfully or timely execute on its liquid debt investment strategy and the impact of one or more of the other risk factors described herein. All dividends will be paid at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our status as a regulated investment company under the Code, compliance with applicable BDC regulations and such other factors as our Board may deem relevant from time to time.

The Adviser and its investment team have no prior experience managing a BDC.

Although the Adviser has experience managing closed-end investment companies, the Adviser and its investment team have no prior experience managing a BDC, and the investment philosophy and techniques used by the Adviser to manage a BDC may differ from the investment philosophy and techniques previously employed by the Adviser’s investment team in identifying and managing past investments and that of the Company’s current management. Accordingly, we can offer no assurance that we will replicate the historical performance of other businesses or companies with which the Adviser’s investment team has been affiliated, and our investment returns could be substantially lower than the returns achieved by such other companies.

After the closing of the Transactions, we will be dependent upon the Adviser for our future success.

After the closing of the Transactions, we will not have any employees. We will depend on the diligence, skill and network of business contacts of the Adviser’s investment professionals to source appropriate investments for us. We will depend on members of the Adviser’s investment team to appropriately analyze our investments and the Adviser’s investment committee to approve and monitor our portfolio investments. The Adviser’s investment committee, together with the other members of its investment team, will evaluate, negotiate, structure, close and monitor our investments. Our future success will depend on the continued availability of the members of the Adviser’s investment committee and the other investment professionals available to the Adviser. We do not have employment agreements with these individuals or other key personnel of the Adviser, and we cannot provide any assurance that unforeseen business, medical, personal or other circumstances would not lead any such individual to terminate his or her relationship with the Adviser. The loss of a material number of senior investment professionals to which the Adviser has access, could have a material adverse effect on our ability to achieve our investment objective as well as on our financial condition and results of operations. In addition, we cannot assure you that the Adviser will remain our investment adviser or that we will continue to have access to the Adviser’s investment professionals or its information and deal flow. Further, there can be no assurance that the Adviser will replicate its own historical success, and we caution you that our investment returns could be substantially lower than the returns achieved by other funds managed by the Adviser.

There are potential conflicts of interest, including the management of other investment funds and accounts by the Adviser, which could impact our investment returns.

The executive officers that will manage the Company after the closing of the Transactions, as well as the other principals of the Adviser, manage other funds affiliated with the Adviser, including other closed-end investment companies. In addition, the Adviser’s investment team has responsibilities for managing U.S. middle market debt investments for certain other investment funds and accounts. Accordingly, they have obligations to investors in those entities, the fulfillment of which may not be in the best interests of, or may be adverse to the interests of, us or our stockholders. Although the professional staff of the Adviser will devote as much time to our management as appropriate to enable the Adviser to perform its duties in accordance with the Advisory Agreement, the investment professionals of the Adviser may have conflicts in allocating their time and services among us, on the one hand, and the other investment vehicles managed by the Adviser or one or more of its affiliates on the other hand.

The Adviser may face conflicts in allocating investment opportunities between us and affiliated investment vehicles that have overlapping investment objectives with ours. Although the Adviser will endeavor to allocate

 

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investment opportunities in a fair and equitable manner in accordance with its allocation policies and procedures, it is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by the Adviser or an investment manager affiliated with the Adviser.

Conflicts may also arise because portfolio decisions regarding our portfolio may benefit the Adviser’s affiliates. The Adviser’s affiliates may pursue or enforce rights with respect to one of our portfolio companies, and those activities may have an adverse effect on us.

Our ability to enter into transactions with affiliates of the Adviser will be restricted.

After the closing of the Transactions, we and certain of our controlled affiliates will be prohibited under the 1940 Act from knowingly participating in certain transactions with our upstream affiliates, or the Adviser and its affiliates, without the prior approval of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our upstream affiliate for purposes of the 1940 Act, and we are generally prohibited from buying or selling any security (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits “joint” transactions with an upstream affiliate, or the Adviser or its affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors. In addition, we and certain of our controlled affiliates will be prohibited from buying or selling any security from or to, or entering into joint transactions with, the Adviser and its affiliates, or any person who owns more than 25% of our voting securities or is otherwise deemed to control, be controlled by, or be under common control with us, absent the prior approval of the SEC through an exemptive order (other than in certain limited situations pursuant to current regulatory guidance as described below). The analysis of whether a particular transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing.

As a BDC, we are required to comply with certain regulatory requirements. For example, we will generally not be permitted to make loans to companies controlled by the Adviser or other funds managed by the Adviser. We will also not be permitted to make any co-investments with the Adviser or its affiliates (including any fund managed by the Adviser or an investment adviser controlling, controlled by or under common control with the Adviser) without exemptive relief from the SEC, subject to certain exceptions. The SEC has granted to the Adviser the Exemptive Relief that permits certain present and future funds, including the Company, advised by the Adviser (or an investment adviser controlling, controlled by or under common control with the Adviser) to co-invest in suitable negotiated investments. Co-investments made under the Exemptive Relief are subject to compliance with the conditions and other requirements contained in the Exemptive Relief, which could limit our ability to participate in a co-investment transaction.

The proposed fee structure under the Advisory Agreement may induce the Adviser to pursue speculative investments and incur leverage, and investors may bear the cost of multiple levels of fees and expenses.

After the closing of the Transactions, the Incentive Fees payable by us to the Adviser under the Advisory Agreement may create an incentive for the Adviser to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The Incentive Fees payable to the Adviser are calculated based on a percentage of our return on invested capital. This may encourage the Adviser to use leverage to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, the Adviser receives the Incentive Fees based, in part, upon net capital gains realized on our investments. Unlike that portion of Incentive Fees based on income, there is no hurdle rate applicable to the portion of the Incentive Fees based on net capital gains. As a result, the Adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

 

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Moreover, because the Base Management Fees payable to the Adviser will be payable based on our gross assets, including those assets acquired through the use of leverage, the Adviser has a financial incentive to incur leverage which may not be consistent with our stockholders’ interests.

The Adviser’s liability will be limited under the Advisory Agreement, and we will be required to indemnify the Adviser against certain liabilities, which may lead the Adviser to act in a riskier manner on our behalf than it would when acting for its own account.

Under the Advisory Agreement, the Adviser will not assume any responsibility to us other than to render the services described in the Advisory Agreement, and it will not be responsible for any action of our Board in declining to follow the Adviser’s advice or recommendations. Pursuant to the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser will not be liable to us for their acts under the Advisory Agreement, absent fraud, willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect the Adviser and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser with respect to all damages, liabilities, costs and expenses arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as the Adviser for us, and not arising out of fraud, willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.

The Adviser will be able to resign upon 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

After the consummation of the Transactions, we will be an externally managed BDC pursuant to the Advisory Agreement. Pursuant to the Advisory Agreement, the Adviser will have the right to resign upon 60 days’ written notice, whether a replacement has been found or not. If the Adviser resigns, it may be difficult to find a replacement with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If a replacement is not found quickly, our business, results of operations and financial condition as well as our ability to pay distributions are likely to be adversely affected and the value of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser. Even if a comparable service provider or individuals performing such services are retained, whether internal or external, their integration into our business and lack of familiarity with our investment objective may result in additional costs and time delays that may materially adversely affect our business, results of operations and financial condition.

We may not replicate our historical performance, or the historical success of the Adviser.

We cannot provide any assurance that we will replicate our own historical performance, the historical success of the Adviser or the historical performance of other companies that the Adviser and its investment team advised in the past. Accordingly, our investment returns could be substantially lower than the returns achieved by the Company in the past, by other Adviser managed closed-end funds or by other clients of the Adviser. We can offer no assurance that the Adviser will be able to continue to implement our investment objective with the same degree of success as it has had in the past.

 

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THE SPECIAL MEETING

This proxy statement summarizes the information regarding the matters to be voted on at the Special Meeting. However, you do not need to attend the Special Meeting to vote your shares of Company Common Stock. You may simply complete, sign, and return the enclosed proxy card, or submit your vote by calling toll free at the telephone number indicated on the enclosed proxy card, or vote your shares through the Internet, as indicated on the proxy card. You may also grant a proxy (i.e., authorize someone to vote your shares). If you properly sign and date the accompanying proxy card or otherwise provide voting instructions, either via the Internet or telephone, as indicated on the proxy card and the Company receives the proxy card or such instruction in time for the Special Meeting, the persons named as proxies will vote the shares registered directly in your name in the manner that you specified.

As of the Record Date, there were             shares of Company Common Stock outstanding and entitled to vote at the Special Meeting. If you are a holder of Company Common Stock, you are entitled to one vote at the Special Meeting for each share of Company Common Stock that you held as of the close of business on the Record Date. The Company began mailing this proxy statement on or about                     , 2018 to all Company stockholders entitled to vote their shares of Company Common Stock at the Special Meeting.

Time and Location

We will hold the Special Meeting on                     , 2018 at             , local time, at             .

Attending the Special Meeting

You are entitled to attend the Special Meeting only if you were a Company stockholder as of the close of business on the Record Date, or if you hold a valid proxy for the Special Meeting. Since seating is limited, admission to the Special Meeting will be on a first-come, first-served basis. You must present valid photo identification, such as a driver’s license or passport, for admittance. If you are not a stockholder of record of the Company but hold shares as a beneficial owner in street name, in order to attend the Special Meeting, you must also provide proof of beneficial ownership, such as your most recent account statement prior to the Record Date, a copy of the voting instruction form provided by your broker, bank, trustee or nominee, or other similar evidence of ownership of shares of the Company.

If you do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the Special Meeting. For security reasons, you and your bags will be subject to search prior to your admittance to the Special Meeting.

Proposal to Approve each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal.

At the Special Meeting, you will be asked to vote on each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal.

Recommendation of the Board

The Board unanimously recommends that you vote “FOR” each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal.

 

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Stockholders Entitled to Vote

You are entitled to vote if you were a holder of record of Company Common Stock as of the close of business on the Record Date.

All holders of Company Common Stock as of the Record Date, voting together, will be entitled to vote for the approval each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal, in each case, at the Special Meeting.

Quorum

To conduct business at the Special Meeting, a quorum of Company stockholders must be present at the Special Meeting. The presence at the Special Meeting, in person or by proxy, of the holders of shares of Company Common Stock entitled to cast a majority of all the votes entitled to be cast will constitute a quorum at the Special Meeting. Abstentions will be treated as shares present for quorum purposes. Shares for which brokers have not received voting instructions from the beneficial owner of the shares and do not have discretionary authority to vote on certain proposals (which are considered “broker non-votes” with respect to such proposals) will not be treated as shares present for quorum purposes.

If a quorum is not present, the Chairman of the Special Meeting shall have the power to adjourn the Special Meeting from time to time without notice other than announcement at the Special Meeting.

Stockholders Holding Shares Through Brokers, Banks or Nominees

If you hold shares of Company Common Stock through a broker, bank, trustee or nominee, you must follow the voting instructions you receive from your broker, bank, trustee or nominee. If you hold shares of Company Common Stock through a broker, bank, trustee or nominee and want to vote in person at the Special Meeting, you must obtain a legal proxy from the record holder of your shares and present it at the Special Meeting. Please instruct your broker, bank, trustee or nominee so your vote can be counted.

Granting Authority to Vote to Brokers, Banks or Nominees

Brokers, banks, trustees and nominees have discretionary authority to vote on “routine” matters, but not on “non-routine” matters. All proposals being considered at this Special Meeting are non-routine. If you hold your shares of Company Common Stock in street name (or “nominee name”) and do not provide your broker, bank, trustee or nominee who holds such shares of record with specific instructions regarding how to vote on the proposals, your broker may not be permitted to vote your shares on any of the proposals.

Voting by Proxy

If you are a record holder of shares of Company Common Stock, you may authorize a proxy to vote on your behalf by following the instructions provided on the enclosed proxy card. Authorizing your proxy will not limit your right to vote in-person at the Special Meeting. A properly completed and submitted proxy will be voted in accordance with your instructions, unless you subsequently revoke your instructions. If you authorize a proxy without indicating your voting instructions, the proxyholder will vote your shares “FOR” each of the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal. Internet and telephone voting procedures are designed to authenticate the Company stockholder’s identity and to allow such stockholders to vote their shares and confirm that their instructions have been properly recorded. Your Internet or telephone vote authorizes the named proxies to vote your shares in the same manner as if you had marked, signed and returned a proxy card.

 

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Receiving Multiple Proxy Cards

Many of the Company’s stockholders hold their shares in more than one account and may receive separate proxy cards or voting instruction forms for each of those accounts. To ensure that all of your shares are represented at the Special Meeting, we recommend that you vote by following the instructions on each proxy card or voting instruction form you receive.

Revocation of Proxy

If you are a Company stockholder of record, you can revoke your proxy at any time before it is exercised by (i) delivering a written revocation notice prior to the Special Meeting to: Triangle Capital Corporation, 3700 Glenwood Avenue, Suite 530, Raleigh, North Carolina 27612, Attention: Steven C. Lilly, Chief Financial Officer and Secretary, (ii) submitting a later-dated proxy that we receive no later than the conclusion of voting at the Special Meeting or (iii) voting in person at the Special Meeting. If you hold shares of Company Common Stock through a broker, bank or other nominee, you must follow the instructions you receive from them in order to revoke your voting instructions. Attending the Special Meeting does not revoke your proxy unless you also vote in person at the Special Meeting.

Votes Required to Approve the Asset Sale Proposal, the Stock Issuance Proposal, the Advisory Agreement Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal

Approval of a majority of the Company’s outstanding Company Common Stock entitled to vote the matter is required to approve the Asset Sale Proposal.

Approval of the holders of a “majority of the outstanding voting securities” entitled to vote at the Special Meeting is required to approve the Advisory Agreement Proposal. Under the 1940 Act, a “majority of the outstanding voting securities” means the affirmative vote of the lesser of (a) 67% or more of the shares of the Company present or represented by proxy at the Special Meeting if the holders of more than 50% of the outstanding shares are present or represented by proxy at the Special Meeting or (b) more than 50% of the outstanding shares of the Company.

Approval of a majority of the votes cast at the Special Meeting, in person or by proxy, is required to approve the Stock Issuance Proposal, the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal.

Abstentions and broker non-votes will have the same effect as a vote “AGAINST” the Asset Sale Proposal and the Advisory Agreement Proposal, and have no effect on the Reduced Asset Coverage Ratio Proposal, the Executive Payments Proposal and the Adjournment Proposal. With respect to the Stock Issuance Proposal, abstentions will have the same effect as a vote “AGAINST” such proposal, however, broker non-votes will have no effect on such proposal.

Expenses Related to Proxy Solicitation

The Company, the Asset Buyer and Barings will equally bear the expense of soliciting proxies for the Special Meeting, including the cost of preparing and posting this proxy statement, as specified in greater detail in the section of this proxy statement captioned “The Asset Purchase Agreement – Transaction Expenses.” We have requested that brokers, nominees, fiduciaries and other persons holding shares in their names, or in the names of their nominees, which are beneficially owned by others, forward the proxy materials to, and obtain proxies from, such beneficial owners. The Company will reimburse such persons for their related reasonable expenses.

 

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Methods of Proxy Solicitation

In addition to the solicitation of proxies by the use of mail, proxies may be solicited in person and by telephone, electronic transmission or facsimile transmission by directors or officers of the Company without special compensation therefor.

Other Matters to be Voted On

Pursuant to the MGCL, no matters may properly be brought before the Special Meeting except as specified in the Notice of the Special Meeting.

Whether or not you expect to attend the Special Meeting, please complete, date, sign and promptly return the accompanying proxy card so that you may be represented at the Special Meeting.

Who to Contact if You Have Questions

If you have any questions concerning the Special Meeting or the accompanying proxy statement, would like additional copies of the accompanying proxy statement or need help voting your shares of Company Common Stock, please contact Alliance Advisors LLC:

200 Broadacres Drive, 3^rd Floor

Bloomfield, NJ 07003

Call Toll-Free: (888) 991-1291

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information with respect to the beneficial ownership of Company Common Stock as of                     , 2018, by each of our executive officers and directors and all of our directors and executive officers as a group. As of                     , 2018, we were not aware of any 5% beneficial owners of Company Common Stock.

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. There is no common stock subject to options or warrants that is currently exercisable or exercisable within 60 days of                     , 2018. Percentage of beneficial ownership is                 based on             shares of Company Common Stock outstanding as of                     , 2018. The business address of each person below is 3700 Glenwood Avenue, Suite 530, Raleigh, North Carolina 27612.

 

Executive Officers and Interested Directors

Number of Shares Beneficially Owned(1)

Percentage of Class(2)

Dollar Range of Equity Securities Beneficially Owned(3)(4)

Executive Officers and Interested Directors

E. Ashton Poole

251,105

(5)

*

over $100,000

Steven C. Lilly

308,622

(6)

*

over $100,000

Jeffrey A. Dombcik

190,426

(7)

*

over $100,000

Cary B. Nordan

215,559

(8)

*

over $100,000

Douglas A. Vaughn

216,834

(9)

*

over $100,000

Garland S. Tucker, III

210,917

(10)

*

over $100,000

Independent Directors

W. McComb Dunwoody

108,972

(11)

*

over $100,000

Mark M. Gambill

29,950

(11)

*

over $100,000

Benjamin S. Goldstein

61,522

(11)

*

over $100,000

Mark F. Mulhern

5,440

(11)

*

$50,000 – $100,000

Simon B. Rich, Jr.

96,515

(12)

*

over $100,000

All directors and executive officers as a group

1,695,862

%

over $100,000

 

*	Less than 1.0%

(1)	Beneficial ownership has been determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(2)	Based on a total of             shares issued and outstanding as of                     , 2018.

(3)	Beneficial ownership has been determined in accordance with Rule 16a-1(a)(2) of the Exchange Act.

(4)	The dollar range of equity securities beneficially owned is based on a stock price of $         per share as of                     , 2018.

(5)	Includes 145,829 shares of unvested restricted stock, which will vest in full upon the Asset Closing pursuant to the terms of Mr. Poole’s individual retention agreement with the Company, and 4,022 shares held by Mr. Poole’s wife.

(6)	Includes 115,250 shares of unvested restricted stock, which will vest in full upon the Asset Closing pursuant to the terms of Mr. Lilly’s individual retention agreement with the Company.

(7)	Includes 97,250 shares of unvested restricted stock, which will vest in full upon the Asset Closing pursuant to the terms of Mr. Dombcik’s individual retention agreement with the Company.

(8)	Includes 102,750 shares of unvested restricted stock, which will vest in full upon the Asset Closing pursuant to the terms of Mr. Nordan’s individual retention agreement with the Company.

(9)	Includes 95,750 shares of unvested restricted stock, which will vest in full upon the Asset Closing pursuant to the terms of Mr. Vaughn’s individual retention agreement with the Company, and 28,965 shares held by Mr. Vaughn’s wife.

(10)	Includes 69,237 shares held by Mr. Tucker’s wife.

 

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(11)	Includes 2,694 shares of unvested restricted stock, which will vest in full on May 3, 2018 pursuant to the terms of the Company’s omnibus incentive plan.

(12)	Includes 2,694 shares of unvested restricted stock, which will vest in full on May 3, 2018 pursuant to the terms of the Company’s omnibus incentive plan, and 5,590 shares held by Mr. Rich’s wife.

 

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PROPOSAL 1 – APPROVAL OF THE ASSET PURCHASE AGREEMENT AND THE ASSET SALE

We are asking you to approve the Asset Sale and the Asset Purchase Agreement and the other transactions contemplated thereby. The Board has declared the Asset Sale advisable and determined to submit these matters to a Company stockholder vote pursuant to Section 3-105 of the MGCL and the terms of the Asset Purchase Agreement.

For a summary of and detailed information regarding this proposal, please see the information about the Asset Purchase Agreement provided throughout this proxy statement. A copy of the Asset Purchase Agreement is attached to this proxy statement as Appendix A. You are urged to read the Asset Purchase Agreement carefully in its entirety.

Approval of a majority of the shares of Company Common Stock outstanding and entitled to vote at the Special Meeting, in person or represented by proxy, is required to approve the Asset Sale Proposal. If you are entitled to vote at the Special Meeting and abstain from voting, fail to cast your vote, in person or by proxy, or fail to give voting instructions to your brokerage firm, bank, trust or other nominee, it will have the same effect as a vote “AGAINST” the Asset Sale Proposal.

The Board unanimously recommends that you vote “FOR” the Asset Sale Proposal.

 

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THE ASSET SALE

This discussion of the Asset Purchase Agreement and related Asset Sale is qualified in its entirety by reference to the Asset Purchase Agreement, which is attached to this proxy statement as Appendix A and incorporated into this proxy statement by reference. You should carefully read the entire Asset Purchase Agreement as it is the legal document that governs the Asset Sale.

Parties to the Asset Purchase Agreement

Triangle Capital Corporation

3700 Glenwood Avenue

Suite 530

Raleigh, North Carolina 27612

P: (919) 719-4770

The Company is a specialty finance company that provides customized financing to lower middle market companies located primarily in the United States. It offers a wide variety of debt and equity investment structures including first lien, unitranche, second lien, and mezzanine with equity components. The Company’s investment objective is to seek attractive returns by generating current income from debt investments and capital appreciation from equity related investments. The Company has elected to be treated as a BDC under the 1940 Act and to be treated as a regulated investment company under the Code.

The Company’s principal executive offices are located at 3700 Glenwood Avenue, Suite 530, Raleigh, North Carolina 27612, and our telephone number is (919) 719-4770.

