e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal
year ended September 30, 2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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COMMISSION
FILE NUMBER: 1-33901
Fifth Street Finance
Corp.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
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DELAWARE
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26-1219283
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(State or jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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10 Bank Street,
12th
Floor
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10606
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White Plains, NY
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(Zip Code)
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(Address of principal executive
office)
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REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE:
(914) 286-6800
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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Common Stock, par value $0.01 per share
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New York Stock Exchange
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter periods as the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) YES o NO þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant as of March 31,
2009 is $164,916,706. The registrant had 37,878,987 shares
of common stock outstanding as of November 30, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
None
PART I
General
We are a specialty finance company that lends to and invests in
small and mid-sized companies in connection with investments by
private equity sponsors. We define small and mid-sized companies
as those with annual revenues between $25 million and
$250 million. We are externally managed and advised by
Fifth Street Management LLC, whose six principals
collectively have over 50 years, and individually have
between four years and 14 years, of experience lending
to and investing in small and mid-sized companies.
Fifth Street Management LLC, which we also refer to as our
investment adviser, is an affiliate of Fifth Street
Capital LLC, a private investment firm founded and managed by
Leonard M. Tannenbaum who has led the investment of over
$600 million in small and mid-sized companies, including
the investments made by Fifth Street Finance Corp., since 1998.
Our investment objective is to maximize our portfolios
total return by generating current income from our debt
investments and capital appreciation from our equity
investments. To meet our investment objective we seek to
(i) capitalize on our investment advisers strong
relationships with private equity sponsors; (ii) focus on
transactions involving small and mid-sized companies which we
believe offer higher yielding debt investment opportunities,
lower leverage levels and other terms more favorable than
transactions involving larger companies; (iii) continue our
growth of direct originations; (iv) employ disciplined
underwriting policies and rigorous portfolio management
practices; (v) structure our investments to minimize risk
of loss and achieve attractive risk-adjusted returns; and
(vi) leverage the skills and experience of our investment
adviser.
As of September 30, 2009, we have originated
$343.4 million of funded debt and equity investments and
our portfolio totaled $299.6 million at fair value and was
comprised of 28 investments, 26 of which were in operating
companies and two of which were in private equity funds. The
weighted average annual yield of our debt investments as of
September 30, 2009 was approximately 15.7%. Our investments
generally range in size from $5 million to $40 million
and are principally in the form of first and second lien debt
investments, which may also include an equity component. As of
September 30, 2009, all of our debt investments were
secured by first or second priority liens on the assets of our
portfolio companies. Moreover, we held equity investments
consisting of common stock, preferred stock, or other equity
interests in 22 out of 28 portfolio companies as of
September 30, 2009.
Fifth Street Mezzanine Partners III, L.P., our predecessor fund,
commenced operations as a private partnership on
February 15, 2007. Effective as of January 2, 2008,
Fifth Street Mezzanine Partners III, L.P. merged with and into
us. We are an externally managed, closed-end, non-diversified
management investment company that has elected to be treated as
a business development company under the Investment Company Act
of 1940, or the 1940 Act. We were formed in late
2007 for the purpose of acquiring Fifth Street Mezzanine
Partners III, L.P. and continuing its business as a public
entity.
As a business development company, we are required to comply
with regulatory requirements, including limitations on our use
of debt. We are permitted to, and expect to, finance our
investments using debt and equity. See Item 1.
Business Regulation. We elected, effective as
of January 2, 2008, to be treated for federal income tax
purposes as a regulated investment company, or RIC,
under Subchapter M of the Internal Revenue Code, or
Code. See Item 1.
Business Taxation as a Regulated Investment
Company. As a RIC, we generally will not have to pay
corporate-level federal income taxes on any net ordinary income
or capital gains that we distribute to our stockholders as
dividends if we meet certain
source-of-income,
distribution and asset diversification requirements.
Our principal executive office is located at 10 Bank Street,
12th Floor, White Plains, New York 10606 and our telephone
number is
(914) 286-6800.
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The
Investment Adviser
Our investment adviser is led by six principals who collectively
have over 50 years, and individually have between
four years and 14 years, of experience lending to and
investing in small and mid-sized companies. Our investment
adviser is affiliated with Fifth Street Capital LLC, a private
investment firm founded and managed by Leonard M. Tannenbaum who
has led the investment of over $600 million in small and
mid-sized companies, including the investments made by Fifth
Street, since 1998. Mr. Tannenbaum and his respective
private investment firms have acted as the lead (and often sole)
first or second lien investor in over 50 investment
transactions. The other investment funds managed by these
private investment firms generally are fully committed and,
other than follow-on investments in existing portfolio
companies, are no longer making investments.
We benefit from our investment advisers ability to
identify attractive investment opportunities, conduct diligence
on and value prospective investments, negotiate investments and
manage a diversified portfolio of those investments. The
principals of our investment adviser have broad investment
backgrounds, with prior experience at investment funds,
investment banks and other financial services companies and have
developed a broad network of contacts within the private equity
community. This network of contacts provides our principal
source of investment opportunities.
The principals of our investment adviser are
Mr. Tannenbaum, our president and chief executive officer
and our investment advisers managing partner, Marc A.
Goodman, our chief investment officer and our investment
advisers senior partner, Juan E. Alva, a partner of our
investment adviser, Bernard D. Berman, our chief compliance
officer, executive vice president and secretary and a partner of
our investment adviser, Ivelin M. Dimitrov, a partner of our
investment adviser, and William H. Craig, our chief financial
officer.
Business
Strategy
Our investment objective is to maximize our portfolios
total return by generating current income from our debt
investments and capital appreciation from our equity
investments. We have adopted the following business strategy to
achieve our investment objective:
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Capitalize on our investment advisers strong
relationships with private equity sponsors. Our
investment adviser has developed an extensive network of
relationships with private equity sponsors that invest in small
and mid-sized companies. We believe that the strength of these
relationships is due to a common investment philosophy, a
consistent market focus, a rigorous approach to diligence and a
reputation for delivering on commitments. In addition to being
our principal source of originations, we believe that private
equity sponsors provide significant benefits including
incremental due diligence, additional monitoring capabilities
and a potential source of capital and operational expertise for
our portfolio companies.
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Focus on established small and mid-sized
companies. We believe that there are fewer
finance companies focused on transactions involving small and
mid-sized companies than larger companies, and that this is one
factor that allows us to negotiate favorable investment terms.
Such favorable terms include higher debt yields and lower
leverage levels, more significant covenant protection and
greater equity grants than typical of transactions involving
larger companies. We generally invest in companies with
established market positions, seasoned management teams, proven
products and services and strong regional or national
operations. We believe that these companies possess better
risk-adjusted return profiles than newer companies that are
building management or in early stages of building a revenue
base.
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Continue our growth of direct originations. We
directly originated 100% of our investments. Over the last
several years, the principals of our investment adviser have
developed an origination strategy designed to ensure that the
number and quality of our investment opportunities allows us to
continue to directly originate substantially all of our
investments. We believe that the benefits of direct originations
include, among other things, our ability to control the
structuring of investment protections and to generate
origination and exit fees.
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Employ disciplined underwriting policies and rigorous
portfolio management. Our investment adviser has
developed an extensive underwriting process which includes a
review of the prospects, competitive position, financial
performance and industry dynamics of each potential portfolio
company. In addition, we perform substantial diligence on
potential investments, and seek to invest with private equity
sponsors who have proven capabilities in building value. As part
of the monitoring process, our investment adviser will analyze
monthly and quarterly financial statements versus the previous
periods and year, review financial projections, meet with
management, attend board meetings and review all compliance
certificates and covenants.
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Structure our investments to minimize risk of loss and
achieve attractive risk-adjusted returns. We
structure our loan investments on a conservative basis with high
cash yields, cash origination fees, low leverage levels and
strong investment protections. As of September 30, 2009,
the weighted average annual yield of our debt investments was
approximately 15.7%, which includes a cash component of 12.9%.
The 26 debt investments in our portfolio as of
September 30, 2009, had a weighted average debt to EBITDA
(Earnings Before Interest, Taxes, Depreciation and Amortization)
multiple of 3.6x calculated at the time of origination of the
investment. Finally, our debt investments have strong
protections, including default penalties, information rights,
board observation rights, and affirmative, negative and
financial covenants, such as lien protection and prohibitions
against change of control. We believe these protections, coupled
with the other features of our investments described above,
should allow us to reduce our risk of capital loss and achieve
attractive risk adjusted returns; however, there can be no
assurance that we will be able to successfully structure our
investments to minimize risk of loss and achieve attractive
risk-adjusted returns.
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Leverage the skills and experience of our investment
adviser. The six principals of our investment
adviser collectively have over 50 years, and individually
have between four years and 14 years, of experience
lending to and investing in small and mid-sized companies. The
principals of our investment adviser have broad investment
backgrounds, with prior experience at private investment funds,
investment banks and other financial services companies and they
also have experience managing distressed companies. We believe
that our investment advisers expertise in valuing,
structuring, negotiating and closing transactions provides us
with a competitive advantage by allowing us to provide financing
solutions that meet the needs of our portfolio companies while
adhering to our underwriting standards.
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Investment
Criteria
The principals of our investment adviser have identified the
following investment criteria and guidelines for use in
evaluating prospective portfolio companies and they use these
criteria and guidelines in evaluating investment opportunities
for us. However, not all of these criteria and guidelines were,
or will be, met in connection with each of our investments.
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Established companies with a history of positive operating
cash flow. We seek to invest in established
companies with sound historical financial performance. We
typically focus on companies with a history of profitability on
an operating cash flow basis. We do not intend to invest in
start-up
companies or companies with speculative business plans.
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Ability to exert meaningful influence. We
target investment opportunities in which we will be the
lead/sole investor in our tranche and in which we can add value
through active participation, often through advisory positions.
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Private equity sponsorship. We generally seek
to invest in companies in connection with private equity
sponsors who have proven capabilities in building value. We
believe that a private equity sponsor can serve as a committed
partner and advisor that will actively work with the company and
its management team to meet company goals and create value. We
assess a private equity sponsors commitment to a portfolio
company by, among other things, the capital contribution it has
made or will make in the portfolio company.
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Seasoned management team. We generally will
require that our portfolio companies have a seasoned management
team, with strong corporate governance. We also seek to invest
in companies that have proper incentives in place, including
having significant equity interests, to motivate management to
act in accordance with our interests.
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Defensible and sustainable business. We seek
to invest in companies with proven products
and/or
services and strong regional or national operations.
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Exit strategy. We generally seek to invest in
companies that we believe possess attributes that will provide
us with the ability to exit our investments. We expect to exit
our investments typically through one of three scenarios:
(i) the sale of the company resulting in repayment of all
outstanding debt, (ii) the recapitalization of the company
through which our loan is replaced with debt or equity from a
third party or parties or (iii) the repayment of the
initial or remaining principal amount of our loan then
outstanding at maturity. In some investments, there may be
scheduled amortization of some portion of our loan which would
result in a partial exit of our investment prior to the maturity
of the loan.
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Deal
Origination
Our deal originating efforts are focused on building
relationships with private equity sponsors that are focused on
investing in the small and mid-sized companies that we target.
We divide the country geographically into Eastern, Central and
Western regions and emphasize active, consistent sponsor
coverage. Over the last ten years, the investment professionals
of our investment adviser have developed an extensive network of
relationships with these private equity sponsors. We estimate
that there are approximately 1,400 of such private equity firms
and our investment adviser has active relationships with
approximately 120 of them. An active relationship is one through
which our investment adviser has received at least one
investment opportunity from the private equity sponsor within
the last year.
Our investment adviser reviewed over 240 potential investment
transactions with private equity sponsors for the year ended
September 30, 2009. All of the investment transactions that
we have completed to date were originated through our investment
advisers relationships with private equity sponsors. We
believe that our investment adviser has a reputation as a
reliable, responsive and efficient source of funding to support
private equity investments. We believe that this reputation and
the relationships of our investment adviser with private equity
sponsors will provide us with significant investment
opportunities.
Our origination process is designed to efficiently evaluate a
large number of opportunities and to identify the most
attractive of such opportunities. A significant number of
opportunities that clearly do not fit our investment criteria
are screened by the partners of our investment adviser when they
are initially identified. If an originator believes that an
opportunity fits our investment criteria and merits
consideration, the investment is presented to our investment
advisers Investment Committee. This is the first stage of
our origination process, the Review stage. During
this stage, the originator gives a preliminary description of
the opportunity. This is followed by preliminary due diligence,
from which an investment summary is created that includes a
scoring of the investment against our investment advisers
proprietary scoring model. The opportunity may be discussed
several times by the full Investment Committee of our investment
adviser, or subsets of that Committee. At any point in this
stage, we may reject the opportunity, and, indeed, we have
historically decided not to proceed with more than 80% of the
investment opportunities reviewed by our investment
advisers Investment Committee.
For the subset of opportunities that we decide to pursue, we
issue preliminary term sheets and classify them in the
Term Sheet Issued stage. This term sheet serves as a
basis for negotiating the critical terms of a transaction. At
this stage we begin our underwriting and investment approval
process, as more fully described below. After the term sheet for
a potential transaction has been fully negotiated, the
transaction is presented to our investment advisers
Investment Committee for approval. If the deal is approved, the
term sheet is signed. Approximately half of the term sheets we
issue result in an executed term sheet. Our underwriting and
investment approval process is ongoing during this stage, during
which we begin documentation of the loan. The final stage,
Closings, culminates with the funding of an
investment only after all due diligence is
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satisfactorily completed and all closing conditions, including
the sponsors funding of its investment in the portfolio
company, have been satisfied.
Underwriting
Underwriting
Process and Investment Approval
We make our investment decisions only after consideration of a
number of factors regarding the potential investment including,
but not limited to: (i) historical and projected financial
performance; (ii) company and industry specific
characteristics, such as strengths, weaknesses, opportunities
and threats; (iii) composition and experience of the
management team; and (iv) track record of the private
equity sponsor leading the transaction. Our investment adviser
uses a proprietary scoring system that evaluates each
opportunity. This methodology is employed to screen a high
volume of potential investment opportunities on a consistent
basis.