Additional information regarding the Company and its business is included in the Company’s most recent Annual Report on Form 10-K, attached as Appendix F to this proxy statement.

Historical financial information regarding the Company and the Company’s management’s discussion and analysis of financial condition and results of operations is included in the Company’s most recent Annual Report on Form 10-K, attached as Appendix F to this proxy statement.

Asset Buyer

The Asset Buyer is a newly formed Delaware limited liability company managed by BSP. The Asset Buyer was formed in connection with and for the sole purpose of effecting the Asset Sale, and is backed by the BSP Funds through equity commitment letters between the BSP Funds and Asset Buyer under which (i) the BSP Funds are obligated to fund the purchase price in the event the conditions to the closing under the Asset Purchase Agreement are satisfied or appropriately waived and (ii) the Company has certain third-party beneficiary rights.

BSP is a leading credit-focused alternative asset management firm with over $24 billion in assets under management as of February 28, 2018. Established in 2008, the BSP platform manages funds for institutional, high-net-worth and retail investors across various strategies including: private/opportunistic debt, liquid loans, high yield, special situations, long-short liquid credit and commercial real estate debt. These complementary strategies leverage the proprietary sourcing, analytical, operational and compliance capabilities that encompass BSP’s robust institutional platform. BSP has over 160 total employees and over 90 investment professionals as of March 31, 2018. BSP is headquartered in New York with additional offices in Charlotte, Houston and Providence. BSP is in partnership with Providence Equity Partners L.L.C., a leading global private equity firm with more than $54 billion in assets under management. BSP’s principal executive offices are located at 9 West 57th Street, Suite 4920, New York, New York 10019, and its telephone number is (212) 588-6770.

 

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Effect on the Company if the Asset Sale is Completed

If the Asset Purchase Agreement and related Asset Sale are approved by the Company’s stockholders, and the other conditions to closing of the Asset Sale are satisfied or appropriately waived, the Company will sell, convey, assign and transfer to the Asset Buyer, and the Asset Buyer will purchase, acquire and accept from the Company, the Investments held at December 31, 2017, as set forth on the Investments Schedule, for a purchase price of approximately $981.2 million in cash, subject to certain adjustments to take into account portfolio activity and certain other matters since such date.

Concurrently with the consummation of the Asset Sale, the Company will:

 

•

repay outstanding indebtedness under the Credit Agreement;

 

•

repay (or provide funds to the indenture trustee to provide for the repayment of) all principal and accrued interest due on the Notes; and

 

•

unless the SBA consents to the Company’s SBA Debentures remaining outstanding, the Company will repay, or make appropriate arrangements for the repayment of, the Company’s SBA Debentures, including all interest due, as directed by the SBA; if the SBA permits the SBA Debentures to be assumed by Asset Buyer, the Purchase Price payable at closing would be reduced by the amount so assumed.

Concurrently with the consummation of the Asset Sale, the restrictions on restricted shares of Company Common Stock held by directors, executive officers and other employees will lapse. In addition, the Company will be obligated to make the Executive Payments following the closing of the Asset Sale. See the section entitled “Proposal 5 – Advisory (Non-Binding) Vote on Executive Compensation.” See the section entitled “Proposal 2 – Approval of the Stock Issuance – The Externalization Agreement” for a detailed discussion of the other transactions that will occur, as well as our related intended plan of business operations, immediately following the Asset Sale and closing of the Externalization Transaction.

Effect on the Company if the Asset Sale is Not Completed

If the Asset Sale is not completed, the Company will not consummate the transactions contemplated by the Externalization Agreement or enter into the Advisory Agreement and we will seek to continue our focus on conducting our business as an internally managed BDC and may consider and evaluate other strategic alternatives.

Purchase Price

Asset Buyer will pay the Company a purchase price of $981,178,542 in cash, subject to certain adjustments to reflect portfolio activity occurring since December 31, 2017 and certain other agreed-up adjustments. For more detail regarding the calculation of the Purchase Price, see “The Asset Purchase Agreement – Purchase Price” below.

Use of Proceeds

If the Asset Sale and other matters described herein are completed, the Company will use the proceeds therefrom to repay the Credit Agreement, the Notes and, if required by the SBA, the SBA Debentures. If the SBA permits Asset Buyer to assume the SBA Debentures in connection with the Asset Sale, the Purchase Price in the Asset Sale would be reduced by them amounts so assumed by Asset Buyer. The Company will also use proceeds from the Asset Sale to pay costs and expenses incurred in connection with the Transactions and to make any Executive Payments and other severance payments to its employees which are triggered in connection with the closing of the Transactions. The remaining proceeds will be invested by the Company over time, as directed by Barings, in its capacity as the investment adviser to the Company after closing of the Externalization Transaction, in accordance with the Advisory Agreement, and for other corporate purposes, as directed by the Board.

 

38

Background of the Transactions

Since the Company’s IPO in 2007, competition for private debt investment opportunities in the lower middle market has significantly intensified. One of the primary drivers of increased competition has been a large influx of capital from global investors seeking yield due to persistent low interest rates. This influx of capital has led to the formation of new competitive market participants with substantial amounts of capital to deploy, formidable financial, technological and marketing resources, and individualized risk tolerances. In addition, structural innovations within the leveraged loan market have afforded borrowers greater financing alternatives, thereby creating pricing pressure on all loan product categories. Indeed, the combination of large inflows of capital, new competitive entrants, and expanded loan product offerings has created an imbalance between supply and demand and resulted in interest rate spread tightening and therefore the lowering of weighted-average yields associated with the investment portfolios of most BDC industry participants, including the Company’s.

Historically, the Company has focused on investments in subordinated debt (or mezzanine) securities, which generally produce higher yields but typically carry higher amounts of principal risk versus more senior-oriented securities. For many years, this mezzanine strategy served the Company well, resulting in positive risk-adjusted returns and strong dividends per share. However, as the Company’s management began to observe the emerging trends noted above and more fully understand their potential impact, the Company began shifting the composition of its investment portfolio towards more lower-risk, senior securities and also towards larger companies which were expected to perform well in a later-stage economic environment. While investing in senior securities can reduce risks for shareholders due to lower volatility associated with fluctuations in principal loan values, such an investing strategy also produces lower investment yields and, depending on investment portfolio composition, reduces the overall weighted average yield of the Company’s investment portfolio. In order to control one’s investment position in senior securities, meaningfully larger commitments of capital are required on a per company basis as compared to junior securities such as subordinated or mezzanine debt. As the Company continued to face competition from larger, more well-capitalized debt capital providers, yield compression associated with the Company’s shift towards investing in senior securities further contributed to reducing the Company’s net investment income and put pressure on the Company’s ability to sustain its historic dividend levels. Consequently, in late 2015, the Company’s management and Board began reviewing strategic options by which the Company could enhance its competitive positioning in the direct lending industry. In 2016 and 2017, the Company’s management met regularly with external financial advisors to gain additional perspectives on the direct lending industry and on ways the Company might consider enhancing stockholder value.

Following the end of the fiscal quarter ended September 30, 2017, and in light of the challenges being presented by persistent low interest rates, new competition, a broader range of available financing products, and the Company’s size constraints due to its comparatively small balance sheet, the Board concluded that in order to maximize shareholder value over the longer term, the Company likely would be best served by finding a suitable strategic partner having the scale, scope, range of financing products and risk profile to navigate the increasingly sophisticated direct lending market. As a result, the Board held a meeting on October 31, 2017 to receive presentations from two financial advisors, including Houlihan Lokey, regarding their experience and qualifications and provided preliminary perspectives regarding the Company’s potential exploration of strategic alternatives. On November 1, 2017, during another regular meeting of the Board, the Board received a presentation from a third financial advisor regarding the same topics. In addition, during the November 1, 2017 meeting, the Board discussed matters relating to the Company’s plan of action in the event that it did not pursue or consummate any strategic alternatives, including future operational plans and investment strategy.

During the meetings on October 31 and November 1, 2017 the Board evaluated each financial advisor’s experience and qualifications. The Board considered the various advantages and disadvantages of hiring a financial advisor, the various strategic alternatives presented by each firm and the experience of each team in the BDC and direct lending sectors and in the mergers and acquisitions field in general. The Board discussed specific experiences with, and the reputations of, each firm and the teams that presented, the merits of each team,

 

39

including any potential independence and conflict of interest issues, fee structures, and other matters. During these meetings, the Board also authorized Simon Rich to serve as chair of the independent members of the Board to coordinate communications with the Company’s management and any investment banking firms. Following the October 31 and November 1, 2017 meetings, the Company publicly announced on November 1, 2017 that the Board had elected to pursue the exploration of strategic alternatives, including the potential benefit of partnering with another organization to accelerate the Company’s corporate initiatives, the potential sale of certain investments and other alternatives.

After follow-up meetings with certain of the potential financial advisors, the Board authorized the engagement of Houlihan Lokey as financial advisor to assist the Board in the exploration of strategic alternatives. Houlihan Lokey was formally engaged as the Board’s financial advisor in connection with the Company’s exploration of strategic alternatives on November 13, 2017, and, on November 16, 2017, the Company publicly announced Houlihan Lokey’s engagement.

On November 17, 2017, the independent members of the Board held a telephone conference with Eversheds Sutherland (US) LLP (“Eversheds Sutherland”), the Company’s outside legal counsel, to review with the Board the standard of conduct governing the acts of directors, applicable fiduciary duties and the standards of judicial review with regard to a strategic transaction review process.

On November 27, 2017, the Board held a telephonic meeting with representatives of Houlihan Lokey and Eversheds Sutherland present at the invitation of the Board. At the meeting, representatives of the Company’s management and Houlihan Lokey provided the Board with an update of the strategic review process. During the meeting, representatives of Houlihan Lokey informed the Board that they had performed a preliminary review of the Company’s investment portfolio in order to assist the Company in compiling information for potential bidders and that Houlihan Lokey could, if requested by the Board, contact over 90 entities in connection with the strategic review process. At the meeting, the Board instructed Houlihan Lokey to contact as many potentially interested parties as practicable without restricting the solicitation process as to type of transaction or counterparty and discussed logistics and the communications strategy with respect to the solicitation process. In addition, the Board, with the assistance of representatives of Eversheds Sutherland, discussed and reviewed confidentiality agreements in the context of the strategic transaction review process, and the legal and fiduciary implications thereof. Thereafter, the Board approved a form confidentiality agreement to be sent to interested parties for execution prior to receiving non-public evaluation material about the Company, its operations and its portfolio investments. The form of confidentiality agreement included customary “standstill” and related provisions designed to protect the strategic transaction review process, along with a provision that would allow bidders to confidentially request a waiver of the standstill provisions once a strategic transaction had been publicly announced, which would allow the Board to receive and consider competing proposals. In order to prevent any single interested party from having any advantage over others during the solicitation process, the Board informed management that, although the form confidentiality agreements to be executed by interested parties were subject to negotiation and subsequent agreement between such parties and the Company, any material deviations from the form confidentiality agreement previously approved by the Board would require Board pre-approval in order to protect the integrity of the strategic transaction review process.

On December 1, 2017, representatives of Houlihan Lokey provided an update to the Board on the solicitation process, noting that, as directed by the Board, over 50 potentially interested parties had been contacted to date to gauge their interest in a potential strategic transaction.

On December 4, 2017, the Board held a telephonic meeting with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to receive an update on the solicitation process. Houlihan Lokey informed the Board that over 80 potentially interested parties had been contacted to date regarding interest in a potential strategic transaction, including any potential interest in bidding on the Company’s portfolio and/or its platform.

The Board held another telephonic meeting on December 11, 2017 with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to receive an update on the solicitation process. During the meeting,

 

40

Houlihan Lokey informed the Board that they had reached out to a total of 112 potential bidders to date, 19 of which indicated they were potentially interested in purchasing all or a portion of the Company’s assets. Of the 112 potential bidders, 55 had negotiated or were negotiating confidentiality agreements with the Company, and 17 parties had already executed confidentiality agreements. Representatives of Houlihan Lokey also discussed with the Board the general categories of interested parties, which included parties interested in a BDC-to-BDC merger, a BDC reverse merger or portfolio contribution transaction, an externalization of the Company’s investment management function coupled with an investment in newly issued shares of Company Common Stock, and parties interested in purchasing all or a portion of the Company’s investment portfolio. The Board, with the assistance of Houlihan Lokey, also discussed the potential to allow for certain joint bidders, which required Board approval under the confidentiality agreements. The representatives of Houlihan Lokey also updated the Board regarding the electronic data room access being provided to those parties that had executed confidentiality agreements. The data room included initial materials such as a confidential information packet, supplementary financial information, and a detailed schedule of the Company’s investment portfolio.

On December 18, 2017, the Board held a telephonic meeting with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to review updates on the solicitation process and other related matters. Representatives of Houlihan Lokey informed the Board that 114 potential bidders in total had now been contacted, that 20 parties were actively negotiating confidentiality agreements and that 38 parties had executed confidentiality agreements. The Board and representatives of Eversheds Sutherland also discussed certain provisions in the form confidentiality agreement being negotiated with interested parties, including the standstill provisions and overall term of the confidentiality agreement, and noted that, given the expected time frame of the strategic transaction review process, to ensure conformity and integrity of the strategic transaction review process and that no interested party was given preferential treatment, the Board did not believe it was in the best interests of the Company or its stockholders to reduce the term of the standstill to less than one year for any single bidder. However, as previously discussed with the Board, under the standard form of confidentiality agreement, following public announcement of a strategic transaction, bidders would be allowed to approach the Board confidentially to seek a waiver of the standstill in order to submit a competing proposal.

On December 20, 2017, the Company uploaded a first round process letter to the electronic data room. The first round process letter informed parties participating in the Board’s strategic transaction review process of the bid information that would be required in their respective indications of interest and that such first round proposals were due on January 18, 2018.

On December 26, 2017, the Board held a telephonic meeting with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to review updates on the solicitation process. Representatives of Houlihan Lokey informed the Board that by this time 45 parties had executed confidentiality agreements, 13 of which had indicated an interest in purchasing all or a portion of the Company’s portfolio assets. During the meeting, the attendees also discussed preliminary feedback from certain interested parties regarding the Company and its subsidiaries’ SBIC licenses.

The Board, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, held a telephonic meeting on January 5, 2018 to receive an update on the strategic transaction review process and to review activity in the electronic data room. Houlihan Lokey noted that, to date, 51 parties had executed confidentiality agreements and had received access to the electronic data room, and that nine confidentiality agreements were still being negotiated. Houlihan Lokey and the Board discussed the interested parties’ activity in the electronic data room and the types of transactions in which such parties had expressed interest.

The Board, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, held a telephonic meeting on January 9, 2018 to review the status of the strategic transaction review process. By then 52 parties had executed confidentiality agreements, and the Board and Houlihan Lokey discussed activity in the electronic data room, the types of transactions in which the potential bidders had expressed preliminary interests and the parties who had dropped out of the Board’s strategic transaction review process. The Board and the

 

41

representatives of Eversheds Sutherland also discussed implementing certain changes in the Company’s bylaws and explicitly subjecting the Company to the Maryland Business Combination Act under the MGCL to further ensure that the strategic transaction review process could proceed in a thorough and systematic nature. The Company publicly announced the revisions to the bylaws and the actions taken with regard to the Maryland Business Combination Act in a current report on Form 8-K filed with the SEC on January 16, 2018.

The Company began to receive initial indications of interest on January 17, 2018, including from Barings and BSP on January 18, 2018, the terms of which are described below. However, prior to that date, a third party that had not entered into a confidentiality agreement with the Company sent a letter to Simon Rich, in his capacity as chair of the independent members of the Board, outlining, among other things, a non-binding indication of the potential range of prices that such third party might consider offering for the Company. That indication, however, was non-binding, was based only on publicly available information (and without the benefit of confidential information, including with regard to the Company’s investment portfolio, that was provided ultimately to 53 bidders that had executed confidentiality agreements), and was subject to confirmatory due diligence. Although the Board affirmed its desire that such third party be a part of the strategic review process, no agreement was reached on the terms of a confidentiality agreement and related standstill provisions, and such third party did not participate in the Company’s strategic transaction review process.

Barings’ Initial Indication of Interest – Barings’ initial indication of interest proposed to externalize the management rights for the Company, including future management of the Company’s existing investment portfolio. The proposal included a one-time, up-front cash payment to the Company’s stockholders of $125 million to secure the right to become the external investment adviser to the Company and all of its subsidiaries, a commitment to make a $100 million investment in newly issued shares of Company Common Stock at 100% of pre-closing net asset value per share, and a commitment to purchase, during the 12 months subsequent to closing, up to $50 million in aggregate amount of Company Common Stock in the open market at then-current market value per share.

With regard to fee structure, Barings’ initial indication of interest proposed a base management fee of 1.5% on total gross assets, including any investments made with borrowings, but excluding cash and cash equivalents. The incentive fee structure proposed included an income-based incentive fee of either (1) 17.5% of pre-incentive fee net investment income with a 6% hurdle rate, or (2) 20% of pre-incentive fee net investment income with a 7% hurdle rate. The initial indication of interest also proposed that the incentive fee structure include either a 17.5% or 20% capital gains fee. Barings’ initial indication of interest was not subject to any financing contingency.

BSP’s Initial Indication of Interest – BSP’s initial indication of interest proposed that BSP’s affiliated funds would acquire the Company’s entire investment portfolio in exchange for a cash amount of approximately $1.053 billion, which represented approximately 96.5% of the Company’s investment portfolio fair value as of September 30, 2017. BSP indicated that, while its preferred acquisition structure was a purchase of assets, they also were open to executing a stock transaction. BSP’s initial indication of interest did not include any financing contingencies and noted that BSP would expect a period of exclusivity before completing all due diligence.

On January 19, 2018, the Board held a teleconference during which representatives of Houlihan Lokey provided a preliminary summary of the initial indications of interest received to date. The representatives of Houlihan Lokey noted that 24 initial indications of interest had been received to date, which included, among others, at least 11 business combination proposals (including BSP’s initial indication of interest) and eight proposals to externalize the Company’s platform (including Barings’ initial indication of interest). The parties discussed how to compare business combination proposals to the externalization proposals, and the consideration offered in each, after which the Board, with the assistance of Houlihan Lokey and Eversheds Sutherland, discussed an additional potential transaction alternative that included a two-part transaction through which the Company could liquidate its entire portfolio for cash and, simultaneously therewith, enter into an externalization agreement and advisory contract with another party to manage the investment portfolio initially consisting of all

 

42

cash (referred to herein as the “Dual Transaction Option”). The Board discussed the significant potential benefits of the Dual Transaction Option, including that it might result in the delivery of the highest value to the Company’s stockholders and would eliminate the market’s perception of risk in, and the volatility associated with, the Company’s existing investment portfolio, as well as the execution risks associated therewith, noting specifically the increased execution risk of negotiating with and between two counterparties and closing the respective transactions. Thereafter, the Board discussed other factors to consider in connection with each bid, including how the Company’s outstanding debt and SBIC licenses would be treated under the various types of proposals, and instructed Houlihan Lokey to review the first round bids in more detail over the ensuing days.

On January 19, 2018, the Company terminated access to the initial electronic data room for all bidders.

On January 22, 2018, the Board held a follow-up teleconference with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to review in detail the initial indications of interest received to date. 115 potential bidders in total had been contacted during the strategic review process, of which 53 had executed confidentiality agreements. A total of 22 parties had submitted 26 proposals in aggregate, which included (1) 11 business combination proposals in which stock constituted a portion of the purchase consideration, (2) one all-cash business combination proposal, (3) nine externalization proposals, (4) three proposals to purchase all or a portion of the Company’s investments that were valued below-cost as of December 31, 2017, (5) one all-cash proposal to purchase the Company’s entire investment portfolio, and (6) one preferred equity investment proposal. The Board, with the assistance of representatives of Houlihan Lokey, reviewed the proposals by transaction type and structure, among other items.

On January 24, 2018, the Board held an in-person meeting to further review the initial indications of interest. The Board discussed, with the assistance of representatives of Houlihan Lokey and Eversheds Sutherland, updates to the initial indications of interest received and discussed timing, diligence requirements, necessary approvals and execution risks associated with each type of proposed transaction, among other matters. A consensus was reached among the members of the Board regarding which parties should be invited to participate in the second round of the offer solicitation process and the content of communications to be provided to various bidders. At the conclusion of the meeting, the Board instructed Houlihan Lokey to pursue second round indications of interest from five of the parties, including one all-cash bidder (BSP) proposing an acquisition of the Company’s investment portfolio or, alternatively, a business combination with the Company, two stock acquisition business combination bidders (Party A and Party B) and two externalization bidders (Barings and Party C). In addition, the Board instructed Houlihan Lokey to contact an additional stock acquisition business combination bidder, Party D, to obtain confirmation from Party D that any subsequent bid would be no less than the high end of the range cited in its initial indication of interest, and an additional externalization bidder, Party E, to obtain confirmation from Party E that it would improve its proposal by increasing its commitment to purchase newly issued shares of Company Common Stock to $50 million from $10 million in aggregate amount at the then-current net asset value per share, with the understanding that with such conditions, the parties would be invited to participate in the second round of the process. The other parties that submitted indications of interest proposed acquisition prices, externalization premiums and/or levels of capital support, as applicable, less than those submitted by Barings, BSP and Parties A through E, or otherwise had characteristics that led the Board, with the assistance of Houlihan Lokey and members of the Company’s senior management, to conclude that such indications of interest did not satisfy the objectives of the strategic review process.

Subsequently, on January 27, 2018, Party F submitted an unsolicited revised stock acquisition business combination indication of interest, which moved them into an acquisition price range that was competitive with the other proposals the Board was considering.

On January 29, 2018, the Company opened the electronic data room for parties invited to participate in the second round of the strategic review process.

 

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On January 30, 2018, after discussions among the members of the Board, with the assistance of the Company’s management and representatives of Houlihan Lokey and Eversheds Sutherland, the Board authorized and directed Houlihan Lokey to pursue a second round indication of interest from Party F. In addition, on January 30, 2018, Houlihan Lokey reported to the Board that Parties D and E met the conditions that the Board determined it would require for such parties to participate in the second round of the strategic review process. As a result, the Board authorized and directed Houlihan Lokey to pursue second round indications of interest from eight parties in total.

The second round diligence process was conducted over the following five weeks and included access to a second round electronic data room and various functional area due diligence calls with representatives of the Company’s management. During this period, starting on February 5, 2018, the Company’s management met with all second round bidders, and a number of second round bidders participated in portfolio review sessions or on-site due diligence meetings, including BSP, Barings, Party B, Party C, Party D and Party F. In addition, either the Board or the independent members thereof held meetings with BSP, Barings, Party A, Party B, Party C, Party D and Party F during this period.

On February 8, 2018, during a portion of a regular meeting of the Board, the members of the Board, with the assistance of representatives of Houlihan Lokey and Eversheds Sutherland, reviewed the status of the strategic review process. The Board, with the assistance of Eversheds Sutherland, discussed the draft agreements – including a stock-for-stock merger agreement, a cash merger agreement, a stock purchase/externalization agreement, and the related provisions designed to allow the Board flexibility to satisfy its fiduciary duties to the Company’s stockholders, as well as an investment advisory agreement and administration agreement – to be provided to prospective bidders, as applicable. The Board also discussed, among other items, tax-related matters regarding any externalization proposals, including the potential tax treatment of any cash payment to be received by the Company and its stockholders in exchange for the right to externally manage the Company’s investment portfolio.

During the week of February 12, 2018, the Company uploaded to the electronic data room a second round process letter, which informed the remaining parties participating in the strategic transaction review process that their final transaction proposals, along with mark-ups of the applicable transaction documents and other requested information, were due at the close of business on March 2, 2018, and Houlihan Lokey distributed to such parties drafts of the potential transaction documents for review and markup, as applicable.

On February 23, 2018, the Board held a teleconference, with the representatives of Houlihan Lokey and Eversheds Sutherland in attendance, primarily to receive a status update. During the meeting, the representatives of Houlihan Lokey informed the Board that all parties in the second round of the bidding process, other than Party E, were continuing to perform diligence on the Company. The meeting attendees then discussed that Party E had indicated to Houlihan Lokey and the Company its intent to withdraw from the strategic review process because it believed it could not remain competitive on timing and valuation.

On March 2, 2018, the Company received the following second round indications of interest:

Barings Externalization – Barings’ second round indication of interest to acquire and externalize the management rights to the Company, including the management of the Company’s existing investment portfolio (the “Barings Legacy Externalization Proposal”), stipulated (i) a one-time, up-front cash payment to the Company’s stockholders of $125 million, or $2.60 per share of Company Common Stock, to secure the right to become the external investment adviser to the Company and all of its subsidiaries, (ii) a commitment to invest $100 million in newly issued shares of Company Common Stock at a pre-close adjusted book value, which included an estimated 6% discount to the fair market value of the Company’s December 31, 2017 investment portfolio and adjustments for estimated severance and transaction expenses, and (iii) a commitment to purchase, during the 12 months subsequent to closing, up to $50 million in aggregate amount of Company Common Stock in the open market at market prices below net asset value per share.

 

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With regard to fee structure, Barings proposed a base management fee of 1.375% on total gross assets, including any investments made with borrowings, but excluding cash and cash equivalents. The incentive fee structure included an income-based incentive fee of 20% of pre-incentive fee net investment income with an 8% hurdle rate. The income-based portion of the incentive fee included a 12-quarter lookback and cap starting in 2021, equal to 20% of the cumulative net return during the relevant trailing 12 quarters, less the aggregate incentive fees based on the income paid in the first 11 quarters in the relevant period. The incentive fee structure also included a 20% capital gains fee. Barings also indicated its willingness to waive fees for a period of time to protect targeted dividend yields.

Barings’ second round indication of interest stated that Barings intended to appoint a new board of directors for the Company, which may include one or more of the existing members of the Board. Barings also indicated that it had completed its business due diligence, included a markup of the relevant draft transaction agreements and a completed 1940 Act Section 15(c) questionnaire and was not subject to any financing contingency.

Party A Business Combination – Party A proposed to acquire 100% of the fully diluted shares of common equity of the Company for aggregate gross consideration of between $592.1 million and $612.3 million, or $12.33 per share to $12.75 per share of Company Common Stock. The value consisted of (i) stock consideration of Party A’s shares with a proposed value of $7.05 per share of Company Common Stock (based on a fixed exchange ratio tied to Party A’s December 31, 2017 net asset value per share) and an implied value of $6.63 per share of Company Common Stock (based on the fixed exchange ratio and Party A’s trading value of common stock as of March 2, 2018) and (ii) cash consideration of $5.70 per share from Party A and its external manager, acting solely on its own behalf. Party A’s second round indication of interest did not include a markup of the draft merger agreement and noted that Party A had not yet completed its diligence on the Company’s portfolio. Party A’s second round indication of interest did not include a financing contingency; the cash portion of the purchase price, and any repayment of the Company’s debt was proposed to be financed through a combination of cash on Party A’s balance sheet and available undrawn amounts under Party A’s existing credit facilities. In addition, Party A’s second round indication of interest required proceeding in negotiations on an exclusive basis, despite the fact that Party A had not yet completed its due diligence on the Company or the investment portfolio.

Party B Business Combination – Party B proposed to acquire 100% of the fully diluted common equity of the Company for aggregate gross consideration of between $540.5 million and $606.3 million, or approximately $11.25 per share to $12.63 per share of Company Common Stock. The consideration consisted of (i) Party B’s shares of common stock with a proposed value of $11.76 per share of Company Common Stock (based on Party B’s 30-day-trailing volume-weighted-average trading price as of March 1, 2018) and an implied value of $10.96 per share of Company Common Stock (based on the proposed illustrative fixed exchange ratio and Party B’s trading value of common stock as of March 1, 2018), (ii) a Contingent Value Right (“CVR”) estimated to pay between $0.00 and $0.57 per share contingent on the future performance of selected investments in the Company’s investment portfolio, and (iii) potential additional value ascribed to the stock consideration from a management fee waiver from Party B’s external manager for ten quarters after closing, which based on the Company’s stockholders’ 40% ownership, on a pro forma basis, of the combined entity under Party B’s second round indication of interest, was approximately $0.30 per share. The Board, with the assistance of Houlihan Lokey, noted that absent future fee waivers of $0.30 per share, the proposed value of Party B’s second round indication of interest ranged from $10.96 per share to $12.33 per share.

Party B’s second round indication of interest included a markup of the draft merger agreement and was not subject to any financing contingency. Party B’s second round indication of interest also stated that it had completed its portfolio due diligence, with only certain confirmatory diligence items remaining, and required a 14-day exclusivity period to complete negotiations.

Party C Externalization – Party C proposed two separate offers to externalize the Company’s management function in its second round indication of interest, both of which contemplated the management of the Company’s existing investment portfolio, and neither of which required any equity or debt offering or other

 

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third-party financing. Party C’s second round indication of interest also stated that it had substantially completed its portfolio due diligence, and that its second round indication of interest was contingent on entering into a three-week exclusivity agreement with the Company by March 9, 2018.

The first option under Party C’s second round indication of interest (“Party C Second Round Option #1”) included, among other items, (1) a one-time payment of $137.5 million up-front cash consideration, or $2.86 per share of Company Common Stock, in exchange for the right of Party C or one of its affiliates to have the management rights of the Company and its subsidiaries; (2) subject to 1940 Act limitations, a commitment to (a) purchase $10 million in aggregate amount of Company Common Stock in the open market and (b) make an investment of $5 million in newly issued shares of Company Common Stock; and (3) a commitment by Party C’s management (on a collective basis) to personally purchase $2 million of Company Common Stock in the open market.

With regard to the fee structure proposed in Party C Second Round Option #1, Party C proposed a base management fee ranging between 1.375% on total assets of up to $1.25 billion, 1.25% on total assets above $1.25 billion up to $2.5 billion and 1.00% on total assets above $2.5 billion. The incentive fee structure included an income-based incentive fee of 10% of net investment income, with a 7% hurdle rate, subject to a three-year total return requirement, which would result in the net investment income amount utilized for the income-based incentive fee calculation being reduced to the extent of any net realized losses and net unrealized depreciation during the applicable three-year period, beginning upon closing of the externalization transaction. Party C Second Round Option #1 also included a 10% capital gains fee.

In addition, Party C Second Round Option #1 included a cap on expenses under the administration agreement proposed to be entered into between the Company and Party C’s proposed administrator at 0.50% of total assets for one year, excluding interest expense, the base management fee, the capital gains fee, the income-based incentive fee, fees and expenses directly related to the externalization and any other non-recurring fees and expenses. After one year, Party C proposed that such cap on expenses would be revisited between the Company and Party C’s proposed administrator and subject to the parties’ mutual agreement.

The second option under Party C’s second round indication of interest (“Party C Second Round Option #2”) included, among other items, (1) a one-time payment of $125 million up-front cash consideration, or $2.60 per share of Company Common Stock, in exchange for Party C or one of its affiliates to secure the right to become the external investment adviser to the Company and its subsidiaries; (2) subject to 1940 Act limitations, a commitment to (a) purchase $10 million in aggregate amount of Company Common Stock in the open market and (b) make an investment of $5 million in newly issued shares of Company Common Stock; and (3) a commitment by Party C’s management (on a collective basis) to personally purchase $2 million of Company Common Stock in the open market.

With regard to the fee structure proposed in Party C Second Round Option #2, Party C proposed a base management fee ranging between 1.25% on total assets of up to $1.25 billion, 1.125% on total assets above $1.25 billion up to $2.5 billion and 1.00% on total assets above $2.5 billion. The incentive fee structure included an income-based incentive fee of 10% of net investment income, with a 7% hurdle rate, subject to a three-year total return requirement, which would result in the net investment income amount utilized for the income-based incentive fee calculation being reduced to the extent of any net realized losses and net unrealized depreciation during the applicable three-year period, beginning upon closing of the externalization transaction. Party C Second Round Option #2 also included a 10% capital gains fee.

In addition, Party C Second Round Option #2 included a cap on expenses under the administration agreement proposed to be entered into between the Company and Party C’s proposed administrator at 0.50% of total assets for one year, excluding interest expense, the base management fee, the capital gains fee, the income-based incentive fee, fees and expenses directly related to the externalization and any other non-recurring fees and expenses. After one year, Party C proposed that such cap on expenses would be revisited between the Company and Party C’s proposed administrator and subject to the parties’ mutual agreement.

 

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Party D Business Combination – Party D proposed to acquire 100% of the diluted common equity of the Company (including shares of restricted stock net of shares retired at the offer price to satisfy the estimated tax withholding due upon the vesting of restricted stock and assuming no incremental stock, restricted stock, options or incentive awards issued between signing and closing) for gross aggregate consideration of between $545.4 million and $547.8 million, or $11.45 per share to $11.50 per share of Company Common Stock. The value consisted of (i) stock consideration of Party D’s shares with a proposed value of $9.27 per share of Company Common Stock (based on a fixed exchange ratio and Party D’s year-to-date average share price as of March 1, 2018) and an implied value of $9.22 per share of Company Common Stock (based on the fixed exchange ratio and Party D’s trading value of common stock as of March 2, 2018), and (ii) cash consideration of $2.23 per share, which comprised of (a) $1.53 per share from existing cash balances, as well as committed debt capacity at Party D, and (b) $0.70 per share of cash contributed by Party D’s external manager to facilitate the transaction.

Party D’s second round indication of interest included a markup of the draft merger agreement and was not subject to any financing contingency. Party D’s second round indication of interest also stated that it had completed its portfolio due diligence, with only certain confirmatory diligence items remaining. Party D stated that it would expect the Company to enter into a 30-day exclusivity period if negotiations proceeded.

On March 3, 2018, the Board held a teleconference, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to discuss the status of the strategic review process. At this meeting, the Board, with the assistance of representatives of Houlihan Lokey, reviewed and discussed the second round indications of interest that the Company had received to date, including from Barings and Party A, Party B, Party C and Party D, and the representatives of Houlihan Lokey informed the Board that Houlihan Lokey would provide a more detailed analysis of each bid on March 6, 2018. The representatives of Houlihan Lokey informed the Board that Party F had indicated that it would submit a second round indication of interest in the ensuing days. The representatives of Houlihan Lokey also informed the Board that BSP was still evaluating its second round indication of interest and that it expected to provide such indication of interest on March 5, 2018. During the meeting, the Board also discussed, with the assistance of representatives of Houlihan Lokey, potential adjustments to the stock consideration from the applicable business combination bidders – Party A, Party B and Party D – due to current stock trading prices and other considerations. The representatives of Houlihan Lokey also informed the Board that Party A, which had not yet submitted a markup of the draft merger agreement or completed its diligence on the Company’s portfolio, had exhibited a decrease in activity in the second round electronic data room.

On March 5, 2018, the Company received a second round indication of interest from BSP, which included two proposals and indicated that BSP had completed its business and financial due diligence, other than confirmatory items.

The first proposal under BSP’s second round indication of interest proposed that various affiliated funds of BSP would acquire all of the Company Common Stock for an aggregate cash amount of approximately $582.0 million, or approximately $12.12 per share of Company Common Stock (the “BSP Second Round Stock Sale Proposal”).

The second proposal under BSP’s second round indication of interest proposed that various affiliated funds of BSP would acquire the Company’s entire investment portfolio in exchange for a cash amount of approximately $984.2 million, or approximately 96.8% of the Company’s investment portfolio fair market value as of December 31, 2017. This proposal, after repayment of certain debt obligations and transaction expenses, implied a per share net asset value of approximately $12.69 (the “BSP Second Round Asset Purchase Proposal”).

Neither the BSP Second Round Stock Sale Proposal nor the BSP Second Round Asset Purchase Proposal included any financing contingencies. In addition, BSP’s second round proposals included an outline of BSP’s material comments to the draft merger agreement and stated that BSP was prepared to provide a draft asset purchase agreement if the parties were to move forward on that basis.

 

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On March 6, 2018, Party F delivered its second round indication of interest to the Company. Party F proposed to acquire 100% of the fully diluted common equity of the Company for an aggregate gross consideration of between $488.2 million and $573.0 million, or approximately $10.25 per share to $12.00 per share of Company Common Stock. Party F’s proposal presented two options to the Company. The value of the first option (“Party F Second Round Option #1”) consisted of (i) stock consideration of Party F’s shares with a proposed value of approximately $1.71 per share of Company Common Stock (based on Party F’s proposed fixed exchange ratio), (ii) cash consideration of $7.29 per share, and (iii) a CVR estimated to pay between $0.00 and $3.00 per share in cash, the value of which was contingent on the future performance of select investments in the Company’s investment portfolio, payable shortly after December 31, 2021. The value of the second option (“Party F Second Round Option #2”) consisted of (i) stock consideration of Party F’s shares with a proposed value of approximately $2.96 per share of Company Common Stock (based on Party F’s proposed fixed exchange ratio) and (ii) cash consideration of $7.29 per share. With respect to both options, Party F required a 30-day exclusivity period in order to proceed further with negotiations.

Also on March 6, 2018, the representatives of Eversheds Sutherland provided the Board, by email, summary, side-by-side comparisons of the bidder markups of (or comments on) the drafts of (1) the stock purchase/externalization agreement from Barings and Party C, and (2) the merger agreements from Party B and Party D, which portion of the comparison also included notes with respect to BSP’s outlined issues received on March 5, 2018. The representatives of Eversheds Sutherland noted that the summary comparison did not include information regarding Party A due to the fact that Party A had not submitted a markup of the draft merger agreement.

Later on March 6, 2018, the Board held an in-person meeting, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, at which the Board, with the assistance of Houlihan Lokey and Eversheds Sutherland, reviewed in detail the second round indications of interest, the interested parties’ proposed acquisition prices and the components thereof and potential adjustments to consideration included in the indications of interest, among other items. The representatives of Houlihan Lokey generally reviewed with the Board the process that had been undertaken with respect to analyzing potential strategic transactions to date and informed the Board that Houlihan Lokey had conducted a preliminary review of Party F’s second round indication of interest, which had been received earlier in the day. The Board, after discussions with the assistance of Houlihan Lokey, determined that Party F’s second round indication of interest was not as competitive as other second round indications of interest already received. The Board, with the assistance of the representatives of Houlihan Lokey, then further discussed the fact that Party A had not completed its diligence and highlighted the associated transaction execution risks. The Board and Houlihan Lokey also discussed Party B’s CVR consideration and the transfer restrictions and other related attributes. The Board then discussed with the representatives of Houlihan Lokey the Barings Legacy Externalization Proposal, Party C Second Round Option #1 and Party C Second Round Option #2.

During the March 6 meeting, representatives of Houlihan Lokey reviewed with the Board a summary of the execution alternatives, including the Dual Transaction Option, and potential advantages and disadvantages of each, and discussed the changes in proposals received from the initial indications of interest to the second round indications of interest. After noting that the BSP Second Round Asset Purchase Proposal would eliminate the market’s perception of risk in, and the volatility associated with, the Company’s existing investment portfolio due to the all-cash consideration, the Board, with the assistance of the representatives of Houlihan Lokey, further discussed the possibility of executing the Dual Transaction Option. With regard to the externalization portion of the Dual Transaction Option, the Board, with the assistance of the representatives of Houlihan Lokey, noted that because of the reduced economics associated with managing a portfolio initially consisting of all cash, the value of the consideration proposed in the current externalization bids would likely be decreased in connection with any bid relating to the Dual Transaction Option, and the proposed fee structures would likely need to be adjusted to better match the timeframe for transitioning to a permanent private debt portfolio from cash. The Board also considered that such a dual transaction could result in aggregate consideration to the Company’s stockholders at a premium to the Company’s net asset value. The representatives of Houlihan Lokey discussed approaching

 

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Barings and Party C to request follow-up information on their proposals, including the submission of additional details on their business plans and investment strategies, as well as to determine their interest level in submitting a proposal to manage a portfolio initially consisting of all cash, which would allow the Board to assess more effectively the Dual Transaction Option. The Board noted, however, that it would need further detail on Barings’ and Party C’s origination capabilities and investment strategies before selecting the Dual Transaction Option instead of the other available options. The Board then further discussed, with the assistance of the Houlihan Lokey and Eversheds Sutherland representatives, potential execution risks and timing of each type of proposed transaction, and potential tax implications of the premiums proposed to be paid in the externalization transactions, among other items. The Board also discussed, with the assistance of representatives of Houlihan Lokey, the fact that the Dual Transaction Option was contingent on executing the all-cash asset sale contemplated by the BSP Second Round Asset Purchase Proposal, which the Board determined represented the most valuable consideration for the Company’s stockholders out of all the business combination transactions, considering, among other items, the significant stock equity consideration components (including the difference between the issuance prices and then-current trading prices) proposed by Party A, Party B, Party D and Party F and/or the execution risks associated with entering into a business combination transaction with such parties.

Following further discussion at the March 6 meeting, the Board authorized and directed Houlihan Lokey to engage with Party C in order to obtain a firm proposal on the terms of an externalization transaction to manage a portfolio initially consisting of all cash. The Board also emphasized its desire to keep available as strategic transaction options the Barings Legacy Externalization Proposal, Party C Second Round Option #1 and Party C Second Round Option #2.

On March 7, 2018, the Board held a teleconference, with the representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to receive an update on Houlihan Lokey’s discussions with Party C regarding its interest in participating in the externalization portion of the Dual Transaction Option. The representatives of Houlihan Lokey informed the Board that Party C was at that point not interested in participating in the externalization portion of the Dual Transaction Option. The Board, with the assistance of the representatives of Houlihan Lokey, further discussed the investment performance of Barings and Party C, among other items. Following further discussions about Barings’ origination capabilities and platform, the Board authorized and directed Houlihan Lokey to approach Barings to solicit their interest in, and potential terms of, an externalization transaction to manage a portfolio initially consisting of all cash in connection with the Dual Transaction Option. The Board discussed that, in the event that neither Party C nor Barings was interested in participating in the externalization portion of the Dual Transaction Option, the BSP Second Round Stock Sale Proposal, the BSP Second Round Asset Purchase Proposal, the Barings Legacy Externalization Proposal, Party C Second Round Option #1 and Party C Second Round Option #2 were still viable strategic transaction alternatives.

On March 8, 2018, Barings submitted a letter to the Board, along with supplemental materials, providing more information about the Barings Legacy Externalization Proposal and Barings’ track record in general. The letter set forth Barings’ perspective on go-forward investment strategy, dividends, and cost allocations, and noted that Barings intended to transition the Company’s portfolio to a senior-secured strategy focused primarily on first lien loans. Barings’ letter noted its commitment to generate a minimum 8% dividend yield for the Company’s stockholders, which was a modest decrease from the current yield. Barings’ letter also emphasized that its proposed 1.375% base management fee and general and administrative expense ratio would be among the lowest in the BDC market.