If an investment is deemed appropriate to pursue, a more
detailed and rigorous evaluation is made along a variety of
investment parameters, not all of which may be relevant or
considered in evaluating a potential investment opportunity. The
following outlines the general parameters and areas of
evaluation and due diligence for investment decisions, although
not all will necessarily be considered or given equal weighting
in the evaluation process.
Management
assessment
Our investment adviser makes an in-depth assessment of the
management team, including evaluation along several key metrics:
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The number of years in their current positions;
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Track record;
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Industry experience;
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Management incentive, including the level of direct investment
in the enterprise;
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Background investigations; and
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Completeness of the management team (lack of positions that need
to be filled).
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Industry
dynamics
An evaluation of the industry is undertaken by our investment
adviser that considers several factors. If considered
appropriate, industry experts will be consulted or retained. The
following factors are analyzed by our investment adviser:
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Sensitivity to economic cycles;
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Competitive environment, including number of competitors, threat
of new entrants or substitutes;
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Fragmentation and relative market share of industry leaders;
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Growth potential; and
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Regulatory and legal environment.
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Business
model and financial assessment
Prior to making an investment decision, our investment adviser
will undertake a review and analysis of the financial and
strategic plans for the potential investment. There is
significant evaluation of and reliance upon the due diligence
performed by the private equity sponsor and third party experts
including accountants and consultants. Areas of evaluation
include:
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Historical and projected financial performance;
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Quality of earnings, including source and predictability of cash
flows;
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Customer and vendor interviews and assessments;
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Potential exit scenarios, including probability of a liquidity
event;
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Internal controls and accounting systems; and
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Assets, liabilities and contingent liabilities.
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Private
equity sponsor
Among the most critical due diligence investigations is the
evaluation of the private equity sponsor making the investment.
A private equity sponsor is typically the controlling
shareholder upon completion of an investment and as such is
considered critical to the success of the investment. The equity
sponsor is evaluated along several key criteria, including:
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Investment track record;
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Industry experience;
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Capacity and willingness to provide additional financial support
to the company through additional capital contributions, if
necessary; and
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Reference checks.
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Investments
We target debt investments that will yield meaningful current
income and provide the opportunity for capital appreciation
through equity securities. We typically structure our debt
investments with the maximum seniority and collateral that we
can reasonably obtain while seeking to achieve our total return
target. In most cases, our debt investment will be
collateralized by a first or second lien on the assets of the
portfolio company. As of September 30, 2009, all of our
debt investments were secured by first or second priority liens
on the assets of the portfolio company.
Debt
Investments
We tailor the terms of our debt investments to the facts and
circumstances of the transaction and prospective portfolio
company, negotiating a structure that seeks to protect our
rights and manage our risk while creating incentives for the
portfolio company to achieve its business plan. A substantial
source of return is monthly cash interest that we collect on our
debt investments. As of September 30, 2009, we directly
originated 100% of our loans. We are currently focusing our new
origination efforts on first lien loans.
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First Lien Loans. Our first lien loans
generally have terms of four to six years, provide for a
variable or fixed interest rate, contain prepayment penalties
and are secured by a first priority security interest in all
existing and future assets of the borrower. Our first lien loans
may take many forms, including revolving lines of credit, term
loans and acquisition lines of credit.
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Second Lien Loans. Our second lien loans
generally have terms of five to six years, primarily provide for
a fixed interest rate, contain prepayment penalties and are
secured by a second priority security interest in all existing
and future assets of the borrower. Our second lien loans often
include
payment-in-kind,
or PIK, interest, which represents contractual interest accrued
and added to the principal that generally becomes due at
maturity. As of September 30, 2009, all second lien loans
had intercreditor agreements requiring a standstill period of no
more than 180 days. During the standstill period, we are
generally restricted from exercising remedies against the
borrower or the collateral in order to provide the first lien
lenders time to cure any breaches or defaults by the borrower.
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Unsecured Loans. Although we currently do not
have any investments in unsecured loans, we may in the future.
We would expect any unsecured investments generally to have
terms of five to six years and provide for a fixed interest
rate. We may make unsecured investments on a stand-alone basis,
or in connection with a senior secured loan, a junior secured
loan or a one-stop financing. Our unsecured
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investments may include
payment-in-kind,
or PIK, interest, which represents contractual interest accrued
and added to the principal that generally becomes due at
maturity, and an equity component, such as warrants to purchase
common stock in the portfolio company.
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We typically structure our debt investments to include covenants
that seek to minimize our risk of capital loss. Our debt
investments have strong protections, including default
penalties, information rights, board observation rights, and
affirmative, negative and financial covenants, such as lien
protection and prohibitions against change of control. Our debt
investments also have substantial prepayment penalties designed
to extend the life of the average loan, which we believe will
help to grow our portfolio.
The 26 debt investments in our portfolio as of
September 30, 2009, had a weighted average debt to EBITDA
multiple of 3.6x calculated at the time of origination of the
investment.
Equity
Investments
When we make a debt investment, we may be granted equity in the
company in the same class of security as the sponsor receives
upon funding. In addition, we may from time to time make
non-control, equity co-investments in connection with private
equity sponsors. We generally seek to structure our equity
investments, such as direct equity co-investments, to provide us
with minority rights provisions and event-driven put rights. We
also seek to obtain limited registration rights in connection
with these investments, which may include piggyback
registration rights.
Limited
Partnership Investments
We make investments in Limited Partnership funds of our equity
sponsors. In general, we make these investments where we have a
long term relationship and are comfortable with the
sponsors business model and investment strategy.
Portfolio
Management
Active
Involvement in our Portfolio Companies
As a business development company, we are obligated to offer to
provide managerial assistance to our portfolio companies and to
provide it if requested. In fact, we provide managerial
assistance to our portfolio companies as a general practice and
we seek investments where such assistance is appropriate. We
monitor the financial trends of each portfolio company to assess
the appropriate course of action for each company and to
evaluate overall portfolio quality. We have several methods of
evaluating and monitoring the performance of our investments,
including but not limited to, the following:
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review of monthly and quarterly financial statements and
financial projections for portfolio companies;
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periodic and regular contact with portfolio company management
to discuss financial position, requirements and accomplishments;
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attendance at board meetings;
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periodic formal update interviews with portfolio company
management and, if appropriate, the private equity
sponsor; and
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assessment of business development success, including product
development, profitability and the portfolio companys
overall adherence to its business plan.
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Rating
Criteria
In addition to various risk management and monitoring tools, we
use an investment rating system to characterize and monitor the
credit profile and our expected level of returns on each
investment in our
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portfolio. We use a five-level numeric rating scale. The
following is a description of the conditions associated with
each investment rating:
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Investment Rating 1 is used for investments that are performing
above expectations
and/or a
capital gain is expected.
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Investment Rating 2 is used for investments that are performing
substantially within our expectations, and whose risks remain
neutral or favorable compared to the potential risk at the time
of the original investment. All new loans are initially rated 2.
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Investment Rating 3 is used for investments that are performing
below our expectations and that require closer monitoring, but
where we expect no loss of investment return (interest
and/or
dividends) or principal. Companies with a rating of 3 may
be out of compliance with financial covenants.
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Investment Rating 4 is used for investments that are performing
below our expectations and for which risk has increased
materially since the original investment. We expect some loss of
investment return, but no loss of principal.
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Investment Rating 5 is used for investments that are performing
substantially below our expectations and whose risks have
increased substantially since the original investment.
Investments with a rating of 5 are those for which some loss of
principal is expected.
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In the event that we determine that an investment is
underperforming, or circumstances suggest that the risk
associated with a particular investment has significantly
increased, we will undertake more aggressive monitoring of the
effected portfolio company. While our investment rating system
identifies the relative risk for each investment, the rating
alone does not dictate the scope
and/or
frequency of any monitoring that we perform. The frequency of
our monitoring of an investment is determined by a number of
factors, including, but not limited to, the trends in the
financial performance of the portfolio company, the investment
structure and the type of collateral securing our investment, if
any.
The following table shows the distribution of our investments on
the 1 to 5 investment rating scale at fair value as of
September 30, 2009:
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Investment Rating
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Fair Value
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% of Portfolio
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1
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$
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22,913,497
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|
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7.65
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%
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2
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|
248,506,393
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|
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|
82.94
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%
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3
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6,122,236
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|
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2.04
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%
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4
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16,377,904
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|
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5.47
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%
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5
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5,691,107
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1.90
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%
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|
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|
|
|
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|
Total
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$
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299,611,137
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|
|
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100.00
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%
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|
Exit
Strategies/Refinancing
We expect to exit our investments typically through one of three
scenarios: (i) the sale of the company resulting in
repayment of all outstanding debt, (ii) the
recapitalization of the company in which our loan is replaced
with debt or equity from a third party or parties or
(iii) the repayment of the initial or remaining principal
amount of our loan then outstanding at maturity. In some
investments, there may be scheduled amortization of some portion
of our loan which would result in a partial exit of our
investment prior to the maturity of the loan.
Determination
of Net Asset Value and the Valuation Process
We determine the net asset value per share of our common stock
on a quarterly basis. The net asset value per share is equal to
the value of our total assets minus liabilities and any
preferred stock outstanding divided by the total number of
shares of common stock outstanding.
8
We are required to report our investments that are not publicly
traded or for which current market values are not readily
available at fair value. The fair value is deemed to be the
value at which an enterprise could be sold in a transaction
between two willing parties other than through a forced or
liquidation sale.
Under the guidance included in FASB Accounting Standard
Codification (ASC) Topic 820 Fair Value
Measurements and Disclosures, which we adopted effective
October 1, 2008, we perform detailed valuations of our debt
and equity investments on an individual basis, using market
based, income based, and bond yield approaches as appropriate.
Under the market approach, we estimate the enterprise value of
the portfolio companies in which we invest. There is no one
methodology to estimate enterprise value and, in fact, for any
one portfolio company, enterprise value is best expressed as a
range of fair values, from which we derive a single estimate of
enterprise value. To estimate the enterprise value of a
portfolio company, we analyze various factors, including the
portfolio companys historical and projected financial
results. Typically, private companies are valued based on
multiples of EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), cash flows, net income,
revenues, or, in limited cases, book value. We generally require
portfolio companies to provide annual audited and quarterly and
monthly unaudited financial statements, as well as annual
projections for the upcoming fiscal year.
Under the income approach, we generally prepare and analyze
discounted cash flow models based on our projections of the
future free cash flows of the business. Under the bond yield
approach, we use bond yield models to determine the present
value of the future cash flow streams of our debt investments.
We review various sources of transactional data, including
private mergers and acquisitions involving debt investments with
similar characteristics, and assess the information in the
valuation process.
We also may, when conditions warrant, utilize an expected
recovery model, whereby we use alternate procedures to determine
value when the customary approaches are deemed to be not as
relevant or reliable.
Our Board of Directors undertakes a multi-step valuation process
each quarter in connection with determining the fair value of
our investments:
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Our quarterly valuation process begins with each portfolio
company or investment being initially valued by the deal team
within our investment adviser responsible for the portfolio
investment;
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Preliminary valuations are then reviewed and discussed with the
principals of our investment adviser;
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Separately, an independent valuation firm engaged by the Board
of Directors prepares preliminary valuations on a selected basis
and submits a report to us;
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The deal team compares and contrasts its preliminary valuations
to the report of the independent valuation firm and resolves any
differences;
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The deal team prepares a final valuation report for the
Valuation Committee of our Board of Directors;
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The Valuation Committee of our Board of Directors reviews the
final valuation report, and the deal team responds and
supplements the final valuation report to reflect any comments
provided by the Valuation Committee;
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The Valuation Committee of our Board of Directors makes a
recommendation to the Board of Directors; and
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The Board of Directors discusses valuations and determines the
fair value of each investment in our portfolio in good faith.
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The fair value of all of our investments at September 30,
2009, and September 30, 2008, was determined by our Board
of Directors. Our Board of Directors is solely responsible for
the valuation of our portfolio investments at fair value as
determined in good faith pursuant to our valuation policy and
our consistently applied valuation process.
9
Our Board of Directors has engaged an independent valuation firm
to provide us with valuation assistance. Upon completion of its
process each quarter, the independent valuation firm provides us
with a written report regarding the preliminary valuations of
selected portfolio securities as of the close of such quarter.
We will continue to engage an independent valuation firm to
provide us with assistance regarding our determination of the
fair value of selected portfolio securities each quarter;
however, our Board of Directors is ultimately and solely
responsible for determining the fair value of our investments in
good faith.
An independent valuation firm, Murray, Devine & Co.,
Inc., provided us with assistance in our determination of the
fair value of 91.9% of our portfolio for the quarter ended
December 31, 2007, 92.1% of our portfolio for the quarter
ended March 31, 2008, 91.7% of our portfolio for the
quarter ended June 30, 2008, 92.8% of our portfolio for the
quarter ended September 30, 2008, 100% of our portfolio for
the quarter ended December 31, 2008, 88.7% of our portfolio
for the quarter ended March 31, 2009 (or 96.0% of our
portfolio excluding our investment in IZI Medical Products,
Inc., which closed on March 31, 2009 and therefore was not
part of the independent valuation process), 92.1% of our
portfolio for the quarter ended June 30, 2009, and 28.1%
for the quarter ended September 30, 2009.
Our $50 million credit facility with Bank of Montreal was
terminated effective September 16, 2009. The facility
required independent valuations for at least 90% of the
portfolio on a quarterly basis. With the termination of this
facility, this valuation test is no longer required. However, we
still intend to have a portion of the portfolio valued by an
independent third party on an quarterly basis, with a
substantial portion being valued on an annual basis.
Determination of fair values involves subjective judgments and
estimates. The notes to our financial statements will refer to
the uncertainty with respect to the possible effect of such
valuations, and any change in such valuations, on our financial
statements.
Competition
We compete for investments with a number of business development
companies and investment funds (including private equity funds
and mezzanine funds), as well as traditional financial services
companies such as commercial banks and other sources of
financing. Many of these entities have greater financial and
managerial resources than we do. We believe we are able to be
competitive with these entities primarily on the basis of the
experience and contacts of our management team, our responsive
and efficient investment analysis and decision-making processes,
the investment terms we offer, and our willingness to make
smaller investments.
We believe that some of our competitors make first and second
lien loans with interest rates and returns that are comparable
to or lower than the rates and returns that we target.
Therefore, we do not seek to compete solely on the interest
rates and returns that we offer to potential portfolio
companies. For additional information concerning the competitive
risks we face, see Item 1A. Risk Factors
Risk Relating to Our Business and Structure We may
face increasing competition for investment opportunities, which
could reduce returns and result in losses.
Employees
We do not have any employees. Our
day-to-day
investment operations are managed by our investment adviser. See
Item 1. Business Investment Advisory
Agreement. Our investment adviser employs a total of 16
investment professionals, including its six principals. In
addition, we reimburse our administrator, FSC, Inc., for the
allocable portion of overhead and other expenses incurred by it
in performing its obligations under an administration agreement,
including the compensation of our chief financial officer and
his staff, and the staff of our chief compliance officer. For a
more detailed discussion of the administration agreement, see
Item 1. Business Administration
Agreement.
10
Legal
Proceedings
Although we may, from time to time, be involved in litigation
arising out of our operations in the normal course of business
or otherwise, we are currently not a party to any pending
material legal proceedings.
Investment
Advisory Agreement
Overview
of Our Investment Adviser
Management
Services
Our investment adviser, Fifth Street Management, is registered
as an investment adviser under the Investment Advisers Act of
1940, or the Advisers Act. Our investment adviser
serves pursuant to the investment advisory agreement in
accordance with the 1940 Act. Subject to the overall supervision
of our Board of Directors, our investment adviser manages our
day-to-day
operations and provides us with investment advisory services.
Under the terms of the investment advisory agreement, our
investment adviser:
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determines the composition of our portfolio, the nature and
timing of the changes to our portfolio and the manner of
implementing such changes;
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determines what securities we purchase, retain or sell;
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identifies, evaluates and negotiates the structure of the
investments we make; and
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executes, monitors and services the investments we make.
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Our investment advisers services under the investment
advisory agreement may not be exclusive and it is free to
furnish similar services to other entities so long as its
services to us are not impaired.
Management
Fee
Base
Management Fee
We pay our investment adviser a fee for its services under the
investment advisory agreement consisting of two
components a base management fee and an incentive
fee. The cost of both the base management fee payable to our
investment adviser and any incentive fees earned by our
investment adviser will ultimately be borne by our common
stockholders.
The base management fee is calculated at an annual rate of 2% of
our gross assets, which includes any borrowings for investment
purposes. The base management fee is payable quarterly in
arrears, and is calculated based on the value of our gross
assets at the end of each fiscal quarter, and appropriately
adjusted on a pro rata basis for any equity capital raises or
repurchases during such quarter. The base management fee for any
partial month or quarter will be appropriately prorated.
In addition to the proration described above, for the quarter
ended September 30, 2009, our investment advisor waived
approximately $172,000 of the base management fee on a portion
of the proceeds raised in connection with the equity offerings
that we completed in the quarter and which were held in cash or
cash equivalents at September 30, 2009.
Incentive
Fee
The incentive fee has two parts. The first part is calculated
and payable quarterly in arrears based on our
Pre-Incentive Fee Net Investment Income for the
immediately preceding fiscal quarter. For this purpose,
Pre-Incentive Fee Net Investment Income means
interest income, dividend income and any other income (including
any other fees (other than fees for providing managerial
assistance), such as commitment, origination, structuring,
diligence and consulting fees or other fees that we receive from
portfolio companies) accrued during the fiscal quarter, minus
our operating expenses for the quarter (including the base
management fee, expenses payable under the administration
agreement with FSC, Inc., and any interest expense and dividends
paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-Incentive Fee Net Investment
Income includes, in the case of investments with a deferred
interest feature (such as
11
original issue discount, debt instruments with PIK interest and
zero coupon securities), accrued income that we have not yet
received in cash. Pre-Incentive Fee Net Investment Income does
not include any realized capital gains, realized capital losses
or unrealized capital appreciation or depreciation.
Pre-Incentive Fee Net Investment Income, expressed as a rate of
return on the value of our net assets at the end of the
immediately preceding fiscal quarter, will be compared to a
hurdle rate of 2% per quarter (8% annualized),
subject to a
catch-up
provision measured as of the end of each fiscal quarter. Our net
investment income used to calculate this part of the incentive
fee is also included in the amount of our gross assets used to
calculate the 2% base management fee. The operation of the
incentive fee with respect to our Pre-Incentive Fee Net
Investment Income for each quarter is as follows:
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no incentive fee is payable to the investment adviser in any
fiscal quarter in which our Pre-Incentive Fee Net Investment
Income does not exceed the hurdle rate of 2% (the
preferred return or hurdle).
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100% of our Pre-Incentive Fee Net Investment Income with respect
to that portion of such Pre-Incentive Fee Net Investment Income,
if any, that exceeds the hurdle rate but is less than or equal
to 2.5% in any fiscal quarter (10% annualized) is payable to the
investment adviser. We refer to this portion of our
Pre-Incentive Fee Net Investment Income (which exceeds the
hurdle rate but is less than or equal to 2.5%) as the
catch-up.
The
catch-up
provision is intended to provide our investment adviser with an
incentive fee of 20% on all of our Pre-Incentive Fee Net
Investment Income as if a hurdle rate did not apply when our
Pre-Incentive Fee Net Investment Income exceeds 2.5% in any
fiscal quarter.
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20% of the amount of our Pre-Incentive Fee Net Investment
Income, if any, that exceeds 2.5% in any fiscal quarter (10%
annualized) is payable to the investment adviser once the hurdle
is reached and the
catch-up is
achieved.
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The following is a graphical representation of the calculation
of the income-related portion of the incentive fee:
Quarterly
Incentive Fee Based on Pre-Incentive Fee Net Investment
Income
Pre-Incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
Percentage
of Pre-Incentive Fee Net Investment
Income allocated to income-related portion of incentive
fee
The second part of the incentive fee is determined and payable
in arrears as of the end of each fiscal year (or upon
termination of the investment advisory agreement, as of the
termination date), commencing on September 30, 2008, and
equals 20% of our realized capital gains, if any, on a
cumulative basis from inception through the end of each fiscal
year, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, less the aggregate
amount of any previously paid capital gain incentive fees,
provided that, the incentive fee determined as of
September 30, 2008 was calculated for a period of shorter
than twelve calendar months to take into account any realized
capital gains computed net of all realized capital losses and
unrealized capital depreciation from inception.
12
Example
1: Income Related Portion of Incentive Fee for Each Fiscal
Quarter
Alternative
1
Assumptions
Investment income (including interest, dividends, fees, etc.) =
1.25%
Hurdle rate(1) = 2%
Management fee(2) = 0.5%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other
expenses) = 0.55%
Pre-Incentive Fee Net Investment Income does not exceed hurdle
rate, therefore there is no income-related incentive fee.
Alternative
2
Assumptions
Investment income (including interest, dividends, fees, etc.) =
2.9%
Hurdle rate(1) = 2%
Management fee(2) = 0.5%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other
expenses) = 2.2%
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Incentive fee
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= 100% × Pre-Incentive Fee Net Investment Income (subject
to
catch-up)(4)
= 100% × (2.2% − 2%)
= 0.2%
|
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate,
but does not fully satisfy the
catch-up
provision, therefore the income related portion of the incentive
fee is 0.2%.
Alternative
3
Assumptions
Investment income (including interest, dividends, fees, etc.) =
3.5%
Hurdle rate(1) = 2%
Management fee(2) = 0.5%
Other expenses (legal, accounting, custodian, transfer agent,
etc.)(3) = 0.2%
Pre-Incentive Fee Net Investment Income
(investment income − (management fee + other
expenses) = 2.8%
Incentive fee = 100% × Pre-Incentive Fee Net Investment
Income (subject to
catch-up)(4)
Incentive fee = 100% ×
catch-up
+ (20% × (Pre-Incentive Fee Net Investment
Income − 2.5%))
= 0.5%
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Incentive fee
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= (100% × 0.5%) + (20% × (2.8% − 2.5%))
|
= 0.5% + (20% × 0.3%)
= 0.5% + 0.06%
= 0.56%
Pre-Incentive Fee Net Investment Income exceeds the hurdle rate,
and fully satisfies the
catch-up
provision, therefore the income related portion of the incentive
fee is 0.56%.
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(1) |
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Represents 8% annualized hurdle rate. |
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(2) |
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Represents 2% annualized base management fee. |
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(3) |
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Excludes organizational and offering expenses. |
13
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(4) |
|
The
catch-up
provision is intended to provide our investment adviser with an
incentive fee of 20% on all Pre-Incentive Fee Net Investment
Income as if a hurdle rate did not apply when our net investment
income exceeds 2.5% in any fiscal quarter. |
Example
2: Capital Gains Portion of Incentive Fee(*):
Alternative
1:
Assumptions
Year 1: $20 million investment made in Company A
(Investment A), and $30 million investment made
in Company B (Investment B)
Year 2: Investment A sold for $50 million and
fair market value (FMV) of Investment B determined
to be $32 million
Year 3: FMV of Investment B determined to be $25 million
Year 4: Investment B sold for $31 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of
$6 million ($30 million realized capital
gains on sale of Investment A multiplied by 20%)
Year 3: None $5 million (20% multiplied by
($30 million cumulative capital gains less $5 million
cumulative capital depreciation)) less $6 million (previous
capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $200,000
$6.2 million ($31 million cumulative realized capital
gains multiplied by 20%) less $6 million (capital gains
incentive fee taken in Year 2)
Alternative
2
Assumptions
Year 1: $20 million investment made in Company A
(Investment A), $30 million investment made in
Company B (Investment B) and $25 million
investment made in Company C (Investment C)
Year 2: Investment A sold for $50 million, FMV of
Investment B determined to be $25 million and FMV of
Investment C determined to be $25 million
Year 3: FMV of Investment B determined to be $27 million
and Investment C sold for $30 million
Year 4: FMV of Investment B determined to be $35 million
Year 5: Investment B sold for $20 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $5 million capital gains incentive fee
20% multiplied by $25 million ($30 million realized
capital gains on Investment A less unrealized capital
depreciation on Investment B)
Year 3: $1.4 million capital gains incentive
fee(1) $6.4 million (20% multiplied by
$32 million ($35 million cumulative realized capital
gains less $3 million unrealized capital depreciation))
less $5 million capital gains incentive fee received in
Year 2
Year 4: None
Year 5: None $5 million (20% multiplied by
$25 million (cumulative realized capital gains of
$35 million less realized capital losses of
$10 million)) less $6.4 million cumulative capital
gains incentive fee paid in Year 2 and Year 3(2)
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* |
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The hypothetical amounts of returns shown are based on a
percentage of our total net assets and assume no leverage. There
is no guarantee that positive returns will be realized and
actual returns may vary from those shown in this example. |
14
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(1) |
|
As illustrated in Year 3 of Alternative 1 above, if we were to
be wound up on a date other than our fiscal year end of any
year, we may have paid aggregate capital gains incentive fees
that are more than the amount of such fees that would be payable
if we had been wound up on our fiscal year end of such year. |
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(2) |
|
As noted above, it is possible that the cumulative aggregate
capital gains fee received by our investment adviser
($6.4 million) is effectively greater than $5 million
(20% of cumulative aggregate realized capital gains less net
realized capital losses or net unrealized depreciation
($25 million)). |
Payment
of Our Expenses
Our primary operating expenses are the payment of a base
management fee and any incentive fees under the investment
advisory agreement and the allocable portion of overhead and
other expenses incurred by FSC, Inc. in performing its
obligations under the administration agreement. Our investment
management fee compensates our investment adviser for its work
in identifying, evaluating, negotiating, executing, monitoring
and servicing our investments. We bear all other expenses of our
operations and transactions, including (without limitation) fees
and expenses relating to:
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offering expenses;
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the cost of calculating our net asset value;
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the cost of effecting sales and repurchases of shares of our
common stock and other securities;
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management and incentive fees payable pursuant to the investment
advisory agreement;
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fees payable to third parties relating to, or associated with,
making investments and valuing investments (including
third-party valuation firms);
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transfer agent and custodial fees;
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fees and expenses associated with marketing efforts (including
attendance at investment conferences and similar events);
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federal and state registration fees;
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any exchange listing fees;
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federal, state and local taxes;
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independent directors fees and expenses;
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brokerage commissions;
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costs of proxy statements, stockholders reports and
notices;
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costs of preparing government filings, including periodic and
current reports with the SEC;
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fidelity bond, liability insurance and other insurance
premiums; and
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printing, mailing, independent accountants and outside legal
costs and all other direct expenses incurred by either our
investment adviser or us in connection with administering our
business, including payments under the administration agreement
that will be based upon our allocable portion of overhead and
other expenses incurred by FSC, Inc. in performing its
obligations under the administration agreement and the
compensation of our chief financial officer and his staff, and
the staff of our chief compliance officer.
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Duration
and Termination
The investment advisory agreement was first approved by our
Board of Directors, including all of the directors who are not
interested persons as defined in the 1940 Act, on
December 13, 2007 and by a majority of the limited partners
of Fifth Street Mezzanine Partners III, L.P. through a written
consent first solicited on December 14, 2007. On
March 14, 2008, our Board of Directors, including all of
the directors who are not interested persons as
defined in the 1940 Act, approved an amendment to the investment
15
advisory agreement that revised the investment advisory
agreement to clarify the calculation of the base management fee.
Such amendment was also approved by a majority of our
outstanding voting securities through a written consent first
solicited on April 7, 2008. Unless earlier terminated as
described below, the investment advisory agreement, as amended,
will remain in effect for a period of two years from the date it
was approved by the Board of Directors and will remain in effect
from
year-to-year
thereafter if approved annually by the Board of Directors or by
the affirmative vote of the holders of a majority of our
outstanding voting securities, including, in either case,
approval by a majority of our directors who are not interested
persons. The investment advisory agreement will automatically
terminate in the event of its assignment. The investment
advisory agreement may be terminated by either party without
penalty upon not more than 60 days written notice to
the other. The investment advisory agreement may also be
terminated, without penalty, upon the vote of a majority of our
outstanding voting securities.