On March 9, 2018, the Board held a teleconference, with the representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to discuss the letter and supplemental materials received from Barings on March 8, 2018 and the feedback Houlihan Lokey had received from Barings regarding its interest in participating in the externalization portion of the Dual Transaction Option. During the meeting, the representatives of Houlihan Lokey informed the Board that Barings was interested in managing a portfolio initially consisting of all cash, but noted that, given the reduced economics associated with managing a portfolio

 

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initially consisting of all cash, Barings would likely reduce its proposed upfront cash consideration to the Company’s stockholders as well as its overall capital commitment to purchase shares of Company Common Stock. In addition, given that the portfolio would initially consist of all cash and subsequently be transitioned to a portfolio consisting primarily of middle market directly originated loans, representatives of Houlihan Lokey informed the Board that Barings might also reduce the proposed management fee to better match the portfolio transition timeframe. The Board noted that Barings, due to its significant liquid portfolio capabilities and robust origination platform capabilities, may be better suited than Party C in managing the transition of the portfolio from its initial all-cash composition. Houlihan Lokey then informed the Board that Barings intended to submit a written proposal for the externalization portion of the Dual Transaction Option in the ensuing days. Houlihan Lokey also informed the Board that Party C had re-initiated, unsolicited, discussions with Houlihan Lokey about participating in the externalization portion of the Dual Transaction Option. In addition, Houlihan Lokey informed the Board that Party A had informed Houlihan Lokey that its proposal no longer required exclusivity, but that Party A requested assurance that it was the preferred partner. After discussions, the Board informed Houlihan Lokey that it was not prepared to provide Party A with such assurance due to the risks of diverting focus from the negotiations with BSP, Barings, and Party C, and considering the execution risks of a transaction with Party A due to the fact that Party A had not submitted a markup of the draft merger agreement and had not completed its diligence on the Company’s investment portfolio.

At the March 9 meeting, the Board further discussed the BSP Second Round Stock Sale Proposal and the BSP Second Round Asset Purchase Proposal, along with all externalization options with Barings and Party C, including in connection with the Dual Transaction Option. The Board also discussed, with the assistance of the representatives of Houlihan Lokey, the timing of receiving Barings’ and Party C’s final proposals, and requested Houlihan Lokey to communicate with BSP to determine whether it was still prepared to execute on the BSP Second Round Stock Sale Proposal and the BSP Second Round Asset Purchase Proposal. Thereafter, the Board authorized and directed the representatives of Houlihan Lokey to engage in further discussions with Party C to obtain their best and final proposal for an externalization transaction to manage a portfolio initially consisting of all cash in connection with the Dual Transaction Option and to determine whether Party C intended to revise Party C Second Round Option #1 or Party C Second Round Option #2 in any manner. The Board also authorized and directed the representatives of Eversheds Sutherland to prepare and deliver to BSP a draft asset purchase agreement for review and markup.

Later in the afternoon on March 9, 2018, the representatives of Houlihan Lokey informed the Board by email that they had spoken with the representatives of BSP who had communicated that BSP was still prepared to execute on both the BSP Second Round Stock Sale Proposal and the BSP Second Round Asset Purchase Proposal. Houlihan Lokey also informed the Board that BSP had indicated its preference to execute on the BSP Second Round Asset Purchase Proposal.

During the evening of March 9, 2018, Party C submitted a proposal (which was further detailed in a presentation delivered on March 12, 2018) that contained revisions to both Party C Second Round Option #1 and Party C Second Round Option #2, but in which Party C declined to participate in the externalization portion of the Dual Transaction Option. Party C’s revisions to Party C Second Round Option #1 and Party C Second Round Option #2 (“Party C Revised Option #1” and “Party C Revised Option #2,” respectively, and collectively, the “Revised Party C Proposals”), both included the following increases or enhancements to Party C’s proposed consideration: (1) Party C would purchase 5% of nearly every investment portfolio asset held by the Company (representing an investment of approximately $50 million), and (2) if the transaction was structured to allow for the upfront management-rights-related cash payment to be deductible or amortizable for tax purposes, Party C would split such tax benefits with the Company. Party C’s presentation also stated that Party C’s plans for the Company would allow covering the existing $0.30 per share quarterly dividend and in the near future have the flexibility to either (a) grow a “reserve” via spillover taxable income, or (b) increase the dividend. Party C also indicted that it would migrate the Company’s portfolio to first lien, senior secured investments. As part of its proposal, Party C requested that the Company agree to proceed with it on an exclusive basis by 5:00 p.m. ET on March 12, 2018, after which its proposal would be rescinded.

 

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On March 12, 2018, Barings submitted a proposal to the Board to participate in the externalization portion of the Dual Transaction Option (the “Barings Dual Transaction Externalization Proposal”). Based upon the scale, scope, liquid portfolio capabilities, direct origination capabilities and market resources of Barings, the Barings Dual Transaction Externalization Proposal set forth an investment strategy that indicated that Barings had the ability to rapidly invest the cash proceeds of any asset sale transaction and construct a new investment portfolio for the Company in a manner perceived by the Board to be more efficient than Party C. Given the increased origination efforts required with a portfolio initially consisting of all cash, as well as the concomitant reduction in the management and incentive fees which could be earned by Barings during the period prior to the time that the Company’s investment portfolio would be fully or substantially invested in middle market directly originated loans, the Barings Dual Transaction Externalization Proposal proposed a reduction to $85 million from $125 million in cash consideration to become the Company’s investment adviser, the majority of which would be paid to the Company’s stockholders at closing, conditioned upon approval of the transactions. The Barings Dual Transaction Externalization Proposal also proposed (i) a $100 million purchase of outstanding shares of Company Common Stock via a Dutch tender offer or other agreed-upon approach, and (ii) a commitment to purchase, during the 12 months subsequent to closing, up to $50 million in aggregate amount of Company Common Stock in the open market at market prices below net asset value, which remained unchanged from the Barings Legacy Externalization Proposal.

With regard to fee structure, rather than the 1.375% management fee proposed in its second round indication of interest to manage the Company’s existing portfolio, the Barings Dual Transaction Externalization Proposal proposed a tiered base management fee structure of (i) 1% of gross assets, less cash, in 2018, (ii) 1.125% of gross assets, less cash, in 2019, and (iii) 1.375% of gross assets, less cash, in 2020 and thereafter. The proposed incentive fee structure included an income-based incentive fee of 20% of pre-incentive fee net investment income, with an 8% hurdle rate, which remained unchanged from the Barings Legacy Externalization Proposal. The income-based portion of the incentive fee, as proposed in the Barings Dual Transaction Externalization Proposal, included an incentive fee cap and lookback (on a go-forward basis) beginning January 1, 2020. Moreover, the Barings Dual Transaction Externalization Proposal requested certain protections for Barings if it were to be approved as the new investment adviser for the Company, included among other items, the ability to elect 100% of the Company’s board of directors (as a staggered board).

With regard to the investment strategy set forth in the Barings Dual Transaction Externalization Proposal for managing a portfolio initially consisting of all cash, Barings indicated that the cash would be initially invested into liquid loans, high-yield bonds and other liquid assets in short order after the completion of the transaction and that middle market direct loans would be originated and replace the liquid investments over an estimated two-year time period, focusing on directly originated senior secured loans. In addition, the Barings Dual Transaction Externalization Proposal indicated that, during the conversion period, dividends would be based on net investment income; no incentive fee would be earned unless a yield of 8% or greater was achieved. Barings also stated it was willing to consider waiving fees to accomplish a 6% dividend yield in the first four quarters post-close and a 7% dividend yield in the first five to eight quarters post-close.

 

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Later on March 12, 2018, Houlihan Lokey, at the direction of the Board, delivered a draft asset purchase agreement to BSP for its review and markup.

On March 13, 2018, BSP submitted a proposal to externalize the Company’s management function in conjunction with the BSP Second Round Asset Purchase Proposal (the “BSP Externalization Proposal”). The BSP Externalization Proposal included a $25 million upfront cash payment and proposed (i) a 1.5% management fee on gross assets, (ii) a 20% incentive fee above a 7% hurdle and (iii) fee waivers during the first year post-closing.

Also on March 13, 2018, the Board held a teleconference, with the representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to review in detail the Barings Legacy Externalization Proposal, the Barings Dual Transaction Externalization Proposal, the BSP Externalization Proposal, and the Revised Party C Proposals. The Board discussed, with the assistance of Houlihan Lokey and Eversheds Sutherland, the differences in the combined investment amounts between the Barings Legacy Externalization Proposal ($275 million) and the Barings Dual Transaction Externalization Proposal ($235 million), and the components thereof, including the potential tax implications of each proposal. The Board also discussed, with the assistance of Houlihan Lokey and Eversheds Sutherland, Barings’ investment strategy in each option, as compared to Party C’s investment strategy, before discussing the enhancements in the Revised Party C Proposals. Houlihan Lokey informed the Board that Party C had extended its exclusivity request to 5:00 p.m., ET on March 13, 2018, after which it indicated it would rescind the proposal.

Also during the March 13 teleconference, the Board engaged in an extensive discussion about, among other items, the benefits of the Dual Transaction Option, including that it might result in the delivery of the highest value to the Company’s stockholders as compared to the BSP Second Round Asset Purchase Proposal and the stand-alone externalization proposals in isolation, and would eliminate the market’s perception of risk in, and the volatility associated with, the Company’s existing investment portfolio. The Board also discussed the execution risks associated therewith, noting specifically the increased execution risk of negotiating with and between two counterparties and closing the respective transactions. The Board noted that Barings and BSP had indicated that they may be willing to consider hiring the Company’s employees, which could potentially decrease severance costs for the Company, the benefit of which would accrue to stockholders, and also discussed the origination capabilities, platform and investment strategy proposed by Barings in connection with the Dual Transaction Option and the capital support provided by each of the externalization proposals. The Board noted the post-closing capital support advantages of the Barings Legacy Externalization Proposal and the Barings Dual Transaction Externalization Proposal compared to the Revised Party C Proposals. In addition, the Board noted the fact that Party C had not submitted a proposal to participate in the externalization portion of the Dual Transaction Option, and thus, entering into an externalization transaction with Party C would preclude monetization of the Company’s investment portfolio for cash at a price close to the portfolio’s most recently determined fair value in connection with the BSP Second Round Asset Purchase Proposal and render unavailable the potential benefits thereof.

Prior to the conclusion of the March 13 teleconference, the Board authorized and directed Houlihan Lokey to coordinate an in-person meeting with Barings and the Board to discuss the Barings Dual Transaction Externalization Proposal and related matters in detail, and authorized and directed Eversheds Sutherland to continue to negotiate the draft asset purchase agreement with BSP relating to the BSP Second Round Asset Purchase Proposal. The Board also directed the representatives of Houlihan Lokey to communicate to Barings that the Company would require the $85 million cash consideration payable to the Company’s stockholders in the Barings Dual Transaction Externalization Proposal to be paid in full at closing in order to consider proceeding with such transaction. The Board also requested that Houlihan Lokey confirm that Barings would commit to

 

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making a $100 million investment in newly issued shares of Company Common Stock at closing and would extend its commitment to purchase up to $50 million in aggregate amount of Company Common Stock in the open market for an additional 12 months (two years in total) post-closing. The Board also directed Houlihan Lokey to inform Party A and Party B that they would be removed from consideration in light of the fact that they would need to conduct additional diligence (in the case of Party A), and improve their bids in order to be competitive with the other proposals which were under consideration by the Board at that time (including the BSP Second Round Asset Purchase Proposal, the BSP Second Round Stock Sale Proposal, the Barings Legacy Externalization Proposal, the Revised Party C Proposals, the BSP Externalization Proposal and the Barings Dual Transaction Externalization Proposal). The Board noted that engaging in further negotiations with Party A and/or Party B entailed execution risks and increased the risk from a timing perspective that the Company would not be able to execute a transaction with BSP, Barings, Party C or any potential Dual Transaction Option.

On March 14, 2018, the Board and the representatives of Houlihan Lokey met in person with the senior management team from Barings and representatives of its financial advisor, Wells Fargo Securities, LLC, to review in detail the Barings Dual Transaction Externalization Proposal, including among other topics, Barings’ business plan, key considerations of the proposal, corporate governance matters and the completed questionnaire prepared by Barings pursuant to Section 15(c) of the 1940 Act, which included, for the Board’s evaluation, information about Barings’ capacity as an investment adviser to the Company. During the meeting, Barings confirmed that it would revise the Barings Dual Transaction Externalization Proposal to include (1) $85 million cash consideration paid in full at closing to the Company’s stockholders, (2) a commitment to invest $100 million in newly issued shares of Company Common Stock at net asset value, determined after giving effect to the Asset Sale and the transactions contemplated thereby, at closing, and (3) a commitment to purchase up to $50 million in aggregate amount of Company Common Stock in the open market for an additional 12 months (two years in total) post-closing (the “Revised Barings Dual Transaction Externalization Proposal”). The attendees also discussed the Barings Legacy Externalization Proposal, the terms of which had not changed. Barings indicated its willingness to undertake either of the Revised Barings Dual Transaction Externalization Proposal or the Barings Legacy Externalization Proposal.

Also on March 14, 2018, the Company received an outline of BSP’s comments to the draft asset purchase agreement previously provided.

On March 15, 2018, the Board held a teleconference, with the representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to discuss the strategic review process generally and review all updates to proposals received to date. Representatives of Houlihan Lokey reviewed with the Board the financial terms of the proposals that had been received. The Board, with the assistance of the representatives of Houlihan Lokey, discussed the potential impact of proposed post-transaction capital support from each relevant party on the Company Common Stock post-externalization outside of the Dual Transaction Option. The attendees discussed timing matters and execution risks relating to the Barings Legacy Externalization Proposal, the Revised Barings Dual Transaction Externalization Proposal (coupled with the BSP Second Round Asset Purchase Proposal), the BSP Second Round Stock Sale Proposal and the Revised Party C Proposals. The Board also considered potential market price ranges post-transaction in the Dual Transaction Option, noting the potential for increased public confidence in the fully transitioned portfolio in the long term. During the meeting, representatives of Eversheds Sutherland also reviewed with the Board a summary of the key contractual terms and related issues raised in BSP’s comments on the draft asset purchase agreement that had been provided by BSP, and noted considerations under the 1940 Act in the context of the externalization proposals. Afterwards, upon further consideration of the potential benefits of the Dual Transaction Option, as previously noted during the March 13, 2018 teleconference, and considering the confirmed consideration, capital commitment and post-transaction capital support in the Revised Barings Dual Transaction Externalization Proposal, the Board informed the representatives of Houlihan Lokey and Eversheds Sutherland of its decision to pursue the Dual Transaction Option as a combination of the BSP Second Round Asset Purchase Proposal and the Revised Barings Dual Transaction Externalization Proposal (the “BSP/Barings Dual Transaction”). The Board then directed Houlihan Lokey and Eversheds Sutherland to proceed in negotiations with BSP and Barings accordingly.

 

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During the March 15 meeting, the Board and the representatives of Houlihan Lokey and Eversheds Sutherland discussed the form of opinion that Houlihan Lokey would, if requested by the Board and appropriate, render to the Board as to the fairness, from a financial point of view, to the Company or its stockholders, as applicable, of the consideration to be received by such party or parties in a transaction, given the potential execution of a Dual Transaction Option. The parties discussed, among other things, the ability to conduct financial analyses sufficient to support an opinion of such nature for the externalization transaction portion of the potential Dual Transaction Option when the asset sale transaction portion of the potential Dual Transaction Option would result in the Company having a portfolio initially consisting of all cash with no operating history and, in all likelihood, no reliable financial projections as to its future financial performance. Accordingly, Houlihan Lokey informed the Board that with respect to the proposed BSP/Barings Dual Transaction, it would, if requested and appropriate, render to the Board an opinion as to the fairness, from a financial point of view, to the Company of the consideration to be received by it in the asset sale transaction portion of the BSP/Barings Dual Transaction and such opinion would not address any aspect or implication of the externalization transaction. The representatives of Eversheds Sutherland then discussed with the Board the standard of conduct and the information to be reviewed and considered in lieu of a fairness opinion on an externalization transaction, including the 1940 Act Section 15(c) questionnaire and accompanying information.

On March 15, 2018, the Company terminated access to the electronic data room for all parties other than Barings and BSP.

On March 16, 2018, Party F submitted a supplemental proposal letter, which revised the terms of Party F Second Round Option #1 to subject each CVR to a minimum total value of $2.00, noting that holders of a CVR would in no event receive less than $2.00. Additionally, Party F noted that the holders of a CVR could receive more than $3.00 per share, to the extent the amounts recovered by the CVR were in excess of $3.00 per share.

Also on March 16, 2018, representatives of Eversheds Sutherland and Barings’ outside counsel, Dechert LLP (“Dechert”), engaged in discussions regarding the structure of the externalization transaction. Subsequent discussions were held on March 17 and March 18, 2018.

On the morning of March 17, 2018, the Board, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, held a teleconference to review in detail overlap issues pertaining to the BSP/Barings Dual Transaction. The Board also discussed, with the assistance of Eversheds Sutherland, the contractual terms of the draft asset purchase agreement with BSP and the draft stock purchase and externalization agreement with Barings, including the draft investment advisory agreement and administration agreement related thereto. The Board also discussed, with the assistance of Eversheds Sutherland, Barings’ desire that the asset sale and the Revised Barings Dual Transaction Externalization Proposal be considered together for purposes of determining whether any competing bids could be considered “superior proposals,” given the interaction between the two proposals and the importance of the counterparties to each in obtaining stockholder approval, and fiduciary matters relating thereto.

On March 18, 2018, representatives of Eversheds Sutherland delivered an updated draft asset purchase agreement to BSP’s outside counsel, Ropes & Gray LLP (“R&G”).

On March 19, 2018, representatives of Eversheds Sutherland delivered updated drafts of the investment advisory agreement and administration agreement, along with a draft stock purchase and externalization agreement, to Dechert.

On March 20, 2018, representatives of R&G delivered to Eversheds Sutherland a revised draft of the asset purchase agreement.

On March 20, 2018, representatives of Dechert delivered to Eversheds Sutherland updated drafts of the investment advisory agreement and the administration agreement.

 

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On March 21, 2018, representatives of Dechert delivered to Eversheds Sutherland a revised draft of the stock purchase and externalization agreement.

Also on March 21, 2018, representatives from Eversheds Sutherland distributed final copies of the draft investment advisory agreement and administration agreement by and between the Company and Barings, or a Barings affiliate, to the Board for final review.

In the morning of March 22, 2018, representatives of the Company’s management and representatives of Houlihan Lokey held a teleconference with BSP to discuss business issues relating to the draft asset purchase agreement.

Later on March 22, 2018, representatives of the Company’s management and representatives of Houlihan Lokey and Eversheds Sutherland held multiple conference calls with Barings and its financial and legal advisors to discuss business and legal issues relating to the draft stock purchase and externalization agreement, overlap issues with the draft asset purchase agreement by and between the Company and BSP, and matters relating to the schedules to the draft stock purchase and externalization agreement.

In the afternoon of March 22, 2018, the Board held an in-person meeting to consider approval of the Advisory Agreement and the Administration Agreement. Following discussion and review of material information, the Board approved the Advisory Agreement and the Administration Agreement, subject to (1) approval of the sale of all or substantially all of the Company’s assets to BSP or one or more of its affiliates, (2) approval of the Advisory Agreement by the Company’s stockholders and (3) consummation of the sale of all or substantially all of the Company’s assets to BSP or one or more of its affiliates and the externalization transaction with Barings. See “Proposal 3 – Approval of the Advisory Agreement – Board Approval of the Advisory Agreement” for more information regarding the Board’s approval of the Advisory Agreement.

During the in-person meeting on March 22, 2018, the Board also discussed with representatives of Houlihan Lokey and Eversheds Sutherland the status of negotiations with regard to the BSP/Barings Dual Transaction, including the status of the draft asset purchase agreement negotiations with BSP and status of the draft stock purchase and externalization agreement negotiations with Barings. Representatives from Houlihan Lokey also reviewed with the Board Houlihan Lokey’s preliminary financial analyses with respect to the Company and the proposed asset sale and supplemental financial information with respect to the proposed externalization transaction. The representatives of Eversheds Sutherland then proceeded to provide an overview of the proposed transactions, the proposed contingent nature of the asset sale and the externalization transaction on one another, and the relevant agreements, including a discussion of the termination fees in the context of the dual nature of the transactions, and the Board’s fiduciary responsibilities.

On March 23, 2018, representatives of the Company and its outside litigation counsel held a teleconference with representatives of Barings and its outside legal counsel to discuss updates relating to pending legal proceedings at the Company. See our annual report on Form 10-K for the year ended December 31, 2017, attached as Appendix F to this proxy statement, for more information relating to such legal proceedings.

Later on March 23, 2018, representatives of the Company’s management and Houlihan Lokey held a teleconference with BSP during which BSP performed certain bringdown diligence procedures on the Company’s investment portfolio. Following the teleconference, BSP and the Company agreed to a $3 million purchase price reduction to $981,178,542, or approximately 96.5% of the fair market value of the Company’s December 31, 2017 investment portfolio.

On March 23, 2018, representatives of Eversheds Sutherland delivered to R&G a revised draft of the asset purchase agreement.

On March 24, 2018, representatives of R&G delivered to Eversheds Sutherland a revised draft of the asset purchase agreement, and Eversheds Sutherland delivered to Dechert a revised draft of the stock purchase and externalization agreement.

 

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On March 25, 2018, representatives of Dechert delivered to Eversheds Sutherland a revised stock purchase and externalization agreement.

On the evening of March 27, 2018, the Board met on a teleconference with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to receive an update on the negotiation process with BSP and Barings and to review Houlihan Lokey’s preliminary financial analyses with respect to the Company and the proposed asset sale and supplemental financial information with respect to the proposed externalization transaction. In addition, Eversheds Sutherland provided an overview of the recently passed Small Business Credit Availability Act, which permits BDCs such as the Company to decrease their asset coverage ratio to 150% from 200% upon approval from the board of directors or stockholders. Following such presentation, the Board, with the assistance of Houlihan Lokey and Eversheds Sutherland, discussed the effect of such legislation with respect to the externalization aspect of the BSP/Barings Dual Transaction. Representatives of Eversheds Sutherland then provided an overview of the proposed transactions, including a summary of the key terms in the draft asset purchase agreement and the draft stock purchase and externalization agreement and any remaining open items in each. The Board, with the assistance of the representatives from Houlihan Lokey and Eversheds Sutherland, also discussed Barings’ request to include amendments to the Company’s articles of amendment and restatement (the “Articles”) as a closing condition to the externalization transaction and the increased execution risks associated therewith, and closing conditions to the BSP/Barings Dual Transaction in general. The representatives of Eversheds Sutherland discussed with the Board the applicable standard of conduct and applicable fiduciary duties in the context of the potential to reduce the Company’s required asset coverage ratio as a result of the Small Business Credit Availability Act, and noted that, although Barings had requested that a proposal to reduce the Company’s asset coverage requirement be submitted to stockholders in connection with the BSP/Barings Dual Transaction, the approval of such proposal was not a condition to closing.

On March 27, 2018, representatives of R&G provided an outline of open issues on the asset purchase agreement. Later in the evening of March 27, 2018, representatives of Eversheds Sutherland delivered to R&G an updated draft of the asset purchase agreement and, on the following day, an updated draft of the related purchase price formula. Also on March 27, 2018, representatives of Eversheds Sutherland provided Dechert with a revised draft of the stock purchase and externalization agreement.

On March 27 and March 28, 2018, following the execution of appropriate waivers to, and consents under, the applicable confidentiality agreements, Barings was provided with information concerning the Asset Sale, and BSP was given information concerning the Externalization Transaction, in each case so that the interaction of the two transactions could be understood and evaluated and that necessary provisions could be coordinated between the two agreements. Thereafter, under signing of the agreements, each of Barings and BSP was provided with periodic updates as negotiations progressed.

On March 28 and March 29, 2018, representatives of the Company’s management and representatives of Houlihan Lokey and Eversheds Sutherland held multiple teleconferences with BSP and its legal and financial advisors to discuss revisions to the draft asset purchase agreement (including a revised draft of the asset purchase agreement delivered by R&G to Eversheds Sutherland on March 29, 2018) and overlap issues with the draft stock purchase and externalization agreement, and exchanged multiple drafts of the agreements. In addition, on March 28 and March 29, 2018, representatives of the Company’s management and representatives of Houlihan Lokey and Eversheds Sutherland held multiple teleconferences with Barings and its legal and financial advisors to discuss revisions to the draft stock purchase and externalization agreement (including a revised draft that was delivered by Dechert to Eversheds Sutherland on March 29, 2018) and overlap issues with the draft asset purchase agreement and exchanged multiple drafts of the agreements.

On the morning of March 30, 2018, representatives of Eversheds Sutherland delivered to R&G a revised draft of the asset purchase agreement.

On the afternoon of March 30, 2018, the Board held a teleconference with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to receive an update on the negotiation process with BSP and

 

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Barings and updates to Houlihan Lokey’s preliminary financial analyses with respect to the Company and the proposed asset sale transaction and supplemental financial information regarding the proposed externalization transaction. The Board also discussed, with the assistance of Houlihan Lokey and Eversheds Sutherland, remaining open business and legal items in the negotiations regarding the draft asset purchase agreement and the draft stock purchase and externalization agreement, as well as matters relating to potential severance expenses, tax treatment, SBIC licenses and projected timing going forward with regard to the BSP/Barings Dual Transaction. Afterwards, the representatives from Houlihan Lokey held a teleconference with BSP in order to discuss remaining open financial items in the draft asset purchase agreement and overlap issues with the draft stock purchase and externalization agreement.

Later in the afternoon of March 30, 2018, the Board held a teleconference, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to receive an update on Houlihan Lokey’s discussions with BSP. During the teleconference, the Board, with the assistance of Houlihan Lokey and Eversheds Sutherland, discussed the remaining open items with Barings relating to the draft stock purchase and externalization agreement and overlap issues with the draft asset purchase agreement. The Board also discussed the interplay of, and relationship between, the asset sale to BSP and externalization transaction with Barings in the context of necessary stockholder approval requirements and closing conditions, among other items.

Late in the evening of March 30, 2018, representatives of R&G delivered to Eversheds Sutherland a revised draft of the asset purchase agreement.

On the morning of March 31, 2018, the Board held a teleconference, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to discuss the financial aspects and execution risks of the BSP/Barings Dual Transaction as compared to the Barings Legacy Externalization Proposal and, for reference, the Revised Party C Proposals. The representatives of Eversheds Sutherland reviewed with the Board members the applicable standard of conduct and other fiduciary duties. The representatives of Eversheds Sutherland then proceeded to provide a summary of the BSP/Barings Dual Transaction and any remaining open items in the draft asset purchase agreement and draft stock purchase and externalization agreement. The Board also discussed, with the assistance of Houlihan Lokey and Eversheds Sutherland, timing going forward with regard to negotiating with each of BSP and Barings.

Also on the morning of March 31, 2018, representatives of the Company’s management and representatives of Houlihan Lokey held a teleconference with Barings and its financial advisors to discuss remaining open financial items in the draft stock purchase and externalization agreement and overlap issues with the draft asset purchase agreement.

Later in the morning of March 31, 2018, representatives of the Company’s management and representatives of Houlihan Lokey held a teleconference with BSP and its financial advisors to finalize remaining open financial items in the draft asset purchase agreement. In the afternoon of March 31, 2018, representatives of R&G delivered to Eversheds Sutherland a revised draft of the asset purchase agreement to reflect matters relating to the purchase price formula.

On April 1, 2018, representatives of Eversheds Sutherland delivered to Dechert a revised stock purchase and externalization agreement.

In the afternoon of April 1, 2018, the Board held a teleconference, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance, to receive an update on the negotiations with BSP and Barings and updates to Houlihan Lokey’s preliminary financial analyses with respect to the Company and the proposed asset sale transaction and supplemental financial information regarding the proposed externalization transaction. The Board, with the assistance of Houlihan Lokey, also reviewed the financial terms of the BSP/Barings Dual Transaction as compared to the financial terms of the Barings Legacy Externalization Proposal.

 

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Also during the April 1, 2018 teleconference, the Board, with the assistance of representatives of Houlihan Lokey and Eversheds Sutherland, further discussed and reviewed financial, structural and legal differences between the BSP/Barings Dual Transaction as compared to the Barings Legacy Externalization Proposal. The representatives from Eversheds Sutherland then proceeded to summarize for the Board the current drafts of the asset purchase agreement and the stock purchase and externalization agreement. Following the discussion, the Board authorized and directed the representatives of the Company’s management, Houlihan Lokey and Eversheds Sutherland to proceed with finalizing the asset purchase agreement and the stock purchase agreement and to communicate with BSP and Barings as necessary to prepare the agreements for Board approval and to formally present the BSP/Barings Dual Transaction for Board approval.

From April 1, 2018 until the early evening of April 3, 2018, representatives of the Company’s management and representatives of Houlihan Lokey and Eversheds Sutherland exchanged multiple drafts of the draft asset purchase agreement and the draft stock purchase and externalization agreement with BSP and Barings, and their respective legal advisors, in order to finalize the agreements. In particular, the parties engaged in negotiations regarding closing conditions, including those related to the “pro forma net asset value” and “pro forma investment company taxable income (“ICTI”) of the Company and calculations thereof.

In the early evening of April 3, 2018, the Board held a teleconference, with representatives of Houlihan Lokey and Eversheds Sutherland in attendance to consider approval of the Asset Purchase Agreement and of the Externalization Agreement, and to hold a formal vote on whether to approve such agreements and the transactions contemplated thereby. At the request of the Board, representatives of Houlihan Lokey reviewed and discussed its financial analyses with respect to the Company and the proposed asset sale transaction. Thereafter, at the request of the Board, the representatives of Houlihan Lokey orally rendered Houlihan Lokey’s opinion to the Board (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the Board dated April 3, 2018), as to, as of such date, the fairness, from a financial point of view, to the Company of the consideration to be received by the Company in the Asset Sale pursuant to the Asset Purchase Agreement.

Later during the April 3 meeting, representatives of Eversheds Sutherland reiterated the applicable standard of conduct, fiduciary duties and the responsibilities of the Board before providing an overview of the Asset Purchase Agreement and the Externalization Agreement, including a summary of the key terms and closing conditions in each, the interaction of the two agreements and related matters. After further discussion, the Board unanimously determined that the Asset Purchase Agreement, the Externalization Agreement and the transactions contemplated thereby were advisable to and in the best interests of the Company and its stockholders and unanimously voted to approve the Asset Purchase Agreement, the Externalization Agreement and the transactions contemplated thereby, and to recommend that the Company’s stockholders approve the Asset Purchase Agreement, the Stock Issuance and the transactions contemplated thereby, and directed that the relevant matters be submitted to the stockholders for approval and adoption at a meeting of stockholders together with the Board’s recommendation that the stockholders approve such matters.

On the evening of April 3, 2018, following the meeting of the Board, representatives of the Company, BSP, Barings, R&G and Dechert held teleconferences, as necessary, to confirm that the Asset Purchase Agreement, Externalization Agreement and other transaction documents were in final form and to exchange executed copies of each. Thereafter, during the evening of April 3, 2018, the Company and Asset Buyer executed the Asset Purchase Agreement and, concurrently therewith, the Company and Barings executed the Externalization Agreement.

On the morning of April 4, 2018, prior to the opening of trading markets, the Company issued a press release announcing the Transactions.

 

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Reasons for the Transactions

In recommending that the Company’s stockholders approve the Asset Sale Proposal, the Stock Issuance Proposal and the Advisory Agreement Proposal, the Board considered the terms of the Asset Purchase Agreement, the Externalization Agreement, the Advisory Agreement and the other transactions and agreements relating thereto, as well as a wide range of other available strategic alternatives and proposals. As part of its evaluation, the Board considered the financial terms, risks, timing and uncertainties of alternatives available to the Company, as well as financial information prepared by the Company’s senior management. The Board consulted with outside financial and legal advisors and the Company’s senior management team, and considered a number of reasons. These reasons included, but were not limited to, the following, which the Board viewed as supporting its determination (which reasons are not necessarily presented in order of relative importance or significance):

 

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The Company will receive in cash an aggregate purchase price equal to $981.2 million in the Asset Sale, subject to certain adjustments to take into account portfolio activity since December 31, 2017 and certain other agreed upon adjustments, which amount represents, before transaction expenses, approximately 96.5% of the $1.016 billion gross fair value of the Company’s investment portfolio as of December 31, 2017.

 

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The Asset Sale completely monetizes the Company’s investment portfolio for cash at a price close to the most recently determined fair value of the investment portfolio, thereby eliminating the market’s perception of risk in, and the volatility associated with, the Company’s existing investment portfolio.

 

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The Asset Sale and Externalization Transaction, considered together, will both monetize the Company’s entire investment portfolio and provide a cash payment directly to the Company’s stockholders and represent, after estimated transaction expenses and estimated severance, approximately 103% of the net asset value of the Company as of December 31, 2017.

 

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The Company’s stockholders will receive $85 million, or $1.78 per share of Company Common Stock, in cash directly from Barings in the Externalization Transaction, for total consideration to be received by the Company and its stockholders in connection with the Transactions representing, after estimated transaction expenses and estimated severance, approximately 103% of the net asset value of the Company as of December 31, 2017.

 

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The purchase price to be paid under the Asset Purchase Agreement and the Stockholder Payment to be paid under the Externalization Agreement, which totals approximately $13.80 per share after estimated transaction expenses and estimated severance, is a 43% premium over the closing price per share of the Company Common Stock on November 2, 2017 (the first trading day after the announcement to pursue strategic alternatives), and a 26% premium per share over the closing price of Company Common Stock on April 3, 2018 (the trading day immediately prior to the announcement of the Transactions).

 

•

The consideration to be paid under the Asset Purchase Agreement and Externalization Agreement will be in all cash.

 

•

The Purchase Price to be paid in the Asset Sale, even without giving effect to the additional consideration to be received in the Externalization Transaction, was one of the highest offers received for the purchase of the Company or all or substantially all of its assets and was the proposal with the highest percentage of total consideration being paid in the form of cash (100%) among offers for the purchase of the Company or all or substantially all of its assets.

 

•

Neither the Asset Sale nor the Externalization Transaction requires shareholder approvals by Asset Buyer or Barings to effectuate the proposed transactions.

 

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The Company will receive, in connection with the Initial Stock Issuance, $100 million from Barings in exchange for newly issued shares of Company Common Stock at 100% of net asset value per share at the time of purchase, after giving effect to the Asset Sale, and resulting in Barings owning approximately 15% of Company Common Stock on a pro forma basis.

 

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•

At least $50 million of the proceeds from the Initial Stock Issuance will be utilized by the Company for stock repurchases at a market price per share up to and including net asset value per share after the Closing of the Transactions, thus providing trading support and stability for the Company’s stock and resulting in Barings owning approximately an additional 1% of Company Common Stock on a pro forma basis, bringing Barings’ aggregate ownership of Company Common Stock on a pro forma basis to approximately 16% after the Initial Stock Issuance and the repurchases described in this paragraph.

 

•

At the closing of the Externalization Transaction, Barings will implement the two-year Trading Plan, under which it will acquire up to $50 million worth of Company Common Stock in open market purchases at a market price per share up to and including net asset value per share, and, if Barings does not acquire at least $50 million of worth of Company Common Stock under the Trading Plan, Barings will purchase the remainder directly from the Company at the greater of the then-current net asset value per share or the then-current market price per share of Company Common Stock on the NYSE, which could result in Barings owning approximately an additional 6% to 8% of outstanding Company Common Stock on a pro forma basis. Pro forma for the Initial Stock Issuance, $50 million in repurchases of Company Common Stock using proceeds from the Initial Stock Issuance and $50 million in repurchases of Company Common Stock under the Trading Plan, Barings’ aggregate ownership of the outstanding Company Common Stock is expected to be approximately 22% to 24%.

 

•

Each of the members of the Board, including a majority of the independent directors thereof, has approved the Advisory Agreement, conditioned on approval thereof by the stockholders of the Company and the consummation of the Asset Sale and Externalization Transaction.

 

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The Board perceived the Transactions as providing better value to the Company’s stockholders than the other strategic alternatives evaluated by the Board, including (i) a sale of the entire Company, either for cash or buyer common stock, (ii) transactions solely involving the externalization of the Company, and (iii) the sale of certain of the assets of the Company.

 

•

The Company actively sought proposals from a large number of other interested parties that it believed were potential buyers of the Company or its assets, or were interested in externalizing the Company, as described below and as described in further detail in the section of this proxy statement captioned “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – Background of the Transactions”:

 

•

115 potential buyers were contacted;

 

•

The Company executed confidentiality agreements with 53 such potential buyers;

 

•

A total of 22 parties had submitted 26 proposals in the aggregate;

 

•

11 proposals involved business combinations in which stock constituted a portion of the purchase consideration;

 

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One proposal related to an all-cash business combination transaction;

 

•

Nine proposals related to externalization of the Company’s management function;

 

•

Three proposals related to the purchase of all or a portion of the Company’s investments that were valued below-cost as of December 31, 2017;

 

•

One all-cash proposal related to the purchase of the Company’s entire investment portfolio;

 

•

One proposal related to a preferred equity investment in the Company;

 

•

Of the 22 parties who submitted initial indications of interest, eight (including Asset Buyer and Barings) were invited to further perform due diligence reviews and to submit proposals and markups of draft transaction agreements;

 

•

Taking into account Party A’s trading price per share as of the proposal date (which was below its December 31, 2017 net asset value per share), the consideration per share to the Company’s

 

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stockholders from Party A’s common stock would have been $6.63 in Party A common stock, and $5.70 per share in cash, or $12.33 per share of aggregate gross consideration (92% of the Company’s net asset value as of December 31, 2017). Party A also (i) did not submit a mark-up of the draft merger agreement, (ii) had not completed its due diligence of the Company’s investment portfolio, and (iii) indicated that it would only move forward if it was given exclusivity or assurance that it was the preferred partner;

 

•

In addition, the Board considered the risk that prolonging the strategic transaction review process further to allow Party A to perform due diligence and firm up its offer could have resulted in the loss of a favorable opportunity to successfully consummate a transaction on reasonable terms;

 

•

Although Party B’s proposal was as high as $12.63 per share (94% of the Company’s net asset value as of December 31, 2017), that value assumed that (i) the stock component of Party B’s proposal was worth $0.80 per share in excess of market value as of March 2, 2018, (ii) 100% of the $0.57 per share of CVR value would be realized by the Company’s stockholders, and (iii) the $0.30 per share of future fee waivers should be considered merger consideration. After adjusting for these factors, Party B’s proposal could be as low as $10.96 per share, or 84% of the Company’s net asset value as of December 31, 2017.

 

•

Party C’s proposals for an externalization transaction involved a significant up-front cash payment, but less in the way of price support for Company Common Stock relative to the Revised Barings Dual Transaction Externalization Proposal. Party C, and its management, proposed to purchase on the open market, post-close of the transaction, only $12 million in aggregate amount of Company Common Stock. Moreover, Party C proposed a $5 million investment in shares of newly issued Company Common Stock, compared to a $100 million investment from Barings in connection with the Externalization Transaction. In addition, Party C declined to submit a proposal to participate in the externalization portion of the Dual Transaction Option, and, thus, any externalization transaction with Party C would have been devoid of any benefits associated with monetizing the Company’s investment portfolio for cash at a price close to the portfolio’s most recently determined fair value;

 

•

Taking into account Party D’s trading price per share as of the proposal date (which was below its year-to-date average share price as of March 1, 2018), the consideration per share to the Company’s stockholders from Party D’s common stock would have been $9.22, or $11.45 per share of aggregate gross consideration (85% of the Company’s net asset value as of December 31, 2017);

 

•

Party E did not submit a proposal in the second round, despite being invited to do so; and

 

•

Although Party F Second Round Option #1 was, on its face and as proposed by Party F, for $12.00 per share, a component of that value (up to $3.00 per share) was in the form of a CVR, and expected to be paid shortly after December 31, 2021. Party F subsequently modified Party F Second Round Option #1 to subject each CVR to a minimum total value of $2.00 per share, or $11.00 per share gross aggregate consideration. Including the range of the potential value per share of the CVR, the aggregate potential value in Party F Second Round Option #1 to the Company’s stockholders was equal to a range of approximately 82% to 89% of the Company’s net asset value as of December 31, 2017. Alternatively, the aggregate potential value of Party F Second Round Option #2 to the Company’s stockholders was equal to approximately 76% of the Company’s net asset value as of December 31, 2017.

 

•

The terms and conditions of the Asset Purchase Agreement, the Externalization Agreement, the Advisory Agreement and related agreements, including:

 

•

Asset Buyer and Barings’ obligation to complete the Asset Sale and the Externalization Transaction, respectively, are not conditioned upon receipt of financing, and Asset Buyer and Barings provided a representation, or other satisfactory evidence, that they have sufficient cash and available lines of credit or other sources of immediately available cash to enable them to pay

 

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the purchase price due at closing of the Asset Sale and the Externalization Transaction, respectively;

 

•

The Board’s ability to change its recommendation to stockholders in certain circumstances, subject to Asset Buyer and Barings’ ability to propose adjustments to the terms and conditions of the Asset Purchase Agreement and the Externalization Agreement that may convince the Board not to change its recommendation, and subject to Asset Buyer and Barings’ right to terminate the Asset Purchase Agreement and the Externalization Agreement, respectively, following such change in recommendation and to collect a termination fee of $18 million and $6 million, respectively;

 

•

The Board’s ability to engage in discussions regarding, and ultimately accept, a Superior Proposal, subject to Asset Buyer and Barings’ ability to match such Superior Proposal and subject to paying Asset Buyer and Barings a termination fee of $18 million and $6 million, respectively;

 

•

The aggregate termination fee payable by the Company is less than 2.3% of the aggregate consideration to be paid to the Company by Asset Buyer and to the stockholders by Barings, which amount the Board believed was reasonable in light of, among other matters, the benefits of the Asset Sale and the Externalization Transaction to the Company and its stockholders, the typical size of the termination fees in similar transactions and the likelihood that a fee of such size would not be a meaningful deterrent to competing acquisition proposals;

 

•

The Asset Purchase Agreement, the Externalization Transaction and the Advisory Agreement have customary terms and were the product of extensive arm’s-length negotiations by the Company with the assistance of its professional advisors;

 

•

Barings is well-known in the asset management industry and possesses the scale, scope, range of financing products and risk profile to navigate the increasingly sophisticated direct lending environment; and

 

•

The Company’s stockholders could experience future appreciation in the value of the common stock of the Company if Barings is able to successfully manage the Company.