Indemnification
The investment advisory agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
their respective duties or by reason of the reckless disregard
of their respective duties and obligations, our investment
adviser and its officers, managers, agents, employees,
controlling persons, members (or their owners) and any other
person or entity affiliated with it, are entitled to
indemnification from us for any damages, liabilities, costs and
expenses (including reasonable attorneys fees and amounts
reasonably paid in settlement) arising from the rendering of our
investment advisers services under the investment advisory
agreement or otherwise as our investment adviser.
Organization
of our Investment Adviser
Our investment adviser is a Delaware limited liability company
that registered as an investment adviser under the Advisers Act.
Our investment adviser maintains addresses at 10 Bank Street,
12th floor, White Plains, NY 10606 and 500 W. Putnam Ave., Suite
400, Greenwich, CT 06830.
Board
Approval of the Investment Advisory Agreement
At a meeting of our Board of Directors held on December 13,
2007, our Board of Directors unanimously voted to approve the
investment advisory agreement and the administration agreement.
In reaching a decision to approve the investment advisory
agreement and the administration agreement, the Board of
Directors reviewed a significant amount of information and
considered, among other things:
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the nature, quality and extent of the advisory and other
services to be provided to us by Fifth Street Management, our
investment adviser;
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the fee structures of comparable externally managed business
development companies that engage in similar investing
activities; and
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various other matters.
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Based on the information reviewed and the discussions detailed
above, the Board of Directors, including all of the directors
who are not interested persons as defined in the
1940 Act, concluded that the investment advisory fee rates and
terms are fair and reasonable in relation to the services
provided and approved the investment advisory agreement and the
administration agreement as being in the best interests of our
stockholders.
On March 14, 2008, our Board of Directors, including all of
the directors who are not interested persons as
defined in the 1940 Act, approved an amendment to the investment
advisory agreement that revised the investment advisory
agreement to clarify the calculation of the base management fee.
In reaching the decision to approve the amendment, our Board of
Directors, including all of the directors who are not
interested persons as defined in the 1940 Act,
followed the same process, and made the same findings, as
described above.
16
Administration
Agreement
We have also entered into an administration agreement with FSC,
Inc. under which FSC, Inc. provides administrative services for
us, including office facilities and equipment and clerical,
bookkeeping and recordkeeping services at such facilities. Under
the administration agreement, FSC, Inc. also performs, or
oversees the performance of, our required administrative
services, which includes being responsible for the financial
records which we are required to maintain and preparing reports
to our stockholders and reports filed with the SEC. In addition,
FSC, Inc. assists us in determining and publishing our net asset
value, overseeing the preparation and filing of our tax returns
and the printing and dissemination of reports to our
stockholders, and generally overseeing the payment of our
expenses and the performance of administrative and professional
services rendered to us by others. For providing these services,
facilities and personnel, we reimburse FSC, Inc. the allocable
portion of overhead and other expenses incurred by FSC, Inc. in
performing its obligations under the administration agreement,
including rent and our allocable portion of the costs of
compensation and related expenses of our chief financial officer
and his staff, and the staff of our chief compliance officer.
FSC, Inc. may also provide on our behalf managerial
assistance to our portfolio companies. The administration
agreement may be terminated by either party without penalty upon
60 days written notice to the other party.
The administration agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
their respective duties or by reason of the reckless disregard
of their respective duties and obligations, FSC, Inc. and its
officers, managers, agents, employees, controlling persons,
members and any other person or entity affiliated with it are
entitled to indemnification from us for any damages,
liabilities, costs and expenses (including reasonable
attorneys fees and amounts reasonably paid in settlement)
arising from the rendering of services under the administration
agreement or otherwise as administrator for us.
Securities
Exchange Act Reports
We maintain a website at www.fifthstreetfinance.com. The
information on our website is not incorporated by reference in
this annual report on
Form 10-K.
We make available on or through our website certain reports and
amendments to those reports that we file with or furnish to the
Securities and Exchange Commission (the SEC) in
accordance with the Securities Exchange Act of 1934, as amended
(the Exchange Act). These include our annual reports
on
Form 10-K,
our quarterly reports on
Form 10-Q
and our current reports on
Form 8-K.
We make this information available on our website free of charge
as soon as reasonably practicable after we electronically file
the information with, or furnish it to, the SEC.
Regulation
We have elected to be regulated as a business development
company under the 1940 Act. The 1940 Act contains prohibitions
and restrictions relating to transactions between business
development companies and their affiliates, principal
underwriters and affiliates of those affiliates or underwriters.
The 1940 Act requires that a majority of the directors be
persons other than interested persons, as that term
is defined in the 1940 Act. In addition, the 1940 Act provides
that we may not change the nature of our business so as to cease
to be, or to withdraw our election as, a business development
company unless approved by a majority of our outstanding voting
securities.
The 1940 Act defines a majority of the outstanding voting
securities as the lesser of (i) 67% or more of the
voting securities present at a meeting if the holders of more
than 50% of our outstanding voting securities are present or
represented by proxy or (ii) 50% of our voting securities.
As a business development company, we will not generally be
permitted to invest in any portfolio company in which our
investment adviser or any of its affiliates currently have an
investment or to make any co-investments with our investment
adviser or its affiliates without an exemptive order from the
SEC.
17
Qualifying
Assets
Under the 1940 Act, a business development company may not
acquire any asset other than assets of the type listed in
Section 55(a) of the 1940 Act, which are referred to as
qualifying assets, unless, at the time the acquisition is made,
qualifying assets represent at least 70% of the companys
total assets. The principal categories of qualifying assets
relevant to our business are any of the following:
(1) Securities purchased in transactions not involving any
public offering from the issuer of such securities, which issuer
(subject to certain limited exceptions) is an eligible portfolio
company, or from any person who is, or has been during the
preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such
rules as may be prescribed by the SEC. An eligible portfolio
company is defined in the 1940 Act as any issuer which:
(a) is organized under the laws of, and has its principal
place of business in, the United States;
(b) is not an investment company (other than a small
business investment company wholly-owned by the business
development company) or a company that would be an investment
company but for certain exclusions under the 1940 Act; and
(c) satisfies any of the following:
(i) does not have any class of securities that is traded on
a national securities exchange;
(ii) has a class of securities listed on a national
securities exchange, but has an aggregate market value of
outstanding voting and non-voting common equity of less than
$250 million;
(iii) is controlled by a business development company or a
group of companies including a business development company and
the business development company has an affiliated person who is
a director of the eligible portfolio company;
(iv) is a small and solvent company having total assets of
not more than $4 million and capital and surplus of not
less than $2 million; or
(v) meets such other criteria as may be established by the
SEC.
(2) Securities of any eligible portfolio company that we
control.
(3) Securities purchased in a private transaction from a
U.S. issuer that is not an investment company or from an
affiliated person of the issuer, or in transactions incident
thereto, if the issuer is in bankruptcy and subject to
reorganization or if the issuer, immediately prior to the
purchase of its securities was unable to meet its obligations as
they came due without material assistance other than
conventional lending or financing arrangements.
(4) Securities of an eligible portfolio company purchased
from any person in a private transaction if there is no ready
market for such securities and we already own 60% of the
outstanding equity of the eligible portfolio company.
(5) Securities received in exchange for or distributed on
or with respect to securities described in (1) through
(4) above, or pursuant to the exercise of warrants or
rights relating to such securities.
(6) Cash, cash equivalents, U.S. government securities
or high-quality debt securities maturing in one year or less
from the time of investment.
In addition, a business development company must be operated for
the purpose of making investments in the types of securities
described in (1), (2) or (3) above.
Managerial
Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for
the purpose of the 70% test, we must either control the issuer
of the securities or must offer to make available to the issuer
of the securities (other than small and solvent companies
described above) significant managerial assistance; except that,
where we
18
purchase such securities in connection with one or more other
persons acting together, one of the other persons in the group
may make available such managerial assistance. Making available
managerial assistance means, among other things, any arrangement
whereby the business development company, through its directors,
officers, employees or other agents, offers to provide, and, if
accepted, does so provide, significant guidance and counsel
concerning the management, operations or business objectives and
policies of a portfolio company.
Temporary
Investments
Pending investment in other types of qualifying
assets, as described above, our investments may consist of
cash, cash equivalents, U.S. government securities or
high-quality debt securities maturing in one year or less from
the time of investment, which we refer to, collectively, as
temporary investments, so that 70% of our assets are qualifying
assets. Typically, we will invest in U.S. Treasury bills or
in repurchase agreements, provided that such agreements are
fully collateralized by cash or securities issued by the
U.S. government or its agencies. A repurchase agreement
(which is essentially a secured loan) involves the purchase by
an investor, such as us, of a specified security and the
simultaneous agreement by the seller to repurchase it at an
agreed-upon
future date and at a price that is greater than the purchase
price by an amount that reflects an
agreed-upon
interest rate. There is no percentage restriction on the
proportion of our assets that may be invested in such repurchase
agreements. However, if more than 25% of our total assets
constitute repurchase agreements from a single counterparty, we
would not meet the diversification tests in order to qualify as
a RIC for federal income tax purposes. Thus, we do not intend to
enter into repurchase agreements with a single counterparty in
excess of this limit. Our investment adviser will monitor the
creditworthiness of the counterparties with which we enter into
repurchase agreement transactions.
Senior
Securities
We are permitted, under specified conditions, to issue multiple
classes of debt and one class of stock senior to our common
stock if our asset coverage, as defined in the 1940 Act, is at
least equal to 200% immediately after each such issuance. In
addition, while any senior securities remain outstanding, we may
be prohibited from making a distribution to our stockholders or
repurchasing shares of our capital stock under certain
circumstances unless we meet the applicable asset coverage
ratios at the time of the distribution or repurchase. We may
also borrow amounts up to 5% of the value of our total assets
for temporary or emergency purposes without regard to asset
coverage. For a discussion of the risks associated with
leverage, see Item 1A. Risk Factors Risks
Relating to Our Business and Structure Regulations
governing our operation as a business development company and
RIC will affect our ability to raise, and the way in which we
raise, additional capital or borrow for investment purposes,
which may have a negative effect on our growth.
Common
Stock
We are not generally able to issue and sell our common stock at
a price below net asset value per share. We may, however, sell
our common stock, warrants, options or rights to acquire our
common stock, at a price below the current net asset value of
the common stock if our board of directors determines that such
sale is in our best interests and that of our stockholders, and
our stockholders approve such sale. In any such case, the price
at which our securities are to be issued and sold may not be
less than a price which, in the determination of our board of
directors, closely approximates the market value of such
securities (less any distributing commission or discount). On
June 24, 2009, our stockholders approved a proposal that
authorizes us to sell shares of our common stock below the
then-current net asset value per share of our common stock in
one or more offerings for a period ending on the earlier of
June 24, 2010 or the date of our next annual meeting of
stockholders. In connection with the receipt of such stockholder
approval, we agreed to limit the number of shares that we issue
at a price below net asset value pursuant to this authorization
so that the aggregate dilutive effect on our then outstanding
shares will not exceed 15%. We have completed two offerings of
shares of our common stock at a price below the then-current net
asset value pursuant to this authorization, which closed on
July 21, 2009 and September 25, 2009, respectively.
The aggregate dilutive effect that these two offerings have had
on our outstanding shares of common stock is 9.1%, which leaves
5.9% remaining of the
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dilution limit we have imposed. We may also make rights
offerings to our stockholders at prices per share less than the
net asset value per share, subject to applicable requirements of
the 1940 Act. See Item 1A. Risk Factors Risks
Relating to Our Business and Structure Regulations
governing our operation as a business development company and
RIC will affect our ability to raise, and the way in which we
raise, additional capital or borrow for investment purposes
which may have a negative effect on our growth.
Code
of Ethics
We have adopted a code of ethics pursuant to
Rule 17j-1
under the 1940 Act and we have also approved the investment
advisers code of ethics that was adopted by it under
Rule 17j-1
under the 1940 Act and
Rule 204A-1
of the Advisers Act. These codes establish procedures for
personal investments and restrict certain personal securities
transactions. Personnel subject to either code may invest in
securities for their personal investment accounts, including
securities that may be purchased or held by us, so long as such
investments are made in accordance with the requirements of the
applicable code. You may also read and copy the codes of ethics
at the SECs Public Reference Room located at
100 F Street, NE, Washington, DC 20549. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
In addition, the codes of ethics are available on the EDGAR
Database on the SECs website at
http://www.sec.gov
and on our website at
http://www.fifthstreetfinance.com.
Compliance
Policies and Procedures
We and our investment adviser have adopted and implemented
written policies and procedures reasonably designed to prevent
violations of the federal securities laws and are required to
review these compliance policies and procedures annually for
their adequacy and the effectiveness of their implementation.
Our chief compliance officer is responsible for administering
these policies and procedures.
Proxy
Voting Policies and Procedures
We have delegated our proxy voting responsibility to our
investment adviser. The proxy voting policies and procedures of
our investment adviser are set forth below. The guidelines are
reviewed periodically by our investment adviser and our
non-interested directors, and, accordingly, are subject to
change.
Introduction
As an investment adviser registered under the Advisers Act, our
investment adviser has a fiduciary duty to act solely in the
best interests of its clients. As part of this duty, it
recognizes that it must vote client securities in a timely
manner free of conflicts of interest and in the best interests
of its clients.
These policies and procedures for voting proxies for the
investment advisory clients of our investment adviser are
intended to comply with Section 206 of, and
Rule 206(4)-6
under, the Advisers Act.
Proxy
policies
Our investment adviser will vote proxies relating to our
securities in the best interest of its clients
stockholders. It will review on a
case-by-case
basis each proposal submitted for a stockholder vote to
determine its impact on the portfolio securities held by its
clients. Although our investment adviser will generally vote
against proposals that may have a negative impact on its
clients portfolio securities, it may vote for such a
proposal if there exists compelling long term reasons to do so.