In evaluating the Transactions, the Board considered the following additional reasons, which it viewed as supporting its determination:

 

•

The financial analyses reviewed by Houlihan Lokey with the Board as well as the oral opinion of Houlihan Lokey rendered to the Board on April 3, 2018 (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the Board, dated April 3, 2018, which is attached as Appendix E to this proxy statement) as to, as of such date, the fairness, from a financial point of view, to the Company of the purchase price to be received in the Asset Sale pursuant to the Asset Purchase Agreement;

 

•

The supplemental financial information relating to the Externalization Transaction reviewed with the Board by Houlihan Lokey; and

 

•

Resolutions approving the Asset Purchase Agreement, the Externalization Agreement, the Advisory Agreement and the transactions contemplated thereby were unanimously approved by the Board, including its independent directors, which retained and received advice from Houlihan Lokey and Eversheds Sutherland.

In the course of reaching the determinations and decisions and making the recommendation described above, the Board considered the risks and potentially negative items relating to the Transactions, including the following material items (which are not necessarily presented in order of relative importance or significance):

 

•

The Asset Sale contemplates a sale of the Company’s only material revenue-generating assets. During the period of time that it takes to reinvest the proceeds from the Asset Sale, the Company intends to

 

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primarily invest those proceeds in liquid loans, high-yield bonds, and other liquid assets, which may produce returns that are significantly lower than the returns which the Company would expect to achieve when its portfolio is fully invested in securities meeting its investment objective. As a result, any dividends or distributions that the Company pays during such period may be substantially lower than the dividends or distributions that the Company may be able to pay when the portfolio is fully invested in securities meeting its investment objective;

 

•

The possibility that the consummation of the Transactions may be delayed or not occur at all, and the possible significant adverse impact that such event would have on the Company and its business;

 

•

The restrictions on the conduct of the Company’s business during the period between execution of the Asset Purchase Agreement and the Externalization Agreement and the closing thereof, which may delay or prevent the Company from undertaking business opportunities that may arise during such time which, absent the Asset Purchase Agreement and the Externalization Agreement, the Company might otherwise have pursued;

 

•

The disruption to the Company’s business that resulted from the negotiation of the Asset Purchase Agreement and the Externalization Agreement and the potential disruption that may result from announcement of the Asset Sale and the Externalization Transaction and the resulting distraction of management’s attention from day-to-day operation of the business;

 

•

The potential negative effect of the pendency of the Asset Purchase Agreement and the Externalization Agreement on the Company’s business, including uncertainty about the effect of the Asset Sale and the Externalization Transaction on the Company’s employees, business partners and other parties, which may impair the Company’s ability to retain and motivate key personnel, and could cause business partners, suppliers and others to seek to change existing business relationships with the Company;

 

•

Under the terms of the Asset Purchase Agreement and the Externalization Agreement, the Company is unable to actively solicit other acquisition proposals during the pendency thereof or to engage in discussions with parties that make unsolicited acquisition proposals;

 

•

The Company will be required to pay termination fees to Asset Buyer and Barings if the Asset Purchase Agreement and the Externalization Agreement are terminated under certain circumstances, including if the Asset Purchase Agreement and the Externalization Agreement are terminated in connection with an adverse recommendation change by the Board or as a result of the Company materially violating the “non-solicitation” or “no-shop” covenants thereof, or in the event the Board desires to accept a Superior Proposal from a third party;

 

•

The Company may be required to pay a “tail” termination fee to Asset Buyer and/or Barings if the Asset Purchase Agreement and/or the Externalization Agreement is terminated in certain circumstances and, within 12 months of such termination, the Company enters into a “competing proposal” with a third party and such “competing proposal” is subsequently consummated (but subject to the specific limitations set forth in the Asset Purchase Agreement and the Externalization Agreement);

 

•

The closing under the Asset Purchase Agreement and the Externalization Agreement is conditioned on stockholders’ approval of each of the Asset Sale Proposal, the Stock Issuance Proposal, and the Advisory Agreement Proposal, and, if such vote is not obtained, the Company will be required to reimburse up to a certain amount of Asset Buyer’s and Barings’ expenses;

 

•

The Asset Purchase Agreement obligates the Company to indemnify the Asset Buyer against certain liabilities;

 

•

The Company has agreed to not solicit or attempt to make loans to any Existing Portfolio Company after closing of the Asset Sale, which could limit the Company’s business after closing of the Asset Sale;

 

•

The Stockholder Payment to holders of Company Common Stock is expected to be taxable to Company stockholders as ordinary income;

 

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•

Some of the Company’s directors and executive officers may be deemed to have interests in the Transactions that are different from, or in addition to, the interests of Company stockholders generally, as further described in the section of this proxy statement captioned “Proposal 1 – Approval of the Asset Purchase Agreement and the Asset Sale – The Asset Sale – Interests of Certain Persons Related to the Company”; and

 

•

The items described in the section of this proxy statement captioned “Risk Factors.”

The foregoing discussion of reasons considered by the Board contains the material reasons considered by the Board, but is not in any way intended to be exhaustive. In light of the variety of reasons considered in connection with its evaluation of the Transactions, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific reasons considered in reaching its determinations and recommendations. Each member of the Board applied his own business judgment to the process and may have given different weight to different reasons. The Board did not undertake to make any specific determination as to whether any reason or any particular aspect of a reason supported or did not support their ultimate determination. The Board based its respective recommendations on the totality of the information presented.

Opinion of the Financial Advisor to the Company

On April 3, 2018, Houlihan Lokey, orally rendered its opinion to the Company’s Board (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the Company’s Board dated April 3, 2018), as to, as of April 3, 2018, the fairness, from a financial point of view, to the Company of the consideration to be received by it in the Asset Sale pursuant to the Asset Purchase Agreement.

Houlihan Lokey’s opinion was directed to the Company’s Board (in its capacity as such) and only addressed the fairness, from a financial point of view, to the Company of the consideration to be received by it in the Asset Sale pursuant to the Asset Purchase Agreement and did not address any other aspect or implication of the Asset Sale, any related transaction or any agreement, arrangement or understanding entered into in connection therewith or otherwise, including, without limitation, the Externalization Agreement. The summary of Houlihan Lokey’s opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is attached as Appendix E to this proxy statement and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in connection with the preparation of its opinion. However, neither Houlihan Lokey’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Company’s Board, any security holder of the Company or any other person as to how to act or vote with respect to any matter relating to the Asset Sale or otherwise.

In connection with its opinion, Houlihan Lokey made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey:

 

•

reviewed a draft, dated April 3, 2018, of the Asset Purchase Agreement;

 

•

reviewed certain publicly available business and financial information relating to the Company that Houlihan Lokey deemed to be relevant;

 

•

reviewed certain information relating to the historical, current and future operations, financial condition and prospects of the Company made available to Houlihan Lokey by the Company, including the Company Projections (as defined herein) prepared by the management of the Company relating to the Company for the years ending December 31, 2018 through 2022;

 

•

spoke with certain members of the management of the Company and certain of its representatives and advisors regarding the business, operations, financial condition and prospects of the Company, the Asset Sale and related matters;

 

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•

compared the financial and operating performance of the Company with that of other companies with publicly traded equity securities that Houlihan Lokey deemed to be relevant;

 

•

considered the publicly available financial terms of certain transactions that Houlihan Lokey deemed to be relevant;

 

•

reviewed the current and historical market prices for certain of the Company’s publicly traded securities, and the current and historical market prices of the publicly traded securities of certain other companies that Houlihan Lokey deemed to be relevant; and

 

•

conducted such other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.

Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and did not assume any responsibility with respect to such data, material and other information. In addition, management of the Company advised Houlihan Lokey, and Houlihan Lokey assumed, that the Company Projections were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of the Company. The Company advised Houlihan Lokey that the Company Projections provided a reasonable basis on which to evaluate the Company and the Asset Sale and, at the Company’s direction, Houlihan Lokey used and relied upon the Company Projections for purposes of its analyses and opinion. Houlihan Lokey expressed no view or opinion with respect to the Company Projections or the assumptions on which they were based. Houlihan Lokey relied upon and assumed, without independent verification, that there had been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of the Company since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Houlihan Lokey that would be material to its analyses or opinion, and that there was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. With the Company’s consent, Houlihan Lokey assumed that any adjustments to the consideration pursuant to the Asset Purchase Agreement or otherwise would not be material to its analyses or opinion.

Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the Asset Purchase Agreement and all other related documents and instruments referred to in the Asset Purchase Agreement were true and correct, (b) each party to the Asset Purchase Agreement and such other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the Asset Sale would be satisfied without waiver thereof, and (d) the Asset Sale would be consummated in a timely manner in accordance with the terms described in the Asset Purchase Agreement and such other related documents and instruments, without any amendments or modifications thereto. Houlihan Lokey relied upon and assumed, without independent verification, that (i) the Asset Sale would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (ii) all governmental, regulatory, and other consents and approvals necessary for the consummation of the Asset Sale would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would have an effect on the Asset Sale or the Company that would be material to its analyses or opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the Asset Purchase Agreement would not differ in any respect from the draft of the Asset Purchase Agreement identified above.

Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of the Company or any other party, including, without limitation, the Purchased Assets (as defined herein). Houlihan Lokey did not make an independent evaluation of the adequacy of the Company’s recorded fair value estimates on its investment portfolio, nor did Houlihan Lokey

 

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review any individual loan files, credit or investment memos or assigned asset values. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity or business. Houlihan Lokey did not undertake any independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which the Company was or may have been a party or was or may have been subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which the Company was or may have been a party or was or may have been subject.

Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of its opinion. Houlihan Lokey did not express any opinion as to the price or range of prices at which the Purchased Assets or shares of Company Common Stock of the Company may be purchased or sold, or otherwise be transferable, at any time.

Houlihan Lokey’s opinion was furnished for the use of the Company’s Board (in its capacity as such) in connection with its evaluation of the Asset Sale and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Under the terms of Houlihan Lokey’s engagement by the Company, the Company agreed that Houlihan Lokey was acting as an independent contractor and that Houlihan Lokey was not acting as an agent or fiduciary of the Company, the security holders or creditors of the Company or any other person or entity in connection with its engagement. Houlihan Lokey’s opinion is not intended to be, and does not constitute, a recommendation to the Company’s Board, the Company, any security holder or any other party as to how to act or vote with respect to any matter relating to the Asset Sale or otherwise.

Houlihan Lokey’s opinion only addressed the fairness, from a financial point of view, to the Company of the Asset Sale consideration to be received by the Company in the Asset Sale pursuant to the Asset Purchase Agreement and did not address or give effect to any other aspect or implication of the Asset Sale or any related transaction or any agreement, arrangement or understanding entered into in connection therewith or otherwise, including, without limitation, the Externalization Agreement. Houlihan Lokey was not requested to opine as to, and its opinion did not express an opinion as to or otherwise address, among other things: (i) the underlying business decision of the Company’s Board, the Company, its security holders or any other party to proceed with or effect the Asset Sale, (ii) the terms of any arrangements, understandings, agreements or documents related to, or the form, structure or any other portion or aspect of, the Asset Sale or otherwise (other than the Asset Sale consideration to the extent expressly specified in the opinion), (iii) the fairness of any portion or aspect of the Asset Sale to the holders of any class of securities, creditors or other constituencies of the Company, or to any other party, except if and only to the extent expressly set forth in the last sentence of the opinion, (iv) the relative merits of the Asset Sale, as compared to any alternative business strategies or transactions that might have been available for the Company or any other party, (v) the fairness of any portion or aspect of the Asset Sale to any one class or group of the Company’s or any other party’s security holders or other constituents vis-à-vis any other class or group of the Company’s or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), (vi) whether or not the Company, the Asset Buyer, any of their respective security holders or any other party was receiving or paying reasonably equivalent value in the Asset Sale, (vii) the solvency, creditworthiness or fair value of the Company, the Asset Buyer, any other participant in the Asset Sale, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (viii) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the Asset Sale, any class of such persons or any other party, relative to the asset sale consideration or otherwise. In addition, Houlihan Lokey’s opinion did not address any aspect or implication of the recent changes in U.S. laws regarding the maximum leverage allowed by BDCs including, without limitation, any potential impact of such changes on the future financial performance of the Company or the Purchased Assets. Furthermore, Houlihan Lokey did not express any opinion, counsel or interpretation regarding matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey

 

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assumed that such opinions, counsel or interpretations had been or would be obtained from the appropriate professional sources. Furthermore, with the consent of the Company’s Board, Houlihan Lokey relied on the assessments by the Company’s Board, the Company and its advisors, as to all legal, regulatory, accounting, insurance and tax matters with respect to the Company, the Asset Sale or otherwise.

In preparing its opinion to the Company’s Board, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s analyses is not a complete description of the analyses underlying Houlihan Lokey’s opinion. The preparation of such an opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey’s opinion nor its underlying analyses is readily susceptible to summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. While the results of each analysis were taken into account in reaching Houlihan Lokey’s overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors, without considering all analyses, methodologies and factors, could create a misleading or incomplete view of the processes underlying Houlihan Lokey’s analyses and opinion.

In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Houlihan Lokey’s analyses for comparative purposes is identical to the Company and an evaluation of the results of those analyses is not entirely mathematical. The estimates contained in the Company Projections and the implied reference range values indicated by Houlihan Lokey’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets, businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of the Company. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.

Houlihan Lokey’s opinion was only one of many factors considered by the Company’s Board in evaluating the Asset Sale. Neither Houlihan Lokey’s opinion nor its analyses were determinative of the consideration or of the views of the Company’s Board with respect to the Asset Sale or the consideration. The type and amount of consideration payable in the Asset Sale pursuant to the Asset Purchase Agreement were determined through negotiation between the Company and the other parties to the Asset Sale, and the decision to enter into the Asset Purchase Agreement was solely that of the Company’s Board and the Company’s Board.

Material Financial Analyses

The following is a summary of the material financial analyses performed by Houlihan Lokey in connection with the preparation of its opinion and reviewed with the Company’s Board on April 3, 2018. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.

For purposes of its analyses, Houlihan Lokey reviewed a number of financial metrics, including:

 

•

Enterprise Value – generally, the value as of a specified date of the relevant company’s outstanding equity securities (taking into account outstanding options and other securities convertible, exercisable

 

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or exchangeable into or for equity securities of the company) plus the amount of debt outstanding, preferred stock and non-controlling interests, and less the amount of cash and cash equivalents on its balance sheet. For purposes of Houlihan Lokey’s financial analyses, with respect to the Company, “Enterprise Value” excludes the net value, as provided by the Company’s management, of the assets and liabilities retained by the Company in the Asset Sale.

 

•

Net Asset Value – generally, the total value of all assets, less any liabilities, of the relevant company as of a specified date.

 

•

Net Asset Value Per Share – generally, the Net Asset Value of the relevant company, divided by the number of shares outstanding of such company.

 

•

Net Investment Income – generally, the amount of the relevant company’s income received from investment assets minus associated investment expenses for a specified period.

 

•

Net Investment Income Per Share – generally, the Net Investment Income of the relevant company, divided by the number of shares outstanding of such company.

 

•

Dividend Yield – generally, the annualized amount of the relevant company’s cash distribution for a specified period, divided by the number of shares outstanding of such company and divided by the relevant company’s price per share.

Unless the context indicates otherwise, equity values used in the selected companies analysis described below were calculated using the closing price of the common stock of the selected companies listed below as of April 2, 2018, transaction values for the selected transactions analysis described below were calculated on an equity value basis based on the announced transaction equity price and other public information available at the time of the announcement, the estimates of future financial performance of the Company relied upon for the financial analyses described below were based on the Company Projections, and the estimates of the future financial performance of the selected companies listed below were based on publicly available research analyst estimates for those companies. For purposes of its financial analyses, Houlihan Lokey evaluated the Purchased Assets based on the implied Enterprise Value reference ranges indicated by Houlihan Lokey’s financial analyses for the Company (excluding the assets and liabilities of the Company to be retained by the Company in the Asset Sale).

Selected Companies Analysis. Houlihan Lokey reviewed certain financial data for selected companies with publicly traded equity securities that Houlihan Lokey deemed relevant. The financial data reviewed included:

 

•

Share price as a multiple of Net Asset Value Per Share;

 

•

Dividend Yield for the most recent quarterly dividend annualized, or “LQA Dividend Yield”;

 

•

Share price as a multiple of Net Investment Income Per Share for the year ending December 31, 2017, or “2017 Net Investment Income Per Share”; and

 

•

Share price as a multiple of estimated Net Investment Income Per Share for the year ending December 31, 2018, or “2018E Net Investment Income Per Share.”

 

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The selected companies and corresponding multiples were:

 

Price /

Net Investment Income Per Share

Net Asset Value Per Share

LQA Dividend Yield

2017

2018E

Main Street Capital Corporation

15.4x

14.9x

1.56x

6.2

%

TPG Specialty Lending, Inc.

8.9x

9.7x

1.11x

8.7

%

Apollo Investment Corporation

8.3x

8.2x

0.80x

11.3

%

TCG BDC, Inc.

10.2x

11.0x

0.98x

8.3

%

New Mountain Finance Corporation

9.6x

9.7x

0.97x

10.3

%

Solar Capital Ltd.

12.5x

11.1x

0.93x

8.1

%

TCP Capital Corp.

8.9x

9.0x

0.95x

10.2

%

Goldman Sachs BDC, Inc.

9.2x

9.9x

1.05x

9.4

%

Oaktree Specialty Lending Corporation

9.6x

11.0x

0.73x

8.0

%

PennantPark Investment Corporation

8.7x

9.1x

0.74x

10.7

%

BlackRock Capital Investment Corporation

8.2x

7.8x

0.76x

12.1

%

Medley Capital Corporation

6.5x

7.2x

0.53x

15.8

%

Taking into account the results of the selected companies analysis, Houlihan Lokey applied selected multiple ranges of 7.5x to 8.5x to the Company’s Net Investment Income for the year ended December 31, 2017, or “2017 Net Investment Income,” 9.0x to 10.0x to the Company’s estimated Net Investment Income for the year ended December 31, 2018, or “2018E Net Investment Income,” and 0.85x to 0.95x to the Company’s Net Asset Value as of December 31, 2017 and a selected Dividend Yield range of 11.0% to 9.0% to the Company’s LQA Dividend. The selected companies analysis indicated implied Enterprise Value reference ranges for the Company of $916.8 million to $989.0 million based on 2017 Net Investment Income, $887.3 million to $944.2 million based on 2018E Net Investment Income, $920.1 million to $984.2 million based on Net Asset Value as of December 31, 2017, and $898.9 million to $1,015.3 million based on Dividend Yield, as compared to the consideration of $981.2 million in the Asset Sale pursuant to the Asset Purchase Agreement.

Selected Transactions Analysis. Houlihan Lokey considered certain financial terms of certain transactions involving target companies that Houlihan Lokey deemed relevant. The financial data reviewed included transaction value as a multiple of Net Asset Value, and the selected transactions and corresponding multiples were:

 

Date Announced		Target		Acquiror		Price / Net Asset Value
						Total Consideration		Excluding Manager Consideration
May 2017		NF Investment Corp.		TCG BDC, Inc.		1.00x		1.00x
Sep. 2016		Credit Suisse Park View		CION		0.92x		0.92x
June 2016		Full Circle Capital Corp.		MAST Funds / Great Elm Capital		1.00x		1.00x
May 2016		American Capital LTD		ARES Capital Corporation		0.93x		0.86x
April 2015		MCG Capital Corp.		PennantPark Floating Rate Capital		1.00x		0.95x
Oct. 2009		Allied Capital Corp.		ARES Capital Corp.		0.48x		0.48x
Aug. 2009		Patriot Capital		Prospect Capital		0.54x		0.54x

Taking into account the results of the selected transactions analysis, Houlihan Lokey applied a selected multiple range of 0.85 to 0.95x to the Company’s Net Asset Value. The selected transactions analysis indicated an implied Enterprise Value reference range for the Company of $920.1 million to $984.2 million, as compared to the consideration of $981,178,542 in the Asset Sale pursuant to the Asset Purchase Agreement.

 

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Discounted Cash Flow Analysis. Houlihan Lokey performed a discounted cash flow analysis of the Company based on the Company Projections. Houlihan Lokey applied a range of terminal value multiples of 0.90x to 1.00x to the Company’s net asset value and discount rates ranging from 9.0% to 11.0%. The discounted cash flow analysis indicated an implied Enterprise Value reference range for the Company of $946.4 million to $1,030.4 million, as compared to the consideration of $981,178,542 in the Asset Sale pursuant to the Asset Purchase Agreement.