The proxy voting decisions of our investment adviser are made by
the senior officers who are responsible for monitoring each of
its clients investments. To ensure that its vote is not
the product of a conflict of interest, it will require that:
(a) anyone involved in the decision making process disclose
to its chief compliance officer any potential conflict that he
or she is aware of and any contact that he or she has had with
any interested party regarding a proxy vote; and
(b) employees involved in the decision-making process or
vote administration are prohibited from revealing how our
investment adviser intends to vote on a proposal in order to
reduce any attempted influence from interested parties.
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Proxy
voting records
You may obtain information, without charge, regarding how we
voted proxies with respect to our portfolio securities by making
a written request for proxy voting information to: Fifth Street
Finance Corp., Chief Compliance Officer, 10 Bank Street,
12th
Floor, White Plains, NY 10606.
Other
We are subject to periodic examination by the SEC for compliance
with the 1940 Act.
We are required to provide and maintain a bond issued by a
reputable fidelity insurance company to protect us against
larceny and embezzlement. Furthermore, as a business development
company, we are prohibited from protecting any director or
officer against any liability to us or our stockholders arising
from willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such
persons office.
Small
Business Administration Regulations
Fifth Street Mezzanine Partners IV, L.P., our wholly-owned
subsidiary, is seeking to be licensed by the Small Business
Administration, or SBA, as a small business investment company,
or SBIC, under Section 301(c) of the Small Business
Investment Act of 1958. We are the sole limited partner of Fifth
Street Mezzanine Partners IV, L.P. and the sole member of FSMP
IV GP, LLC, the general partner of Fifth Street Mezzanine
Partners IV, L.P.
On May 19, 2009, we received a letter from the Investment
Division of the SBA that invited us to continue moving forward
with the licensing of an SBIC subsidiary. Although our
application to license this entity as an SBIC with the SBA is
subject to the SBA approval, we remain cautiously optimistic
that we will complete the licensing process. Our SBIC subsidiary
will have an investment objective similar to ours and will make
similar types of investments in accordance with SBIC regulations.
To the extent that we receive an SBIC license, our SBIC
subsidiary will be allowed to issue SBA-guaranteed debentures,
subject to the required capitalization of the SBIC subsidiary.
SBA guaranteed debentures carry long-term fixed rates that are
generally lower than rates on comparable bank and other debt.
Under the regulations applicable to SBICs, an SBIC may have
outstanding debentures guaranteed by the SBA generally in an
amount up to twice its regulatory capital, which generally
equates to the amount of its equity capital. The SBIC
regulations currently limit the amount that our SBIC subsidiary
may borrow to a maximum of $150 million. This means that
our SBIC subsidiary may access the full $150 million
maximum available if it has $75 million in regulatory
capital. However, we are not required to capitalize this
subsidiary with $75 million and may determine to capitalize
it with a lesser amount. In addition, if we are able to obtain
financing under the SBIC program, our SBIC subsidiary will be
subject to regulation and oversight by the SBA, including
requirements with respect to maintaining certain minimum
financial ratios and other covenants. On July 14, 2009, we
received a letter from the SBA indicating that our SBIC
subsidiarys application had been approved for further
processing and our SBIC subsidiary is eligible to make
pre-licensing investments. During the fiscal year ended
September 30, 2009, our SBIC subsidiary funded one
pre-licensing investment.
In connection with the filing of our SBIC license application,
we will apply for exemptive relief from the SEC to permit us to
exclude the debt of our SBIC subsidiary guaranteed by the SBA
from our consolidated asset coverage ratio, which will enable us
to fund more investments with debt capital. There can be no
assurance that we will be granted an SBIC license or that, if
granted, it will be granted in a timely manner, that if we are
granted an SBIC license we will be able to capitalize the
subsidiary to $75 million to access the full
$150 million maximum borrowing amount available, or that we
will receive the exemptive relief from the SEC.
If we receive an SBIC license, our SBIC subsidiary will be
periodically examined and audited by the Small Business
Administrations staff to determine its compliance with
SBIC regulations.
21
Taxation
as a Regulated Investment Company
As a business development company, we have elected to be
treated, and intend to qualify annually, as a RIC under
Subchapter M of the Code. As a RIC, we generally will not have
to pay corporate-level federal income taxes on any income that
we distribute to our stockholders as dividends. To continue to
qualify as a RIC, we must, among other things, meet certain
source-of-income
and asset diversification requirements (as described below). In
addition, to qualify for RIC tax treatment we must distribute to
our stockholders, for each taxable year, at least 90% of our
investment company taxable income, which is
generally our ordinary income plus the excess of our realized
net short-term capital gains over our realized net long-term
capital losses (the Annual Distribution Requirement).
If we:
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qualify as a RIC; and
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satisfy the Annual Distribution Requirement,
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then we will not be subject to federal income tax on the portion
of our income we distribute (or are deemed to distribute) to our
stockholders. We will be subject to U.S. federal income tax
at the regular corporate rates on any income or capital gains
not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible federal excise tax on
certain undistributed income unless we distribute in a timely
manner an amount at least equal to the sum of (1) 98% of
our net ordinary income for each calendar year, (2) 98% of
our capital gain net income for the one-year period ending
October 31 in that calendar year and (3) any income
recognized, but not distributed, in preceding years (the
Excise Tax Avoidance Requirement). We generally will
endeavor in each taxable year to make sufficient distributions
to our stockholders to avoid any U.S. federal excise tax on
our earnings.
In order to qualify as a RIC for federal income tax purposes, we
must, among other things:
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continue to qualify as a business development company under the
1940 Act at all times during each taxable year;
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derive in each taxable year at least 90% of our gross income
from dividends, interest, payments with respect to loans of
certain securities, gains from the sale of stock or other
securities, net income from certain qualified publicly
traded partnerships, or other income derived with respect
to our business of investing in such stock or securities (the
90% Income Test); and
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diversify our holdings so that at the end of each quarter of the
taxable year:
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at least 50% of the value of our assets consists of cash, cash
equivalents, U.S. Government securities, securities of
other RICs, and other securities if such other securities of any
one issuer do not represent more than 5% of the value of our
assets or more than 10% of the outstanding voting securities of
the issuer; and
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no more than 25% of the value of our assets is invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer, of two or more issuers
that are controlled, as determined under applicable Code rules,
by us and that are engaged in the same or similar or related
trades or businesses or of certain qualified publicly
traded partnerships (the Diversification
Tests).
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We may be required to recognize taxable income in circumstances
in which we do not receive cash. For example, if we hold debt
obligations that are treated under applicable tax rules as
having original issue discount (such as debt instruments with
PIK interest or, in certain cases, increasing interest rates or
issued with warrants), we must include in income each year a
portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing
such income is received by us in the same taxable year. We may
also have to include in income other amounts that we have not
yet received in cash, such as PIK interest and deferred loan
origination fees that are paid after origination of the loan or
are paid in non-cash compensation such as warrants or stock.
Because any original issue discount or other amounts accrued
will be included in our investment company taxable income for
the year of accrual, we may be
22
required to make a distribution to our stockholders in order to
satisfy the Annual Distribution Requirement, even though we will
not have received any corresponding cash amount.
Although we do not presently expect to do so, we are authorized
to borrow funds and to sell assets in order to satisfy
distribution requirements. However, under the 1940 Act, we are
generally not permitted to make distributions to our
stockholders while our debt obligations and other senior
securities are outstanding unless the asset coverage
test is met. Moreover, our ability to dispose of assets to meet
our distribution requirements may be limited by (1) the
illiquid nature of our portfolio
and/or
(2) other requirements relating to our status as a RIC,
including the Diversification Tests. If we dispose of assets in
order to meet the Annual Distribution Requirement or the Excise
Tax Avoidance Requirement, we may make such dispositions at
times that, from an investment standpoint, are not advantageous.
RISK
FACTORS
Investing in our common stock involves a number of
significant risks. In addition to the other information
contained in this annual report on
Form 10-K,
you should consider carefully the following information before
making an investment in our common stock. The risks set out
below are not the only risks we face. Additional risks and
uncertainties not presently known to us or not presently deemed
material by us might also impair our operations and performance.
If any of the following events occur, our business, financial
condition and results of operations could be materially and
adversely affected. In such case, our net asset value and the
trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Relating to Our Business and Structure
We are
currently in a period of capital markets disruption and
recession and conditions may not improve in the near
future.
The U.S. capital markets experienced extreme volatility and
disruption over the past 18 months, leading to recessionary
conditions and depressed levels of consumer and commercial
spending. Disruptions in the capital markets increased the
spread between the yields realized on risk-free and higher risk
securities, resulting in illiquidity in parts of the capital
markets. While recent indicators suggest modest improvement in
the capital markets, we cannot provide any assurance that these
conditions will not worsen. If these conditions continue or
worsen, the prolonged period of market illiquidity may have an
adverse effect on our business, financial condition, and results
of operations. Unfavorable economic conditions also could
increase our funding costs, limit our access to the capital
markets or result in a decision by lenders not to extend credit
to us. These events could limit our investment originations,
limit our ability to grow and negatively impact our operating
results.
In addition, to the extent that recessionary conditions continue
or worsen, the financial results of small to mid-sized
companies, like those in which we invest, will continue to
experience deterioration, which could ultimately lead to
difficulty in meeting debt service requirements and an increase
in defaults. Additionally, the end markets for certain of our
portfolio companies products and services have
experienced, and continue to experience, negative economic
trends. The performances of certain of our portfolio companies
have been, and may continue to be, negatively impacted by these
economic or other conditions, which may ultimately result in our
receipt of a reduced level of interest income from our portfolio
companies
and/or
losses or charge offs related to our investments, and, in turn,
may adversely affect distributable income.
23
Economic
recessions or downturns could impair the ability of our
portfolio companies to repay loans, which, in turn, could
increase our non-performing assets, decrease the value of our
portfolio, reduce our volume of new loans and harm our operating
results, which would have an adverse effect on our results of
operations.
Many of our portfolio companies are and may be susceptible to
economic slowdowns or recessions and may be unable to repay our
loans during such periods. Therefore, our non-performing assets
are likely to increase and the value of our portfolio is likely
to decrease during such periods. Adverse economic conditions
also may decrease the value of collateral securing some of our
loans and the value of our equity investments. In this regard,
as a result of current economic conditions and their impact on
certain of our portfolio companies, we have agreed to modify the
payment terms of our investments in nine of our portfolio
companies as of September 30, 2009. Such modified terms
include changes in
payment-in-kind
interest provisions and cash interest rates. These
modifications, and any future modifications to our loan
agreements as a result of the current economic conditions or
otherwise, may limit the amount of interest income that we
recognize from the modified investments, which may, in turn,
limit our ability to make distributions to our stockholders and
have an adverse effect on our results of operations.
Stockholders
will incur dilution if we sell shares of our common stock in one
or more offerings at prices below the then-current net asset
value per share of our common stock.
At a special meeting of stockholders held on June 24, 2009,
our stockholders approved a proposal designed to allow us to
access the capital markets in a way that we were previously
unable to as a result of restrictions that, absent stockholder
approval, apply to business development companies under the 1940
Act. Specifically, our stockholders approved a proposal that
authorizes us to sell shares of our common stock below the
then-current net asset value per share of our common stock in
one or more offerings for a period ending on the earlier of
June 24, 2010 or the date of our next annual meeting of
stockholders. Any decision to sell shares of our common stock
below the then-current net asset value per share of our common
stock would be subject to the determination by our Board of
Directors that such issuance is in our and our
stockholders best interests. In connection with the
receipt of such stockholder approval, we agreed to limit the
number of shares that we issue at a price below net asset value
pursuant to this authorization so that the aggregate dilutive
effect on our then outstanding shares will not exceed 15%. We
have completed two offerings of shares of our common stock at a
price below the then-current net asset value pursuant to this
authorization, which closed on July 21, 2009 and
September 25, 2009, respectively. The aggregate dilutive
effect that these two offerings have had on our outstanding
shares of common stock is 9.1%, which leaves 5.9% remaining of
the dilution limit we have imposed.
If we were to sell additional shares of our common stock below
net asset value per share, such sales would result in an
immediate dilution to the net asset value per share. This
dilution would occur as a result of the sale of shares at a
price below the then-current net asset value per share of our
common stock and a proportionately greater decrease in a
stockholders interest in our earnings and assets and
voting interest in us than the increase in our assets resulting
from such issuance.
Further, if our current stockholders do not purchase any shares
to maintain their percentage interest, regardless of whether
such offering is above or below the then-current net asset value
per share, their voting power will be diluted. Because the
number of shares of common stock that could be so issued and the
timing of any issuance is not currently known, the actual
dilutive effect cannot be predicted.
Changes
in interest rates may affect our cost of capital and net
investment income.
Because we may borrow to fund our investments, a portion of our
net investment income may be dependent upon the difference
between the interest rate at which we borrow funds and the
interest rate at which we invest these funds. A portion of our
investments will have fixed interest rates, while a portion of
our borrowings will likely have floating interest rates. As a
result, a significant change in market interest rates could have
a material adverse effect on our net investment income. In
periods of rising interest rates, our cost of funds could
increase, which would reduce our net investment income. We may
hedge against such interest
24
rate fluctuations by using standard hedging instruments such as
futures, options and forward contracts, subject to applicable
legal requirements, including without limitation, all necessary
registrations (or exemptions from registration) with the
Commodity Futures Trading Commission. These activities may limit
our ability to participate in the benefits of lower interest
rates with respect to the hedged borrowings. Adverse
developments resulting from changes in interest rates or hedging
transactions could have a material adverse effect on our
business, financial condition and results of operations.
We
have a limited operating history.
Fifth Street Mezzanine Partners III, L.P. commenced operations
on February 15, 2007. On January 2, 2008, Fifth Street
Mezzanine Partners III, L.P. merged with and into Fifth Street
Finance Corp., a Delaware corporation. As a result, we are
subject to all of the business risks and uncertainties
associated with any new business, including the risk that we
will not achieve our investment objective and that the value of
our common stock could decline substantially.
We
currently have a limited number of investments in our investment
portfolio. As a result, a loss on one or more of those
investments would have a more adverse effect on our company than
the effect such a loss would have on a company with a larger and
more diverse investment portfolio.
As a company with a limited operating history, we have not had
the opportunity to invest in a large number of portfolio
companies. As a result, until we have increased the number of
investments in our investment portfolio, a loss on one or more
of our investments would affect us more adversely than such loss
would affect a company with a larger and more diverse investment
portfolio.
A
significant portion of our investment portfolio is and will
continue to be recorded at fair value as determined in good
faith by our Board of Directors and, as a result, there is and
will continue to be uncertainty as to the value of our portfolio
investments.
Under the 1940 Act, we are required to carry our portfolio
investments at market value or, if there is no readily available
market value, at fair value as determined by our Board of
Directors. Typically, there is not a public market for the
securities of the privately held companies in which we have
invested and will generally continue to invest. As a result, we
value these securities quarterly at fair value as determined in
good faith by our Board of Directors.
Certain factors that may be considered in determining the fair
value of our investments include the nature and realizable value
of any collateral, the portfolio companys earnings and its
ability to make payments on its indebtedness, the markets in
which the portfolio company does business, comparison to
comparable publicly-traded companies, discounted cash flow and
other relevant factors. Because such valuations, and
particularly valuations of private securities and private
companies, are inherently uncertain, may fluctuate over short
periods of time and may be based on estimates, our
determinations of fair value may differ materially from the
values that would have been used if a ready market for these
securities existed. Due to this uncertainty, our fair value
determinations may cause our net asset value on a given date to
materially understate or overstate the value that we may
ultimately realize upon the sale of one or more of our
investments. As a result, investors purchasing our common stock
based on an overstated net asset value would pay a higher price
than the realizable value of our investments might warrant.
Our
ability to achieve our investment objective depends on our
investment advisers ability to support our investment
process; if our investment adviser were to lose any of its
principals, our ability to achieve our investment objective
could be significantly harmed.
As discussed above, we were organized on February 15, 2007.
We have no employees and, as a result, we depend on the
investment expertise, skill and network of business contacts of
the principals of our investment adviser. The principals of our
investment adviser evaluate, negotiate, structure, execute,
monitor and service our investments. Our future success will
depend to a significant extent on the continued service and
coordination of the principals of our investment adviser,
Messrs. Tannenbaum, Goodman, Alva, Berman and
25
Dimitrov. The departure of any of these individuals could have a
material adverse effect on our ability to achieve our investment
objective.
Our ability to achieve our investment objective depends on our
investment advisers ability to identify, analyze, invest
in, finance and monitor companies that meet our investment
criteria. Our investment advisers capabilities in
structuring the investment process, providing competent,
attentive and efficient services to us, and facilitating access
to financing on acceptable terms depend on the employment of
investment professionals in adequate number and of adequate
sophistication to match the corresponding flow of transactions.
To achieve our investment objective, our investment adviser may
need to hire, train, supervise and manage new investment
professionals to participate in our investment selection and
monitoring process. Our investment adviser may not be able to
find investment professionals in a timely manner or at all.
Failure to support our investment process could have a material
adverse effect on our business, financial condition and results
of operations.
Our
investment adviser has no prior experience managing a business
development company or a RIC.
The 1940 Act and the Code impose numerous constraints on the
operations of business development companies and RICs that do
not apply to the other investment vehicles previously managed by
the principals of our investment adviser. For example, under the
1940 Act, business development companies are required to invest
at least 70% of their total assets primarily in securities of
qualifying U.S. private or thinly traded companies.
Moreover, qualification for taxation as a RIC under subchapter M
of the Code requires satisfaction of
source-of-income
and diversification requirements and our ability to avoid
corporate-level taxes on our income and gains depends on our
satisfaction of distribution requirements. The failure to comply
with these provisions in a timely manner could prevent us from
qualifying as a business development company or RIC or could
force us to pay unexpected taxes and penalties, which could be
material. Our investment adviser does not have any prior
experience managing a business development company or RIC. Its
lack of experience in managing a portfolio of assets under such
constraints may hinder its ability to take advantage of
attractive investment opportunities and, as a result, achieve
our investment objective.
Our
business model depends to a significant extent upon strong
referral relationships with private equity sponsors, and the
inability of the principals of our investment adviser to
maintain or develop these relationships, or the failure of these
relationships to generate investment opportunities, could
adversely affect our business.
We expect that the principals of our investment adviser will
maintain their relationships with private equity sponsors, and
we will rely to a significant extent upon these relationships to
provide us with potential investment opportunities. If the
principals of our investment adviser fail to maintain their
existing relationships or develop new relationships with other
sponsors or sources of investment opportunities, we will not be
able to grow our investment portfolio. In addition, individuals
with whom the principals of our investment adviser have
relationships are not obligated to provide us with investment
opportunities, and, therefore, there is no assurance that such
relationships will generate investment opportunities for us.
We may
face increasing competition for investment opportunities, which
could reduce returns and result in losses.
We compete for investments with other business development
companies and investment funds (including private equity funds
and mezzanine funds), as well as traditional financial services
companies such as commercial banks and other sources of funding.
Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing
resources than we do. For example, some competitors may have a
lower cost of capital and access to funding sources that are not
available to us. In addition, some of our competitors may have
higher risk tolerances or different risk assessments than we
have. These characteristics could allow our competitors to
consider a wider variety of investments, establish more
relationships and offer better pricing and more flexible
structuring than we are able to do. We may lose investment
opportunities if we do not match our competitors pricing,
terms and structure. If we are forced to match our
competitors pricing, terms and structure, we may not be
able to achieve acceptable returns on our investments or may
bear substantial risk of capital loss. A significant part of our
competitive advantage stems
26
from the fact that the market for investments in small and
mid-sized companies is underserved by traditional commercial
banks and other financial sources. A significant increase in the
number
and/or the
size of our competitors in this target market could force us to
accept less attractive investment terms. Furthermore, many of
our competitors have greater experience operating under, or are
not subject to, the regulatory restrictions that the 1940 Act
imposes on us as a business development company.
Our
incentive fee may induce our investment adviser to make
speculative investments.
The incentive fee payable by us to our investment adviser may
create an incentive for it to make investments on our behalf
that are risky or more speculative than would be the case in the
absence of such compensation arrangement, which could result in
higher investment losses, particularly during cyclical economic
downturns. The way in which the incentive fee payable to our
investment adviser is determined, which is calculated separately
in two components as a percentage of the income (subject to a
hurdle rate) and as a percentage of the realized gain on
invested capital, may encourage our investment adviser to use
leverage to increase the return on our investments or otherwise
manipulate our income so as to recognize income in quarters
where the hurdle rate is exceeded. Under certain circumstances,
the use of leverage may increase the likelihood of default,
which would disfavor the holders of our common stock.
The incentive fee payable by us to our investment adviser also
may create an incentive for our investment adviser to invest on
our behalf in instruments that have a deferred interest feature.
Under these investments, we would accrue the interest over the
life of the investment but would not receive the cash income
from the investment until the end of the investments term,
if at all. Our net investment income used to calculate the
income portion of our incentive fee, however, includes accrued
interest. Thus, a portion of the incentive fee would be based on
income that we have not yet received in cash and may never
receive in cash if the portfolio company is unable to satisfy
such interest payment obligation to us. Consequently, while we
may make incentive fee payments on income accruals that we may
not collect in the future and with respect to which we do not
have a formal claw back right against our investment
adviser per se, the amount of accrued income written off in any
period will reduce the income in the period in which such
write-off was taken and thereby reduce such periods
incentive fee payment.
In addition, our investment adviser receives the incentive fee
based, in part, upon net capital gains realized on our
investments. Unlike the portion of the incentive fee based on
income, there is no performance threshold applicable to the
portion of the incentive fee based on net capital gains. As a
result, our investment adviser may have a tendency to invest
more 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.
Given the subjective nature of the investment decisions made by
our investment adviser on our behalf, we will be unable to
monitor these potential conflicts of interest between us and our
investment adviser.
Our
base management fee may induce our investment adviser to incur
leverage.
The fact that our base management fee is payable based upon our
gross assets, which would include any borrowings for investment
purposes, may encourage our investment adviser to use leverage
to make additional investments. Under certain circumstances, the
use of leverage may increase the likelihood of default, which
would disfavor holders of our common stock. Given the subjective
nature of the investment decisions made by our investment
adviser on our behalf, we will not be able to monitor this
potential conflict of interest.
Because
we borrow money, the potential for loss on amounts invested in
us will be magnified and may increase the risk of investing in
us.
Borrowings, also known as leverage, magnify the potential for
loss on invested equity capital. If we continue to use leverage
to partially finance our investments, through borrowings from
banks and other lenders, you will experience increased risks of
investing in our common stock. If the value of our assets
decreases, leveraging would cause net asset value to decline
more sharply than it otherwise would have had we not leveraged.
Similarly, any decrease in our income would cause net income to
decline more sharply than
27
it would have had we not borrowed. Such a decline could
negatively affect our ability to make common stock distribution
payments. Leverage is generally considered a speculative
investment technique.
Substantially
all of our assets could potentially be subject to security
interests under secured revolving credit facilities and if we
default on our obligations under the facilities, the lenders
could foreclose on our assets.
As is common in the business development company industry, our
obligations under secured revolving credit facilities may be
secured by liens on substantially all of our assets. If we
default on our obligations under these facilities, the lenders
may have the right to foreclose upon and sell, or otherwise
transfer, the collateral subject to their security interests.
Because
we intend to distribute between 90% and 100% of our income to
our stockholders in connection with our election to be treated
as a RIC, we will continue to need additional capital to finance
our growth. If additional funds are unavailable or not available
on favorable terms, our ability to grow will be
impaired.
In order to qualify for the tax benefits available to RICs and
to minimize corporate-level taxes, we intend to distribute to
our stockholders between 90% and 100% of our annual taxable
income, except that we may retain certain net capital gains for
investment, and treat such amounts as deemed distributions to
our stockholders. If we elect to treat any amounts as deemed
distributions, we must pay income taxes at the corporate rate on
such deemed distributions on behalf of our stockholders. As a
result of these requirements, we will likely need to raise
capital from other sources to grow our business. As a business
development company, we generally are required to meet a
coverage ratio of total assets, less liabilities and
indebtedness not represented by senior securities, to total
senior securities, which includes all of our borrowings and any
outstanding preferred stock, of at least 200%. These
requirements limit the amount that we may borrow. Because we
will continue to need capital to grow our investment portfolio,
these limitations may prevent us from incurring debt and require
us to raise additional equity at a time when it may be
disadvantageous to do so.
While we expect to be able to borrow and to issue additional
debt and equity securities, we cannot assure you that debt and
equity financing will be available to us on favorable terms, or
at all. Also, as a business development company, we generally
are not permitted to issue equity securities priced below net
asset value without stockholder approval. If additional funds
are not available to us, we could be forced to curtail or cease
new investment activities, and our net asset value and share
price could decline.
Unfavorable
economic conditions or other factors may affect our ability to
borrow for investment purposes, and may therefore adversely
affect our ability to achieve our investment
objective.
Unfavorable economic conditions or other factors could increase
our funding costs, limit our access to the capital markets or
result in a decision by lenders not to extend credit to us. An
inability to successfully access the capital markets could limit
our ability to grow our business and fully execute our business
strategy and could decrease our earnings, if any.
Our
ability to enter into transactions with our affiliates is
restricted.
We are prohibited under the 1940 Act from participating in
certain transactions with certain of our affiliates without the
prior approval of the members 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 affiliate for purposes of the 1940 Act and we are generally
prohibited from buying or selling any securities (other than our
securities) from or to such affiliate, absent the prior approval
of our independent directors. The 1940 Act also prohibits
certain joint transactions with certain of our
affiliates, which could include investments in the same
portfolio company (whether at the same or different times),
without prior approval of our independent directors and, in some
cases, the SEC. If a person acquires more than 25% of our voting
securities, we are prohibited from buying or selling any
security (other than any security of which we are the issuer)
from or to such person or certain of that persons
affiliates, or entering into prohibited joint transactions with
such person, absent the prior approval of the SEC. Similar
restrictions limit our ability to transact business with our
officers or directors or their affiliates. As a result of these
restrictions, we may be prohibited from buying or selling
28
any security (other than any security of which we are the
issuer) from or to any portfolio company of a private equity
fund managed by our investment adviser without the prior
approval of the SEC, which may limit the scope of investment
opportunities that would otherwise be available to us.
There
are significant potential conflicts of interest which could
adversely impact our investment returns.
Our executive officers and directors, and the members of our
investment adviser, serve or may serve as officers, directors or
principals of entities that operate in the same or a related
line of business as we do or of investment funds managed by our
affiliates. Accordingly, they may have obligations to investors
in those entities, the fulfillment of which might not be in the
best interests of us or our stockholders. For example,
Mr. Tannenbaum, our president and chief executive officer,
and managing partner of our investment adviser, is the managing
partner of Fifth Street Capital LLC, a private investment firm.
Although the other investment funds managed by Fifth Street
Capital LLC and its affiliates generally are fully committed
and, other than follow-on investments in existing portfolio
companies, are no longer making investments, in the future, the
principals of our investment adviser may manage other funds
which may from time to time have overlapping investment
objectives with those of us and accordingly invest in, whether
principally or secondarily, asset classes similar to those
targeted by us. If this should occur, the principals of our
investment adviser will face conflicts of interest in the
allocation of investment opportunities to us and such other
funds. Although our investment professionals will endeavor to
allocate investment opportunities in a fair and equitable
manner, we and our common stockholders could be adversely
affected in the event investment opportunities are allocated
among us and other investment vehicles managed or sponsored by,
or affiliated with, our executive officers, directors, and the
members of our investment adviser.
The
incentive fee we pay to our investment adviser in respect of
capital gains may be effectively greater than 20%.
As a result of the operation of the cumulative method of
calculating the capital gains portion of the incentive fee we
pay to our investment adviser, the cumulative aggregate capital
gains fee received by our investment adviser could be
effectively greater than 20%, depending on the timing and extent
of subsequent net realized capital losses or net unrealized
depreciation. For additional information on this calculation,
see the disclosure in footnote 2 to Example 2 under the caption
Item 1. Business Investment Advisory
Agreement Management Fee Incentive
Fee. We cannot predict whether, or to what extent, this
payment calculation would affect your investment in our stock.