Supplemental Financial Information

At the request of the Board, Houlihan Lokey also reviewed with the Board certain supplemental financial information with respect to the Asset Sale and Externalization Transaction, including (i) the Net Asset Value Per Share of the Company as of December 31, 2017, as provided by Company management (the “December 31, 2017 NAV”), (ii) an illustrative implied Net Asset Value Per Share of the Company as of December 31, 2017 pro forma for the asset sale transaction based on the December 31, 2017 NAV as provided by Company management and assumptions and terms provided by or discussed with Company management, and (iii) an illustrative implied Net Asset Value Per Share of the Company as of December 31, 2017 pro forma for the asset sale transaction and the externalization transaction based on the December 31, 2017 NAV as provided by Company management and assumptions and terms provided by or discussed with Company management. The supplemental financial information was separate and apart from the financial analyses performed in connection with the preparation of Houlihan Lokey’s opinion to the Board as to, as of April 3, 2018, the fairness, from a financial point of view, to the Company of the consideration to be received by the Company in the asset sale transaction pursuant to the Asset Purchase Agreement. The supplemental financial information was reviewed with the Board for informational purposes only. Houlihan Lokey expressed no view or opinion with respect to the externalization transaction, the supplemental financial information or the assumptions upon which such information was based.

Other Matters

Houlihan Lokey was engaged by the Company to act as its financial advisor in connection with the Transactions and will receive fees for its services, a substantial portion of which is contingent upon the consummation of the Asset Sale and the Externalization Transaction. The Company’s Board engaged Houlihan Lokey based on Houlihan Lokey’s experience and reputation. Houlihan Lokey is regularly engaged to provide financial advisory services in connection with mergers and acquisitions, financings, and financial restructurings. Pursuant to its engagement by the Company, an engagement fee of $100,000 became payable to Houlihan Lokey upon its engagement, an opinion fee of $500,000 became payable to Houlihan Lokey upon the rendering of its opinion to the Company’s Board with respect to the proposed Asset Sale, and a transaction fee of approximately $6,850,000 against which the engagement fee and the opinion fee are creditable to the extent previously paid, will become payable to Houlihan Lokey upon the consummation of the Asset Sale and the Externalization Transaction. The Company has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey and certain related parties for certain potential liabilities and arising out of Houlihan Lokey’s engagement.

In the ordinary course of business, certain of Houlihan Lokey’s employees and affiliates, as well as investment funds in which they may have financial interests or with which they may co-invest, may acquire, hold or sell, long or short positions, or trade, in debt, equity, and other securities and financial instruments (including loans and other obligations) of, or investments in, the Company, the Asset Buyer or any other party that may be involved in the Asset Sale and their respective affiliates or any currency or commodity that may be involved in the Asset Sale.

Houlihan Lokey and certain of its affiliates have in the past provided and are currently providing investment banking, financial advisory and/or other financial or consulting services to BSP, an affiliate of the Asset Buyer, or one or more security holders or affiliates of, and/or investment funds affiliated or associated with, BSP (collectively, with BSP, the “BSP Group”) and Barings, LLC (“Barings”), or one or more security holders or

 

70

affiliates of, and/or portfolio companies of investment funds affiliated or associated with, Barings (collectively, with Barings, the “Barings Group”) and have in the past provided financial advisory and/or other financial or consulting services to Providence, an affiliate of BSP, or one or more security holders or affiliates of, and/or portfolio companies of investment funds affiliated or associated with, Providence (collectively, with Providence, the “Providence Group”), for which Houlihan Lokey and its affiliates have received, and may receive, compensation, including, among other things, (a)(i) having acted as financial advisor to BSP in connection with the appointment of BSP as advisor to Realty Finance Trust, Inc., which transaction occurred in September 2016, (ii) having acted as advisor to BSP in connection with the acquisition of the advisor to Business Development Corporation of America, which transaction occurred in November 2016, (iii) providing certain valuation advisory services to BSP for financial reporting purposes, (iv) having acted as financial advisor to a noteholder group, of which an affiliate of BSP was a member, in relation to their interests as noteholders of Berry Petroleum Company, LLC (“Berry”) in its chapter 11 bankruptcy proceedings, which concluded in February 2017 (the “Berry Restructuring”), and (v) having acted as financial advisor to Berry following the Berry Restructuring, in connection with (1) its sale of its interests in the Hugoton natural gas field, (2) its acquisition of interests in the South Belridge Hill oilfield, and (3) a refinancing of its senior secured credit facility, which transactions closed in July 2017, for which financial advisory services to the BSP Group, Berry and the Providence Group Houlihan Lokey received fees of approximately $24-26 million, and (b)(i) currently acting as financial advisor to a noteholder group, of which Barings is a member, in relation to their interests as noteholders of Appvion, Inc. in connection with its chapter 11 bankruptcy proceedings and (ii) providing certain valuation advisory services to members of the Barings Group for financial reporting purposes for which financial advisory services to the Barings Group Houlihan Lokey received fees of approximately $1.2 million. Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and/or other financial or consulting services to the Company, the Asset Buyer, members of the BSP Group or the Providence Group, other participants in the Asset Sale or certain of their respective affiliates or security holders in the future, for which Houlihan Lokey and its affiliates may receive compensation. In addition, Houlihan Lokey and certain of its affiliates and certain of its and their respective employees may have committed to invest in private equity or other investment funds managed or advised by BSP, Providence, Barings, other participants in the Asset Sale or certain of their respective affiliates or security holders, and in portfolio companies of such funds, and may have co-invested with members of the BSP Group, the Providence Group, the Barings Group, other participants in the Asset Sale or certain of their respective affiliates or security holders, and may do so in the future. Furthermore, in connection with bankruptcies, restructurings, distressed situations and similar matters, Houlihan Lokey and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees, agents and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, or may be or have been adverse to, the Company, the Asset Buyer, members of the BSP Group, the Providence Group, the Barings Group, other participants in the Asset Sale or certain of their respective affiliates or security holders, for which advice and services Houlihan Lokey and its affiliates have received and may receive compensation.

Summary of Financial Projections

In connection with the Asset Sale, the Company’s senior management prepared certain information relating to the Company without giving effect to the Asset Sale, (the “Company Projections”). The Company Projections set forth below were prepared for use by the Board in evaluating whether the Asset Purchase Agreement and the Asset Sale are advisable to and in the best interests of the Company and its stockholders.

The Company Projections were authorized for use by Houlihan Lokey in connection with providing advice to the Board. However, the inclusion of such summary of the Company Projections should not be regarded as an indication that any party considered, or now considers, any of the Company Projections to be a reliable prediction of future results. Neither the Company nor any of its representatives has made, or makes, any representation to any person regarding the ultimate performance of the Company compared to the Company Projections. The

 

71

inclusion of the Company Projections in this proxy statement shall not be deemed an admission or representation by the Company that such information is material.

In the view of the Company’s senior management, the Company Projections prepared by them were prepared on a reasonable basis based on the best information available to the Company’s senior management at the time of preparation, taking into account the assumptions underlying the Company Projections. The Company Projections reflect the best currently available estimates and judgments of the Company’s senior management as to the future investment income and cash flows to be received, and the costs and other expenses to be incurred, as a result of the Company continuing to operate under its current strategy in current market conditions, and do not give effect to the Asset Sale. The Company Projections, however, are not fact and should not be relied upon as being necessarily indicative of future results of the Company, and readers of this proxy statement are cautioned not to place undue reliance on the Company Projections. While the Company Projections were reasonably prepared in good faith on bases reflecting the best estimates available at the time of their preparation, no assurance can be made regarding future events with respect to the Company.

The Company Projections are subjective in many respects and are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. The Company Projections are inherently subject to significant business, economic, competitive and regulatory uncertainties and contingencies, including, among others, risks and uncertainties described under the sections of this proxy statement captioned “Risk Factors” and “Forward-Looking Statements” and the information in our consolidated financial statements and the notes thereto included in our most recent filing on Form 10-K attached as Appendix F to this proxy statement, all of which are difficult to predict and many of which are beyond the control of the Company. As a result, we cannot assure you that the underlying estimates and assumptions made in preparing the Company Projections will prove accurate, that the projected results will be realized, or that actual results will not be significantly or materially higher or lower than the results reflected in the Company Projections, whether or not the Asset Sale is consummated. In addition, the Company Projections cover multiple years and such information by its nature becomes less reliable with each successive year. As a result, the Company Projections cannot be considered a reliable predictor of future operating results, and the Company Projections should not be relied on as such.

Some or all of the assumptions that have been made have changed since the date the Company Projections were made, and the portions of the Company Projections set forth below do not take into account any circumstances or events occurring after the date on which the Company Projections were prepared, including the announcement of the Asset Sale and transaction-related expenses.

The Company Projections were not prepared with a view toward public disclosure or toward complying with GAAP, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial data or published guidelines of the SEC regarding forward-looking statements and the use of GAAP or non-GAAP financial measures. While the Company believes that these non-GAAP financial measures used to prepare the Company Projections provide useful supplemental information, there are limitations associated with the use of such financial measures. Such financial measures are not reported by all of the Company’s competitors and may not be directly comparable to similarly titled measures used by such competitors due to potential differences in the exact method of calculation. The prospective financial information included in this proxy statement has been prepared by, and is the responsibility of, the Company’s senior management. Ernst & Young LLP has neither examined, compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto.

The Company does not undertake any obligation, except as required by applicable law, to update or otherwise revise the Company Projections contained in this proxy statement to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events or to reflect changes in general economic or industry conditions, even in the event that any or all of the underlying assumptions are shown to be in error.

 

72

In light of the foregoing factors and uncertainties inherent in the Company Projections, Company stockholders are cautioned not to rely on the Company Projections included in this proxy statement. The summary of the Company Projections is not included in this proxy statement to induce any Company stockholder to vote in favor of the proposal to approve the Asset Purchase Agreement and/or Advisory Agreement, and the transactions contemplated thereby, including the Stock Issuance. However, the Company provided, among other information, the Company Projections to Houlihan Lokey, which was authorized to rely upon the Company Projections for purposes of providing advice to the Board.

Summary of Company Projections

The following is a summary of the Company Projections. The Company Projections were prepared by the Company’s management based solely on the information available to the Company’s management at that time. While presented with numerical specificity, the Company Projections were based on numerous variables, judgments, estimates and assumptions made by the Company’s senior management with respect to, among other things:

 

•

the timing and amount of, and investment income on, the Company’s investment activity, including (a) the timing and amount of investment repayments and the yields on the investments repaid and (b) the timing and amount of new and add-on portfolio investments and estimated yields on those new and add-on investments;

 

•

the availability of debt capital to fund new investments, refinance existing indebtedness, and for general corporate working capital purposes, as well as the cost of such debt and equity capital;

 

•

the ability to raise additional equity capital and the impact of that additional equity capital;

 

•

interest rates;

 

•

the Company’s operating costs and expenses;

 

•

the performance of investment assets;

 

•

future industry performance and competition;

 

•

general business, economic, market and financial conditions;

 

•

other future events or business decisions that may not be realized; and

 

•

matters specific to the Company’s business.

 

73

All of these variables and assumptions are inherently subjective and uncertain and many are beyond the control of the Company’s management.

 

		Year Ending December 31,
$ in millions, except per share figures		2018				2019				2020				2021				2022
Total investment income		$	109.5			$	120.0			$	128.6			$	138.0			$	146.1
Operating expenses
Interest and other financing fees			31.5				35.2				37.8				39.9				41.9
Compensation, general and administrative expenses			21.1				22.2				22.8				23.3				23.8
Total operating expenses			52.6				57.4				60.6				63.1				65.7
Net investment income		$	56.9			$	62.6			$	68.0			$	74.8			$	80.4
Net investment income per share		$	1.19			$	1.25			$	1.25			$	1.28			$	1.28
Regular dividends / distributions per share		$	1.20			$	1.20			$	1.20			$	1.20			$	1.20

 

		As of December 31,
$ and share counts in millions, except per share figures		2018				2019				2020				2021				2022
Total investments at fair value		$	1,222.9			$	1,269.1			$	1,393.3			$	1,536.8			$	1,640.3
Cash and cash equivalents			41.5				129.6				115.0				82.7				82.9
Other assets			7.2				7.2				7.4				7.5				7.6
Total assets		$	1,271.6			$	1,405.9			$	1,515.6			$	1,627.0			$	1,730.9
Total debt outstanding(1)			624.5				699.5				749.5				799.5				849.5
Other liabilities			0.7				3.6				6.5				9.4				4.3
Total liabilities			625.2				703.1				756.0				808.9				853.8
Total net assets			646.4				702.8				759.6				818.1				877.0
Total liabilities and net assets		$	1,271.6			$	1,405.9			$	1,515.6			$	1,627.0			$	1,730.9
Net asset value per share		$	13.45			$	13.45			$	13.45			$	13.48			$	13.51
Total shares outstanding			48.1				52.3				56.5				60.7				64.9

 

(1)	Excludes deferred financings fees, which are included in other assets and other liabilities.

Key Company Projection Assumptions

 

•

Net portfolio growth (new investments less repayments) of $198.3 million in 2018 and an average of $100.0 million from 2019 to 2022.

 

•

No change in LIBOR or credit spreads.

 

•

No net appreciation / depreciation or net gains / losses on investment assets throughout the projection period.

 

•

$100.0 million increase in SBA Debentures in 2018-2019 under third SBIC license, bringing the total amount of SBA Debentures outstanding to $350.0 million.

 

•

All Company debt is refinanced at existing terms at the time of maturity.

 

•

Equity issuances of $50.0 million per year beginning in 2019.

 

•

Overall credit environment throughout the forecast period remains stable and consistent with the current environment.

Interests of Certain Persons Related to the Company

In considering the recommendation of the Board, Company stockholders should be aware that the Company’s executive officers and directors may have interests in the Transactions that are different from, or in

 

74

addition to, those of Company stockholders generally. Specifically, (i) under the terms of the Company’s restricted share award agreements with its directors and officers, the restrictions on those restricted shares will lapse upon the Asset Closing, (ii) under the terms of the Company’s executive deferred compensation plan, the executive officers’ non-qualified deferred compensation benefits will be fully vested upon the Asset Closing, and (iii) under the terms of the individual retention agreements with the executive officers, the officers may be entitled to severance benefits if, (A) during the twenty-four month period following the Asset Sale, the officer’s employment is terminated (I) by the Company (other than for death, disability or cause); or (II) by the officer for good reason, or (B) the officer remains employed by the Company or its successor following the Asset Sale and terminates employment for any reason during the thirty-day period immediately following the first anniversary of the Asset Closing, or (C) the officer accepts employment with the Asset Buyer but the Asset Buyer does not assume the Company’s severance obligations under the officer’s retention agreement; provided, in any case, the receipt of severance benefits is conditioned upon the officer releasing the Company from any liabilities, known or unknown. In addition, the Board has established a bonus pool in the amount of $2.5 million to be allocated among Company employees for the successful Asset Closing and Externalization Closing. A committee of the Board has full discretion to determine how much of the bonus pool to expend, who will receive a share of the bonus pool, and the amount of the bonus for any individual. For further information regarding these Executive Payments, including the treatment of Company restricted stock, deferred compensation and severance obligations, see the section entitled “Proposal 5 – Advisory (Non-Binding) Vote on Executive Compensation” of this proxy statement.

Closing of the Asset Sale

Unless otherwise mutually agreed by the Company and the Asset Buyer, the Asset Closing will take place no later than the fifth business day following the satisfaction or waiver of all of the conditions to the Asset Closing (as set forth in the Asset Purchase Agreement and as described in the section of this proxy statement captioned “The Asset Purchase Agreement – Conditions to the Asset Sale”), other than conditions that by their terms are to be satisfied at the Asset Closing and subject to the satisfaction or waiver of such conditions.

We currently expect the Transactions to be completed in June or July 2018. However, the exact timing of the Asset Closing cannot be predicted because it is subject to the conditions to the Asset Closing specified in the Asset Purchase Agreement, many of which conditions are outside of our control.

Appraisal Rights

Pursuant to Section 3-202(c)(1) of the MGCL, there are no appraisal or dissenters’ rights that apply to the execution, delivery and performance of the Asset Purchase Agreement or the consummation of the Asset Sale. Further, pursuant to the charter of the Company, as amended, supplemented, corrected and/or restated through the date hereof, no stockholder is entitled to appraisal rights unless the Board shall determine that such rights apply to the Asset Sale. The Board has made no such determination.

U.S. Federal Income Tax Consequences of the Asset Sale

The following discussion is a general summary of the U.S. federal income tax consequences of the Asset Sale. This summary does not purport to be a complete description of the income tax consequences of the Asset Sale. For example, we have not described tax consequences that we assume to be known generally by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, partnerships and other pass-through entities, dealers in securities, pension plans and trusts, financial institutions, U.S. stockholders (as defined below) whose functional currency is not the U.S. dollar, persons who mark-to-market our shares and persons who hold our shares as part of a “straddle,” “hedge” or “conversion” transaction.

 

75

This summary assumes that investors hold shares of our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this proxy statement and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. We have not sought and do not intend to seek any ruling from the IRS regarding the Asset Sale. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.

For purposes of our discussion, a “U.S. stockholder” means a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:

 

•

a citizen or individual resident of the United States;

 

•

a corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

 

•

an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

•

a trust if (i) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) it has a valid election in place to be treated as a U.S. person.

For purposes of our discussion, a “Non-U.S. stockholder” means a beneficial owner of shares of our common stock that is neither a U.S. stockholder nor a partnership (including an entity treated as a partnership for U.S. federal income tax purposes).

If an entity treated as a partnership for U.S. federal income tax purposes (a “partnership”) holds shares of our common stock, the tax treatment of a partner or member of the partnership will generally depend upon the status of the partner or member and the activities of the partnership. A prospective stockholder that is a partner or member in a partnership holding shares of our common stock should consult his, her or its tax advisors with respect to the purchase, ownership and disposition of shares of our common stock.

Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.

The Asset Sale will be treated for U.S. federal income tax purposes as a sale of certain of the Company’s assets in exchange for cash. The Asset Sale is a taxable transaction for the Company for U.S. federal income tax purposes, and the Company anticipates that it will realize a loss for U.S. federal income tax purposes in connection with the Asset Sale.

The Asset Sale is not a stockholder-level action, and our U.S. and non-U.S. stockholders, in their capacities as such, are not expected to realize any gain or loss for U.S. federal income tax purposes solely as a result of the Asset Sale.    

Accounting Treatment of the Asset Sale

The Company expects the sales of each of its portfolio investments in connection with the Asset Sale to be accounted for as “sales” by the Company for accounting and financial reporting purposes in accordance with Accounting Standards Codification 860, Transfers and Servicing (“ASC 860”). Upon the completion of the Asset Sale, we will remove any portfolio investments sold from our consolidated balance sheet and recognize a corresponding gain or loss on the sale of each portfolio investment. We anticipate recording an overall net loss related to the Asset Sale.

 

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To the extent we cannot obtain the required consents with respect to any of the Purchased Assets, in order to provide to the Asset Buyer the full benefits (including economic) and rights of ownership related to such assets, we may be required to grant a participation interest in such assets to the Asset Buyer. Under ASC 860, certain requirements must be met in order to account for these participation interests as sales in accordance with GAAP. Any participations which do not meet all of the required conditions will remain on the Company’s consolidated balance sheets and any proceeds under the Asset Sale related to such participations will be recorded as secured borrowings until the required conditions are met.

Required Regulatory Approvals

The Company and the Asset Buyer have agreed to use commercially reasonable efforts to comply with all regulatory notification requirements and to obtain all regulatory approvals required to consummate the Asset Sale, including, if applicable, that the applicable waiting period under the HSR Act has expired or been terminated.

HSR Act and U.S. Antitrust Matters

Under the Asset Purchase Agreement, each of Asset Buyer and the Company agreed, if required, to file with the DOJ and FTC a notification and report form relating to Asset Sale pursuant to the HSR Act as soon as reasonably practicable following the execution and delivery of the Asset Purchase Agreement. However, subsequent to the date of the Asset Purchase Agreement and Externalization Agreement, each of the Asset Buyer, Barings and the Company confirmed that no filings under the HSR Act are required in connection with closing of the Externalization Transaction and Asset Sale.

Notwithstanding the foregoing, the DOJ, the FTC or other U.S. governmental authorities could take action under the antitrust laws with respect to the Asset Sale as they deem necessary or desirable in the public interest, either before or after the Asset Sale, including seeking to enjoin the completion of the Asset Sale, to rescind the Asset Sale or to conditionally approve the Asset Sale upon the divestiture of assets of the Company. Moreover, in some jurisdictions, a competitor, customer, state Attorney General or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the Asset Sale, before or after it is completed. In view of the competitive circumstances in the industry in which the Company operates, we believe that the likelihood of any such action is remote.

Other Regulatory Approvals

We believe we are not required to make any other material filings or obtain any material governmental consents or approvals before the consummation of the Asset Sale. If any other approvals, consents or filings are required to consummate the Asset Sale, we will seek or make such consents, approvals or filings as promptly as possible.

To the extent any other regulatory approvals or consents are required, one or more governmental entities may impose a condition, restriction, qualification, requirement or limitation when it grants such necessary approvals and consents. Third parties may also seek to intervene in the regulatory process or litigate to enjoin or overturn regulatory approvals, any of which actions could significantly impede or even preclude obtaining required regulatory approvals.

There can be no guarantee that the Asset Sale will not be challenged on antitrust grounds or, if such challenge is made, that the challenge will not be successful. Similarly, there can be no assurance that any other required regulatory clearances and approvals will be timely obtained, obtained at all or that the granting of these regulatory clearances and approvals will not involve the imposition of conditions to the consummation of the Asset Sale or require changes to the terms of the Asset Sale. These conditions or changes could result in the conditions to the Asset Purchase Agreement not being satisfied prior to October 5, 2018, which is the latest date

 

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on which the Asset Sale must have been consummated before either the Company or the Asset Buyer may terminate the Asset Purchase Agreement (the “Outside Date”). For more information, please see the section of this proxy statement captioned “The Asset Purchase Agreement – Termination of the Asset Purchase Agreement.”