The
involvement of our investment advisers investment
professionals in our valuation process may create conflicts of
interest.
Our portfolio investments are generally not in publicly traded
securities. As a result, the values of these securities are not
readily available. We value these securities at fair value as
determined in good faith by our Board of Directors based upon
the recommendation of the Valuation Committee of our Board of
Directors. In connection with that determination, investment
professionals from our investment adviser prepare portfolio
company valuations based upon the most recent portfolio company
financial statements available and projected financial results
of each portfolio company. The participation of our investment
advisers investment professionals in our valuation process
could result in a conflict of interest as our investment
advisers management fee is based, in part, on our gross
assets.
A
failure on our part to maintain our qualification as a business
development company would significantly reduce our operating
flexibility.
If we fail to continuously qualify as a business development
company, we might be subject to regulation as a registered
closed-end investment company under the 1940 Act, which would
significantly decrease our operating flexibility. In addition,
failure to comply with the requirements imposed on business
development companies by the 1940 Act could cause the SEC to
bring an enforcement action against us. For additional
information on the qualification requirements of a business
development company, see the disclosure under the caption
Item 1. Business Regulation.
29
Regulations
governing our operation as a business development company and
RIC will affect our ability to raise, and the way in which we
raise, additional capital or borrow for investment purposes,
which may have a negative effect on our growth.
As a result of the annual distribution requirement to qualify
for tax free treatment at the corporate level on income and
gains distributed to stockholders, we need to periodically
access the capital markets to raise cash to fund new
investments. We generally are not able to issue or sell our
common stock at a price below net asset value per share, which
may be a disadvantage as compared with other public companies.
We may, however, sell our common stock, or warrants, options or
rights to acquire our common stock, at a price below the current
net asset value of the common stock if our Board of Directors
and independent directors determine that such sale is in our
best interests and the best interests of our stockholders, and
our stockholders as well as those stockholders that are not
affiliated with us approve such sale. In any such case, the
price at which our securities are to be issued and sold may not
be less than a price that, in the determination of our Board of
Directors, closely approximates the market value of such
securities (less any underwriting commission or discount). If
our common stock trades at a discount to net asset value, this
restriction could adversely affect our ability to raise capital.
See Item 1A. Risk Factors Risks Relating
to Our Business and Structure Stockholders will
incur dilution if we sell shares of our common stock in one or
more offerings at prices below the then-current net asset value
per share of our common stock for a discussion of a
proposal approved by our stockholders that permits us to issue
shares of our common stock below net asset value.
We also may make rights offerings to our stockholders at prices
less than net asset value, subject to applicable requirements of
the 1940 Act. If we raise additional funds by issuing more
shares of our common stock or issuing senior securities
convertible into, or exchangeable for, our common stock, the
percentage ownership of our stockholders may decline at that
time and such stockholders may experience dilution. Moreover, we
can offer no assurance that we will be able to issue and sell
additional equity securities in the future, on terms favorable
to us or at all.
In addition, we may issue senior securities,
including borrowing money from banks or other financial
institutions only in amounts such that our asset coverage, as
defined in the 1940 Act, equals at least 200% after such
incurrence or issuance. Our ability to issue different types of
securities is also limited. Compliance with these requirements
may unfavorably limit our investment opportunities and reduce
our ability in comparison to other companies to profit from
favorable spreads between the rates at which we can borrow and
the rates at which we can lend. As a business development
company, therefore, we may need to issue equity more frequently
than our privately owned competitors, which may lead to greater
stockholder dilution.
We expect to continue to borrow for investment purposes. If the
value of our assets declines, we may be unable to satisfy the
asset coverage test, which could prohibit us from paying
dividends and could prevent us from qualifying as a RIC. If we
cannot satisfy the asset coverage test, we may be required to
sell a portion of our investments and, depending on the nature
of our debt financing, repay a portion of our indebtedness at a
time when such sales may be disadvantageous.
In addition, we may in the future seek to securitize our
portfolio securities to generate cash for funding new
investments. To securitize loans, we would likely create a
wholly-owned subsidiary and contribute a pool of loans to the
subsidiary. We would then sell interests in the subsidiary on a
non-recourse basis to purchasers and we would retain all or a
portion of the equity in the subsidiary. An inability to
successfully securitize our loan portfolio could limit our
ability to grow our business or fully execute our business
strategy and may decrease our earnings, if any. The
securitization market is subject to changing market conditions
and we may not be able to access this market when we would
otherwise deem appropriate. Moreover, the successful
securitization of our portfolio might expose us to losses as the
residual investments in which we do not sell interests will tend
to be those that are riskier and more apt to generate losses.
The 1940 Act also may impose restrictions on the structure of
any securitization.
We may
experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating
results due to a number of factors, including our ability or
inability to make investments in companies that meet our
investment criteria, the interest rate
30
payable on the debt securities we acquire, the level of our
expenses, variations in and the timing of the recognition of
realized and unrealized gains or losses, the degree to which we
encounter competition in our market and general economic
conditions. As a result of these factors, results for any period
should not be relied upon as being indicative of performance in
future periods.
Our
Board of Directors may change our investment objective,
operating policies and strategies without prior notice or
stockholder approval, the effects of which may be
adverse.
Our Board of Directors has the authority to modify or waive our
current investment objective, operating policies and strategies
without prior notice and without stockholder approval. We cannot
predict the effect any changes to our current investment
objective, operating policies and strategies would have on our
business, net asset value, operating results and value of our
stock. However, the effects might be adverse, which could
negatively impact our ability to pay you distributions and cause
you to lose part or all of your investment.
We
will be subject to corporate-level income tax if we are unable
to maintain our qualification as a RIC under Subchapter M of the
Code or do not satisfy the annual distribution
requirement.
To maintain RIC status and be relieved of federal taxes on
income and gains distributed to our stockholders, we must meet
the following annual distribution, income source and asset
diversification requirements.
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The annual distribution requirement for a RIC will be satisfied
if we distribute to our stockholders on an annual basis at least
90% of our net ordinary income and realized net short-term
capital gains in excess of realized net long-term capital
losses, if any. We will be subject to a 4% nondeductible federal
excise tax, however, to the extent that we do not satisfy
certain additional minimum distribution requirements on a
calendar-year basis. Because we may use debt financing, we are
subject to an asset coverage ratio requirement under the 1940
Act and we may be subject to certain financial covenants under
our debt arrangements that could, under certain circumstances,
restrict us from making distributions necessary to satisfy the
distribution requirement. If we are unable to obtain cash from
other sources, we could fail to qualify for RIC tax treatment
and thus become subject to corporate-level income tax.
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The income source requirement will be satisfied if we obtain at
least 90% of our income for each year from dividends, interest,
gains from the sale of stock or securities or similar sources.
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The asset diversification requirement will be satisfied if we
meet certain asset diversification requirements at the end of
each quarter of our taxable year. To satisfy this requirement,
at least 50% of the value of our assets must consist of cash,
cash equivalents, U.S. government securities, securities of
other RICs, and other acceptable securities; and no more than
25% of the value of our assets can be invested in the
securities, other than U.S. government securities or
securities of other RICs, of one issuer, of two or more issuers
that are controlled, as determined under applicable Code rules,
by us and that are engaged in the same or similar or related
trades or businesses or of certain qualified publicly
traded partnerships. Failure to meet these requirements
may result in our having to dispose of certain investments
quickly in order to prevent the loss of RIC status. Because most
of our investments will be in private companies, and therefore
will be relatively illiquid, any such dispositions could be made
at disadvantageous prices and could result in substantial losses.
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If we fail to qualify for or maintain RIC status or to meet the
annual distribution requirement for any reason and are subject
to corporate income tax, the resulting corporate taxes could
substantially reduce our net assets, the amount of income
available for distribution and the amount of our distributions.
We may
not be able to pay you distributions, our distributions may not
grow over time and a portion of our distributions may be a
return of capital.
We intend to pay quarterly distributions to our stockholders out
of assets legally available for distribution. We cannot assure
you that we will achieve investment results that will allow us
to make a specified level of
31
cash distributions or
year-to-year
increases in cash distributions. Our ability to pay
distributions might be adversely affected by, among other
things, the impact of one or more of the risk factors described
in this annual report on
Form 10-K.
In addition, the inability to satisfy the asset coverage test
applicable to us as a business development company can limit our
ability to pay distributions. All distributions will be paid at
the discretion of our Board of Directors and will depend on our
earnings, our financial condition, maintenance of our RIC
status, compliance with applicable business development company
regulations and such other factors as our Board of Directors may
deem relevant from time to time. We cannot assure you that we
will pay distributions to our stockholders in the future.
When we make quarterly distributions, we will be required to
determine the extent to which such distributions are paid out of
current or accumulated earnings and profits. Distributions in
excess of current and accumulated earnings and profits will be
treated as a non-taxable return of capital to the extent of an
investors basis in our stock and, assuming that an
investor holds our stock as a capital asset, thereafter as a
capital gain.
We may
have difficulty paying our required distributions if we
recognize income before or without receiving cash representing
such income.
For federal income tax purposes, we include in income certain
amounts that we have not yet received in cash, such as original
issue discount or accruals on a contingent payment debt
instrument, which may occur if we receive warrants in connection
with the origination of a loan or possibly in other
circumstances. Such original issue discount is included in
income before we receive any corresponding cash payments. We
also may be required to include in income certain other amounts
that we do not receive in cash.
Since, in certain cases, we may recognize income before or
without receiving cash representing such income, we may have
difficulty meeting the annual distribution requirement necessary
to be relieved of federal taxes on income and gains distributed
to our stockholders. Accordingly, we may have to sell some of
our investments at times
and/or at
prices we would not consider advantageous, raise additional debt
or equity capital or forgo new investment opportunities for this
purpose. If we are not able to obtain cash from other sources,
we may fail to satisfy the annual distribution requirement and
thus become subject to corporate-level income tax.
We may
in the future choose to pay dividends in our own stock, in which
case you may be required to pay tax in excess of the cash you
receive.
We may distribute taxable dividends that are payable in part in
our stock. Taxable stockholders receiving such dividends will be
required to include the full amount of the dividend as ordinary
income (or as long-term capital gain to the extent such
distribution is properly designated as a capital gain dividend)
to the extent of our current and accumulated earnings and
profits for United States federal income tax purposes. As a
result, a U.S. stockholder may be required to pay tax with
respect to such dividends in excess of any cash received. If a
U.S. stockholder sells the stock it receives as a dividend
in order to pay this tax, the sales proceeds may be less than
the amount included in income with respect to the dividend,
depending on the market price of our stock at the time of the
sale. Furthermore, with respect to
non-U.S. stockholders,
we may be required to withhold U.S. tax with respect to
such dividends, including in respect of all or a portion of such
dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our stock
in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our stock.
In addition, as discussed elsewhere in this annual report on
Form 10-K,
our loans typically contain a
payment-in-kind
(PIK) interest provision. The PIK interest, computed
at the contractual rate specified in each loan agreement, is
added to the principal balance of the loan and recorded as
interest income. To avoid the imposition of corporate-level tax
on us, this non-cash source of income needs to be paid out to
stockholders in cash distributions or, in the event that we
determine to do so, in shares of our common stock, even though
we have not yet collected and may never collect the cash
relating to the PIK interest. As a result, if we distribute
taxable dividends in the form of our common stock, we may have
to distribute a stock dividend to account for PIK interest even
though we have not yet collected the cash.
32
Changes
in laws or regulations governing our operations may adversely
affect our business or cause us to alter our business
strategy.
We and our portfolio companies are subject to regulation at the
local, state and federal level. New legislation may be enacted
or new interpretations, rulings or regulations could be adopted,
including those governing the types of investments we are
permitted to make or that impose limits on our ability to pledge
a significant amount of our assets to secure loans, any of which
could harm us and our stockholders, potentially with retroactive
effect.
Additionally, any changes to the laws and regulations governing
our operations relating to permitted investments may cause us to
alter our investment strategy in order to avail ourselves of new
or different opportunities. Such changes could result in
material differences to the strategies and plans set forth in
this annual report on
Form 10-K
and may result in our investment focus shifting from the areas
of expertise of our investment adviser to other types of
investments in which our investment adviser may have less
expertise or little or no experience. Thus, any such changes, if
they occur, could have a material adverse effect on our results
of operations and the value of your investment.
Risks
Relating to Our Investments
Our
investments in portfolio companies may be risky, and we could
lose all or part of our investment.
Investing in small and mid-sized companies involves a number of
significant risks. Among other things, these companies:
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may have limited financial resources and may be unable to meet
their obligations under their debt instruments that we hold,
which may be accompanied by a deterioration in the value of any
collateral and a reduction in the likelihood of us realizing any
guarantees from subsidiaries or affiliates of our portfolio
companies that we may have obtained in connection with our
investments, as well as a corresponding decrease in the value of
the equity components of our investments;
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may have shorter operating histories, narrower product lines,
smaller market shares
and/or
significant customer concentrations than larger businesses,
which tend to render them more vulnerable to competitors
actions and market conditions, as well as general economic
downturns;
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are more likely to depend on the management talents and efforts
of a small group of persons; therefore, the death, disability,
resignation or termination of one or more of these persons could
have a material adverse impact on our portfolio company and, in
turn, on us;
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generally have less predictable operating results, may from time
to time be parties to litigation, may be engaged in rapidly
changing businesses with products subject to a substantial risk
of obsolescence, and may require substantial additional capital
to support their operations, finance expansion or maintain their
competitive position; and
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generally have less publicly available information about their
businesses, operations and financial condition. If we are unable
to uncover all material information about these companies, we
may not make a fully informed investment decision, and as a
result may lose part or all of our investment.
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In addition, in the course of providing significant managerial
assistance to certain of our portfolio companies, certain of our
officers and directors may serve as directors on the boards of
such companies. To the extent that litigation arises out of our
investments in these companies, our officers and directors may
be named as defendants in such litigation, which could result in
an expenditure of funds (through our indemnification of such
officers and directors) and the diversion of management time and
resources.