THE ASSET PURCHASE AGREEMENT

Explanatory Note Regarding the Asset Purchase Agreement

The following summary describes the material provisions of the Asset Purchase Agreement. The descriptions of the Asset Purchase Agreement in this summary and elsewhere in this proxy statement are not complete and are qualified in their entirety by reference to the Asset Purchase Agreement, a copy of which is attached to this proxy statement as Appendix A and incorporated by reference in its entirety into this proxy statement. We encourage you to read the Asset Purchase Agreement carefully and in its entirety because this summary may not contain all the information about the Asset Purchase Agreement that is important to you.

The representations, warranties and covenants of the Company and the Asset Buyer contained in the Asset Purchase Agreement have been made solely for the benefit of the parties thereto. In addition, such representations, warranties and covenants (i) have been made only for purposes of the Asset Purchase Agreement, (ii) have been qualified by (a) matters specifically disclosed in the Company’s filings with the SEC filed or furnished since December 31, 2016 (excluding “risk factor” sections or any language in such filings that is predictive or forward-looking) and (b) confidential disclosures made in the disclosure schedules delivered in connection with the Asset Purchase Agreement, (iii) are subject to applicable materiality qualifications contained in the Asset Purchase Agreement which may differ from what may be viewed as material by investors, (iv) were made only as of the date of the Asset Purchase Agreement or such other date as is specified in the Asset Purchase Agreement and (v) have been included in the Asset Purchase Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as fact. Accordingly, the Asset Purchase Agreement is included with this filing only to provide investors with information regarding the terms of the Asset Purchase Agreement, and not to provide investors with any other factual information regarding the Company or the Asset Buyer or their respective businesses. Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or the Asset Buyer or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Asset Purchase Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

The representations and warranties in the Asset Purchase Agreement and the description of them in this proxy statement should not be read alone but instead should be read in conjunction with the other information contained in this proxy statement and the other reports, statements and filings the Company files publicly with the SEC.

Assets to be Transferred to the Asset Buyer

At the Asset Closing, subject to the provisions of the Asset Purchase Agreement regarding Restricted Investments (as defined elsewhere herein), the Company will transfer the Investments to the Asset Buyer together with all documents, files, books and records, governing documents and other information in respect thereof, in each case, subject to the rights and obligations thereunder (collectively, the “Purchased Assets”). The complete list of the Investments subject to the Asset Sale are set forth in relevant schedules in the Asset Purchase Agreement.

Notwithstanding the foregoing, the Company and Asset Buyer have agreed that, to the extent certain Purchased Assets are currently, or with the Asset Buyer’s consent at closing are, owned by a subsidiary of the

 

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company, with the Asset Buyer’s and Barings’ prior written consent, at the closing of the Asset Sale, the Company may transfer to Asset Buyer the issued and outstanding equity of the relevant subsidiary without a requirement that the relevant Purchased Asset be separately transferred. In addition, if the SBA Approval (as defined elsewhere herein) is obtained, the Company will, in lieu of transferring the Purchased Assets held by any of the Company’s SBIC subsidiaries, transfer the equity of the SBICs to Asset Buyer without separately transferring the underlying Purchased Asset. In the case of either of the foregoing events, the parties will work together in good faith to address the treatment of, or make appropriate adjustments to the Purchase Price to appropriately account for, cash and other assets (including pre-paid taxes and any deferred SBA financing fees) and liabilities (including tax liabilities) of the relevant subsidiary or SBIC subsidiary in addition to the relevant Purchased Assets. To the extent any subsidiaries of the Company (including the SBIC subsidiaries) are transferred to the Asset Buyer, the Company would be responsible for paying, performing, and discharging when due, and will indemnify and hold harmless Asset Buyer for all liabilities, taxes and obligations of any such subsidiary or SBIC subsidiary to be performed, arising out of or relating to facts, events or circumstances arising or occurring prior to the closing of the Asset Sale to the extent such liabilities, taxes and obligations were not taken into account in calculating the Purchase Price.

In the event that any consent of a third party required in order to transfer an Investment to Asset Buyer at closing of the Asset Sale has not been obtained, then the relevant Investment (a “Restricted Investment”) will not be transferred to Asset Buyer at closing of the Asset Sale, and instead the parties will take the actions described below under “The Asset Purchase Agreement – Additional Covenants – Restricted Investments.”

Assets to be Retained by the Company

The Company will not transfer to Asset Buyer certain excluded assets including, but not limited to, the Company’s organizational documents, stock records, licenses and permits, cash, cash equivalents, accounts receivable and bank deposits not expressly included in the Purchased Assets, intellectual property, information technology, and all other tangible and intangible property, and certain investments made after the date of the Asset Purchase Agreement. Also, as noted above, the Restricted Investments may be retained by the Company until the requisite consent to assignment has been obtained, and such Restricted Investments will be held by the Company for the economic benefit of Asset Buyer.

Liabilities for Which Asset Buyer Will be Responsible

Upon the terms and subject to the conditions set forth in the Asset Purchase Agreement, from and after the Asset Closing, Asset Buyer will be responsible for, satisfy and discharge when due all obligations with respect to the Purchased Assets arising out of and relating to facts, events or circumstances arising or occurring after the Asset Closing (the “Assumed Obligations”). Asset Buyer will also be responsible for any taxes with respect to the Purchased Assets and Assumed Obligations allocable to the period after the Asset Closing, and for half of the transfer taxes, if any, imposed in connection with the Asset Sale, subject to an agreed-upon cap. Asset Buyer has agreed to indemnify and hold harmless the Company from all Assumed Obligations, along with any related legal expenses and costs of enforcement of the indemnity.

Liabilities to be Retained by the Company

Under the Asset Purchase Agreement, the Company has agreed to retain, and be responsible for paying, performing and discharging when due, all liabilities and obligations relating to the Company, its subsidiaries or affiliates or the Purchased Assets other than the Assumed Obligations (collectively, “Excluded Obligations”). The Excluded Obligations include all liabilities for taxes (i) arising with respect to the Purchased Assets and the Assumed Obligations for or allocable to the “pre-closing tax period” (as determined in accordance with the Asset Purchase Agreement), (ii) the Company’s share of any transfer taxes determined in accordance with the Asset Purchase Agreement, and (iii) other than Asset Buyer’s share of any transfer taxes determined in accordance with the Asset Purchase Agreement, any taxes of the Company attributable to the Asset Sale. The Company has

 

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agreed to indemnify and hold harmless the Asset Buyer from all Excluded Obligations, along with any related legal expenses and costs of enforcement of the indemnity.

Purchase Price

In connection with the Asset Sale, Asset Buyer will pay the Company a purchase price equal to:

 

(i)

an amount in cash equal to $981,178,542; plus

 

(ii)

the purchase price of (a) any loan originated (and not subsequently sold or transferred) to an Existing Portfolio Company or to an affiliate of an Existing Portfolio Company and (b) the increase in principal on a Purchased Loan, in each case between the Cut-off Time and the Closing Cut-off Time; plus

 

(iii)

the aggregate increase in principal attributable to the capitalization of interest between the Cut-off Time and the Closing Cut-off Time with respect to a Purchased Loan that is recognized as PIK interest income in the Company’s consolidated financial statements; plus

 

(iv)

the aggregate amount of original issue discount amortization and deferred fee income amortization between the April 1, 2018 and the Closing Cut-off Time with respect to a Purchased Loan that is recognized as income in the Company’s consolidated financial statements; plus

 

(v)

the aggregate purchase price paid by the Company or its subsidiaries for a Purchased Equity Interest acquired from an Existing Portfolio Company or from an affiliate of an Existing Portfolio Company (and not subsequently sold or transferred) by the Company or its subsidiaries between the Cut-off Time and the Closing Cut-off Time; minus

 

(vi)

any principal proceeds received by the Company or its subsidiaries on any Purchased Loan between the Cut-off Time and the Closing Cut-off Time; minus

 

(vii)

the aggregate proceeds received by the Company or its subsidiaries that are attributable to the redemption of, sale of, or return of capital on, any Purchased Equity Interest between the Cut-off Time and the Closing Cut-off Time; plus

 

(viii)

the aggregate amount of accrued but unpaid interest (including uncapitalized PIK interest earned), dividends, penalties, fees, charges and other amounts on the Investments as of the Closing Cut-off Time, as determined in accordance with GAAP; minus

 

(ix)

the Company’s consolidated net interest margin on the Investments, defined as (A) total investment income, less investment income on cash and cash equivalents, less investment income on new investments made after the Cut-off Time; less (B) total interest expense (including the amortization of deferred financing fees but excluding unused commitment fees under the Credit Agreement for the period from May 16, 2018 through the Closing Cut-off Time, and excluding any interest expense on new investments), in each case, as determined in accordance with GAAP, for the period commencing on April 1, 2018 and ending on the Closing Cut-off Time; plus

 

(x)

a monthly servicing fee payable to the Company by the Asset Buyer equal to $875,000 per calendar month for the period beginning April 1, 2018, payable on a pro rata basis through the Closing Cut-off Time, with the total amount not to exceed $3,062,500.

Based on the purchase price adjustments outlined in items (ii), (iii), (v), (vi), (vii) and (viii) above, we estimate the purchase price in connection with the Asset Sale would be approximately $936.5 million as of March 31, 2018. The reduction in purchase price is attributable to cash proceeds received by the Company for the repayment of Purchased Loans and redemption of Purchased Equity Interests since December 31, 2017, partially offset by the purchase price of new Purchased Loans and Purchased Equity Interests made during the quarter, and the increase in purchase price attributable to capitalized interest and accrued but unpaid interest and fees. The net reduction in purchase price, however, is offset by cash proceeds that are retained by the Company and therefore does not impact the net asset value of the Company.

 

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Closing of the Asset Sale

Unless otherwise mutually agreed by the Company and the Asset Buyer, the Asset Closing will take place no later than the fifth business day following the satisfaction or waiver of all of the conditions to the Asset Closing (as set forth in the Asset Purchase Agreement and as described in the section of this proxy statement captioned “The Asset Purchase Agreement – Conditions to the Asset Sale”), other than conditions that by their terms are to be satisfied at the Asset Closing and subject to the satisfaction or waiver of such conditions.

At the Asset Closing, except as it relates to Restricted Investments, the Company will deliver to the Asset Buyer assignments relating to the Purchased Assets and all related notes, loan documents, loan files, books and records, stock certificates or other evidences of equity ownership, documents governing the equity interests to be sold, and certain other certificates and deliveries required by the Asset Purchase Agreement; provided that the Company will retain copies of relevant documents to the extent relating to any legitimate legal, tax, litigation, business, financial reporting or similar purpose; and provided further, that copies or originals of documents related to the Restricted Investments will be retained for the benefit of Asset Buyer as described above.

At the Asset Closing, the Asset Buyer (or, without relieving Asset Buyer of its obligations under the Asset Purchase Agreement, its affiliated designees) will deliver to the Company or, as necessary, to one or more separate accounts established in connection with repaying amounts outstanding under the Credit Agreement, the Notes and, if required, the SBA Debentures, the Purchase Price, along with counterparts to assignment agreements and certain other certificates or deliveries required by the Asset Purchase Agreement. In the event the SBA Debentures are not repaid, but instead are assumed by Asset Buyer, the Purchase Price payable to the Company will be reduced by the amount of principal, accrued interest and all other amounts outstanding under the SBA Debentures, and assumed by Asset Buyer, as of the Asset Closing.

Also at, and as a result of, the Asset Closing, each restricted share of Company Common Stock outstanding and not previously forfeited under the Company’s omnibus incentive plan will become fully vested and all restrictions with respect to such restricted shares shall lapse. In the event that the relevant holder of restricted shares has so requested (in accordance with the omnibus incentive plan and the relevant restricted share award agreement), the Company shall, in accordance with the procedures adopted by the Company, withhold a number of restricted shares having a fair market value (determined on the date such shares are withheld) equal to the aggregate amount required to be deducted and withheld under the Code and any applicable state or local tax law with respect to the lapsing of restrictions on all restricted shares held by the relevant holder, and the Company will pay over to the appropriate taxing authorities a corresponding amount of cash in satisfaction of such tax liabilities.

Representations and Warranties

The Asset Purchase Agreement contains certain representations and warranties made by the Company to the Asset Buyer including, but not limited to, representations regarding:

 

•

corporate and legal organization and power, qualification and good standing;

 

•

the authorization of the Asset Purchase Agreement and Externalization Agreement, and the execution, delivery and enforceability of the Asset Purchase Agreement;

 

•

third party and governmental consents and approvals;

 

•

absence of conflicts and no violations of law, governance documents and certain agreements;

 

•

public filings and regulatory matters;

 

•

financial statements and internal controls and procedures;

 

•

broker’s fees;

 

•

the absence of undisclosed liabilities and certain changes;

 

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•

legal proceedings;

 

•

matters relating to the Investments and the Company’s ownership thereof;

 

•

compliance with law;

 

•

state takeover laws;

 

•

certain tax matters; and

 

•

information to be provided by the Company for inclusion in this proxy statement.

In addition, the Asset Buyer makes representations and warranties to the Company regarding, among other things:

 

•

limited liability company and legal organization and power, qualification and good standing;

 

•

the authorization, execution, delivery and enforceability of the Asset Purchase Agreement;

 

•

third party and governmental consents and approvals;

 

•

absence of conflicts and no violations of law, governance documents and certain agreements;

 

•

broker’s fees;

 

•

state takeover laws;

 

•

information to be provided by Asset Buyer for inclusion in this proxy statement;

 

•

no financing conditions and source of financing, including the equity commitment letters and limited guaranties from certain entities affiliated with the Asset Buyer;

 

•

no arrangements with management or stockholders;

 

•

status of Asset Buyer under the securities laws; and

 

•

Asset Buyer’s independent review of the Company.

Many of the representations and warranties contained in the Asset Purchase Agreement are qualified by materiality or an “Asset Sale Material Adverse Effect” standard.

For purposes of the Asset Purchase Agreement, “Asset Sale Material Adverse Effect” is defined to mean any occurrence, change, event, effect or development that, individually, or taken together with all other occurrences, changes, events, effects or developments, (a) has or would reasonably be likely to have a material adverse effect on the condition (financial or otherwise), results of operations, properties, assets (including, without limitation, the Purchased Assets) or business of the Company and its subsidiaries taken as a whole; or (b) with respect to either the Company or the Asset Buyer, has or would reasonably be expected to prevent or materially delay the ability of the Company or Asset Buyer, as applicable, to timely consummate the Asset Sale; provided, however, that, with respect to clause (a), the determination of whether an “Asset Sale Material Adverse Effect” exists or has occurred does not include effects to the extent attributable to:

 

(i)

changes, after the date of the Asset Purchase Agreement, in GAAP or regulatory accounting requirements applicable generally to companies in the industry in which the Company and its subsidiaries operate;

 

(ii)

changes, after the date of the Asset Purchase Agreement, in laws, rules or regulations of general applicability to companies in the industry in which the Company and its subsidiaries operate;

 

(iii)

changes, after the date of the Asset Purchase Agreement, in global or national political conditions or general economic or market conditions generally affecting other companies in the industry in which the Company and its subsidiaries operate;

 

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(iv)

conditions arising out of acts of terrorism, war, weather conditions or other force majeure events;

 

(v)

the public disclosure of the Asset Purchase Agreement or the Asset Sale or any action required to be taken in accordance therewith (other than covenants to operate in the ordinary course of business)

 

(vi)

any legal proceedings made or brought by any of the current or former stockholders of the Company (on their own behalf or on behalf of the Company) arising out of or related to Asset Purchase Agreement or the Asset Sale; or

 

(vii)

the failure to obtain consents relating to the sale or transfer of Investments, as described in the Asset Purchase Agreement,

except, with respect to clauses (i), (ii), (iii) and (iv), to the extent that the effects of such change are disproportionately adverse to the condition (financial or otherwise), results of operations, properties, assets (including, without limitation, the Purchased Assets) or business of the Company and its subsidiaries, taken as a whole, as compared to other companies in the industry in which the Company and its subsidiaries operate.

Covenants Relating to the Conduct of the Business

Under the Asset Purchase Agreement, the Company has agreed that, between the execution of the Asset Purchase Agreement and the Asset Closing, the Company will, and will cause its subsidiaries to, to the extent related to the Purchased Assets, conduct its business in the ordinary course in all material respects; use commercially reasonable efforts to maintain and preserve intact our assets and business organization; not take or omit to take any action which would have an Asset Sale Material Adverse Effect on the Company and its subsidiaries.

In addition, the Company has agreed, subject at all times to the requirements of its financing documents applicable law, to not take (or omit to take) certain actions that would materially affect the Purchased Assets without the written consent of Asset Buyer (which shall not be unreasonably withheld), including, but not limited to (i) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money, assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other person; (ii) issue any notes, bonds or other debt securities or any capital stock or equity-based securities; (iii) acquire, sell, transfer, pledge, lease, license, mortgage, encumber or otherwise dispose of any Purchased Asset; (iv) modify, amend or waive any of the terms, covenants or conditions of any Purchased Asset or authorize the acceleration or repayment of any Purchased Asset; (v) loan any money to, or make any equity investment in, any Existing Portfolio Company (excluding certain loans required to be made); (vi) subordinate or release any security or collateral with respect to certain Purchased Assets; (vii) amend the Company’s bylaws or articles of incorporation; (viii) commence or settle any material claim, action or proceeding relating to the Purchased Assets; (ix) effect any corporate restructuring, corporate reorganization or complete or partial liquidation; (x) implement or adopt in any change in its tax accounting or financial accounting principles, practices or methods, or make or change any tax election, unless required by GAAP or recommended by the Audit Committee of the Board of the Company; or (xi) take any action or willfully fail to take any action that is intended or may reasonably be expected to result in any of the conditions to the Asset Closing not being satisfied. Notwithstanding the foregoing, but subject at all times to the terms of the Externalization Agreement, the foregoing restrictions do not restrict the Company’s ability to make new investments in companies that are not Existing Portfolio Companies.

 

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Additional Covenants

The Company and the Asset Buyer have agreed to additional covenants between the execution of the Asset Purchase Agreement and the Asset Closing including, but limited to, the following matters:

Regulatory Matters

The Company and Asset Buyer have agreed to cooperate with each other and use their respective commercially reasonable efforts to promptly prepare and file all necessary documentation, to effect all applications, notices, petitions and filings, to obtain as promptly as practicable all permits, consents, approvals and authorizations of all third parties and governmental entities that are necessary or advisable to consummate the Asset Sale. Without limiting the foregoing, the Company and Asset Buyer have agreed to the following as it relates to regulatory matters:

 

•

Proxy Statement

The Company has agreed to certain covenants regarding the preparation, filing and mailing of the proxy statement to the Company’s stockholders and the holding of the Special Meeting. In addition, the Company and Asset Buyer have agreed to take additional steps in order to ensure the accuracy of the information contained in the proxy statement.

 

•

Hart Scott Rodino Act Filing Matters

Each of Asset Buyer and the Company agreed to file with the FTC and the DOJ, if applicable, a notification and report form relating to Asset Sale pursuant to the HSR Act as soon as reasonably practicable following the execution and delivery of the Asset Purchase Agreement. However, subsequent to the date of the Asset Purchase Agreement and the Externalization Agreement, each of Asset Buyer, the Company and Barings confirmed that no filings under the HSR Act are required in connection with closing of the Asset Sale and Externalization Transaction.

 

•

SBA Matters

The Company has agreed to notify the SBA of the Asset Sale and Externalization Transaction, to seek guidance from the SBA regarding the treatment of the Company’s SBA licenses in connection with the transactions, and to take such actions as may be reasonably necessary to obtain the SBA’s approval of the Asset Sale or Externalization Transaction, as directed by the SBA, and the continued effectiveness of the Company’s SBA license and to keep the SBA Debentures issued by the SBIC subsidiaries outstanding in accordance with their terms (the “SBA Approval”). In connection with the foregoing, the Company has agreed to reasonably cooperate with each of Asset Buyer and Barings to facilitate the obtaining of the SBA Approval and the related transfer of the SBA licenses; provided, however, the Company is not obligated to advocate on Asset Buyer’s or Barings’ behalf in connection with the SBA Approval, and the Company’s cooperation with Asset Buyer will not be deemed to constitute a failure to cooperate with Barings in connection with seeking the SBA Approval, and vice versa.

Stockholder Meeting and Board Recommendation

In connection with the Special Meeting, the Chairman is permitted to adjourn, delay or postpone the Special Meeting in accordance with applicable law (but not beyond October 5, 2018) (i) to the extent necessary to allow reasonable additional time for the filing and mailing of any reasonably necessary or appropriate supplemental or amended disclosure and for such supplemental or amended disclosure to be disseminated and reviewed by the Company’s stockholders prior to the Special Meeting, (ii) if there are insufficient shares of Company Common Stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the Special Meeting, or (iii) to allow reasonable additional time to solicit additional proxies to the extent the Board or any committee thereof reasonably believes necessary in order to obtain the required approvals of the Company’s stockholders. In addition, at the instruction of the Asset Buyer, the Special Meeting shall be adjourned, delayed or postponed to allow reasonable additional time to solicit additional proxies to the extent the Asset Buyer believes necessary in order to obtain the required approvals of the Company’s stockholders.

 

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