33
An
investment strategy focused primarily on privately held
companies presents certain challenges, including the lack of
available information about these companies.
We invest primarily in privately held companies. Generally,
little public information exists about these companies,
including typically a lack of audited financial statements and
ratings by third parties. We must therefore rely on the ability
of our investment adviser to obtain adequate information to
evaluate the potential risks of investing in these companies.
These companies and their financial information may not be
subject to the Sarbanes-Oxley Act and other rules that govern
public companies. If we are unable to uncover all material
information about these companies, we may not make a fully
informed investment decision, and we may lose money on our
investments. These factors could affect our investment returns.
If we
make unsecured investments, those investments might not generate
sufficient cash flow to service their debt obligations to
us.
We may make unsecured investments. Unsecured investments may be
subordinated to other obligations of the obligor. Unsecured
investments often reflect a greater possibility that adverse
changes in the financial condition of the obligor or in general
economic conditions (including, for example, a substantial
period of rising interest rates or declining earnings) or both
may impair the ability of the obligor to make payment of
principal and interest. If we make an unsecured investment in a
portfolio company, that portfolio company may be highly
leveraged, and its relatively high
debt-to-equity
ratio may create increased risks that its operations might not
generate sufficient cash flow to service its debt obligations.
If we
invest in the securities and obligations of distressed and
bankrupt issuers, we might not receive interest or other
payments.
We are authorized to invest in the securities and obligations of
distressed and bankrupt issuers, including debt obligations that
are in covenant or payment default. Such investments generally
are considered speculative. The repayment of defaulted
obligations is subject to significant uncertainties. Defaulted
obligations might be repaid only after lengthy workout or
bankruptcy proceedings, during which the issuer of those
obligations might not make any interest or other payments.
The
lack of liquidity in our investments may adversely affect our
business.
We invest, and will continue to invest, in companies whose
securities are not publicly traded, and whose securities will be
subject to legal and other restrictions on resale or will
otherwise be less liquid than publicly traded securities. In
fact, all of our assets may be invested in illiquid securities.
The illiquidity of these investments may make it difficult for
us to sell these investments when desired. In addition, if we
are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the value at
which we had previously recorded these investments. Our
investments are usually subject to contractual or legal
restrictions on resale or are otherwise illiquid because there
is usually no established trading market for such investments.
The illiquidity of most of our investments may make it difficult
for us to dispose of them at a favorable price, and, as a
result, we may suffer losses.
We may
not have the funds or ability to make additional investments in
our portfolio companies.
After our initial investment in a portfolio company, we may be
called upon from time to time to provide additional funds to
such company or have the opportunity to increase our investment
through the exercise of a warrant to purchase common stock.
There is no assurance that we will make, or will have sufficient
funds to make, follow-on investments. Any decisions not to make
a follow-on investment or any inability on our part to make such
an investment may have a negative impact on a portfolio company
in need of such an investment, may result in a missed
opportunity for us to increase our participation in a successful
operation or may reduce the expected yield on the investment.
34
Our
portfolio companies may incur debt that ranks equally with, or
senior to, our investments in such companies.
We invest primarily in first and second lien debt issued by
small and mid-sized companies. Our portfolio companies may have,
or may be permitted to incur, other debt that ranks equally
with, or senior to, the debt in which we invest. By their terms,
such debt instruments may entitle the holders to receive
payments of interest or principal on or before the dates on
which we are entitled to receive payments with respect to the
debt instruments in which we invest. Also, in the event of
insolvency, liquidation, dissolution, reorganization or
bankruptcy of a portfolio company, holders of debt instruments
ranking senior to our investment in that portfolio company would
typically be entitled to receive payment in full before we
receive any distribution. After repaying such senior creditors,
such portfolio company may not have any remaining assets to use
for repaying its obligation to us. In the case of debt ranking
equally with debt instruments in which we invest, we would have
to share on an equal basis any distributions with other
creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of the
relevant portfolio company.
The
disposition of our investments may result in contingent
liabilities.
Most of our investments will involve private securities. In
connection with the disposition of an investment in private
securities, we may be required to make representations about the
business and financial affairs of the portfolio company typical
of those made in connection with the sale of a business. We may
also be required to indemnify the purchasers of such investment
to the extent that any such representations turn out to be
inaccurate or with respect to certain potential liabilities.
These arrangements may result in contingent liabilities that
ultimately yield funding obligations that must be satisfied
through our return of certain distributions previously made to
us.
There
may be circumstances where our debt investments could be
subordinated to claims of other creditors or we could be subject
to lender liability claims.
Even though we have structured some of our investments as senior
loans, if one of our portfolio companies were to go bankrupt,
depending on the facts and circumstances, including the extent
to which we actually provided managerial assistance to that
portfolio company, a bankruptcy court might recharacterize our
debt investment and subordinate all or a portion of our claim to
that of other creditors. We may also be subject to lender
liability claims for actions taken by us with respect to a
borrowers business or instances where we exercise control
over the borrower. It is possible that we could become subject
to a lenders liability claim, including as a result of
actions taken in rendering significant managerial assistance.
Second
priority liens on collateral securing loans that we make to our
portfolio companies may be subject to control by senior
creditors with first priority liens. If there is a default, the
value of the collateral may not be sufficient to repay in full
both the first priority creditors and us.
Certain loans that we make to portfolio companies will be
secured on a second priority basis by the same collateral
securing senior secured debt of such companies. The first
priority liens on the collateral will secure the portfolio
companys obligations under any outstanding senior debt and
may secure certain other future debt that may be permitted to be
incurred by the company under the agreements governing the
loans. The holders of obligations secured by the first priority
liens on the collateral will generally control the liquidation
of and be entitled to receive proceeds from any realization of
the collateral to repay their obligations in full before us. In
addition, the value of the collateral in the event of
liquidation will depend on market and economic conditions, the
availability of buyers and other factors. There can be no
assurance that the proceeds, if any, from the sale or sales of
all of the collateral would be sufficient to satisfy the loan
obligations secured by the second priority liens after payment
in full of all obligations secured by the first priority liens
on the collateral. If such proceeds are not sufficient to repay
amounts outstanding under the loan obligations secured by the
second priority liens, then we, to the extent not repaid from
the proceeds of the sale of the collateral, will only have an
unsecured claim against the companys remaining assets, if
any.
35
The rights we may have with respect to the collateral securing
the loans we make to our portfolio companies with senior debt
outstanding may also be limited pursuant to the terms of one or
more intercreditor agreements that we enter into with the
holders of senior debt. Under such an intercreditor agreement,
at any time that obligations that have the benefit of the first
priority liens are outstanding, any of the following actions
that may be taken with respect to the collateral will be at the
direction of the holders of the obligations secured by the first
priority liens: the ability to cause the commencement of
enforcement proceedings against the collateral; the ability to
control the conduct of such proceedings; the approval of
amendments to collateral documents; releases of liens on the
collateral; and waivers of past defaults under collateral
documents. We may not have the ability to control or direct such
actions, even if our rights are adversely affected.
We
generally will not control our portfolio
companies.
We do not, and do not expect to, control most of our portfolio
companies, even though we may have board representation or board
observation rights, and our debt agreements may contain certain
restrictive covenants. As a result, we are subject to the risk
that a portfolio company in which we invest may make business
decisions with which we disagree and the management of such
company, as representatives of the holders of their common
equity, may take risks or otherwise act in ways that do not
serve our interests as a debt investor. Due to the lack of
liquidity for our investments in non-traded companies, we may
not be able to dispose of our interests in our portfolio
companies as readily as we would like or at an appropriate
valuation. As a result, a portfolio company may make decisions
that could decrease the value of our portfolio holdings.
Defaults
by our portfolio companies will harm our operating
results.
A portfolio companys failure to satisfy financial or
operating covenants imposed by us or other lenders could lead to
defaults and, potentially, termination of its loans and
foreclosure on its secured assets, which could trigger
cross-defaults under other agreements and jeopardize a portfolio
companys ability to meet its obligations under the debt or
equity securities that we hold. We may incur expenses to the
extent necessary to seek recovery upon default or to negotiate
new terms, which may include the waiver of certain financial
covenants, with a defaulting portfolio company.
We may
not realize gains from our equity investments.
Certain investments that we have made in the past and may make
in the future include warrants or other equity securities. In
addition, we have made in the past and may make in the future
direct equity investments in companies. Our goal is ultimately
to realize gains upon our disposition of such equity interests.
However, the equity interests we receive may not appreciate in
value and, in fact, may decline in value. Accordingly, we may
not be able to realize gains from our equity interests, and any
gains that we do realize on the disposition of any equity
interests may not be sufficient to offset any other losses we
experience. We also may be unable to realize any value if a
portfolio company does not have a liquidity event, such as a
sale of the business, recapitalization or public offering, which
would allow us to sell the underlying equity interests. We often
seek puts or similar rights to give us the right to sell our
equity securities back to the portfolio company issuer. We may
be unable to exercise these puts rights for the consideration
provided in our investment documents if the issuer is in
financial distress.
We are
subject to certain risks associated with foreign
investments.
We make investments in foreign companies. As of
September 30, 2009, we had an investment in one foreign
company.
Investing in foreign companies may expose us to additional risks
not typically associated with investing in U.S. companies.
These risks include changes in foreign exchange rates, exchange
control regulations, political and social instability,
expropriation, imposition of foreign taxes, less liquid markets
and less available information than is generally the case in the
U.S., higher transaction costs, less government supervision of
36
exchanges, brokers and issuers, less developed bankruptcy laws,
difficulty in enforcing contractual obligations, lack of uniform
accounting and auditing standards and greater price volatility.
Our success will depend, in part, on our ability to anticipate
and effectively manage these and other risks. We cannot assure
you that these and other factors will not have a material
adverse effect on our business as a whole.
Risks
Relating to Our Common Stock
Shares
of closed-end investment companies, including business
development companies, may trade at a discount to their net
asset value.
Shares of closed-end investment companies, including business
development companies, may trade at a discount from net asset
value. This characteristic of closed-end investment companies
and business development companies is separate and distinct from
the risk that our net asset value per share may decline. We
cannot predict whether our common stock will trade at, above or
below net asset value.
Investing
in our common stock may involve an above average degree of
risk.
The investments we make in accordance with our investment
objective may result in a higher amount of risk than alternative
investment options and a higher risk of volatility or loss of
principal. Our investments in portfolio companies involve higher
levels of risk, and therefore, an investment in our shares may
not be suitable for someone with lower risk tolerance.
The
market price of our common stock may fluctuate
significantly.
The market price and liquidity of the market for shares of our
common stock may be significantly affected by numerous factors,
some of which are beyond our control and may not be directly
related to our operating performance. These factors include:
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significant volatility in the market price and trading volume of
securities of business development companies or other companies
in our sector, which are not necessarily related to the
operating performance of these companies;
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changes in regulatory policies, accounting pronouncements or tax
guidelines, particularly with respect to RICs and business
development companies;
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loss of RIC status;
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changes in earnings or variations in operating results;
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changes in the value of our portfolio of investments;
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any shortfall in revenue or net income or any increase in losses
from levels expected by investors or securities analysts;
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departure of our or our investment advisers key
personnel; and
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general economic trends and other external factors.
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Certain
provisions of our restated certificate of incorporation and
amended and restated by-laws as well as the Delaware General
Corporation Law could deter takeover attempts and have an
adverse impact on the price of our common stock.
Our restated certificate of incorporation and our amended and
restated by-laws as well as the Delaware General Corporation Law
contain provisions that may have the effect of discouraging a
third party from making an acquisition proposal for us. These
anti-takeover provisions may inhibit a change in control in
37
circumstances that could give the holders of our common stock
the opportunity to realize a premium over the market price for
our common stock.
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Item 1B.
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Unresolved
Staff Comments
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None.
We do not own any real estate or other physical properties
materially important to our operation; however, we lease office
space for our principal executive office at 10 Bank Street,
12th
Floor, White Plains, NY 10606. Our investment advisor also
maintains additional office space at 500 W. Putnam
Ave., Suite 400, Greenwich, CT 06830. We believe that our
current office facilities are adequate for our business as we
intend to conduct it.
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Item 3.
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Legal
Proceedings
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Although we may, from time to time, be involved in litigation
arising out of our operations in the normal course of business
or otherwise, we are currently not a party to any pending
material legal proceedings.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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During the quarter ended September 30, 2009, there were no
matters submitted to a vote of our security holders through the
solicitation of proxies or otherwise.
38
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange under
the symbol FSC. The following table sets forth, for
each fiscal quarter since our initial public offering, the range
of high and low sales prices of our common stock as reported on
the New York Stock Exchange.
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High
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Low
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Fiscal year ended September 30, 2008
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Third quarter (from June 12, 2008)
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$
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13.32
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$
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10.10
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Fourth quarter
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$
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11.48
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$
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7.56
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Fiscal year ended September 30, 2009
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First quarter
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$
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10.24
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$
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5.02
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Second quarter
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$
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8.48
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$
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5.80
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Third quarter
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$
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11.14
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$
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6.92
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Fourth quarter
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$
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11.36
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$
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9.02
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The last reported price for our common stock on
November 30, 2009 was $9.77 per share. As of
November 30, 2009, we had 16 stockholders of record, which
did not include stockholders for whom shares are held in nominee
or street name.
Sales of
Unregistered Securities
On August 5, 2009, our Board of Directors declared a
dividend of $0.25 per share of common stock, payable on
September 25, 2009 to stockholders of record as of
September 8, 2009. On September 25, 2009, we issued a
total of 56,890 shares of our common stock under our
dividend reinvestment plan pursuant to an exemption from the
registration requirements of the Securities Act of 1933. The
aggregate value of the shares of our common stock distributed
under the dividend reinvestment plan was $0.6 million.
Distributions
Our dividends, if any, are determined by our Board of Directors.
We have elected to be treated for federal income tax purposes as
a RIC under Subchapter M of the Code. As long as we qualify as a
RIC, we will not be taxed on our investment company taxable
income or realized net capital gains, to the extent that such
taxable income or gains are distributed, or deemed to be
distributed, to stockholders on a timely basis.
To maintain RIC tax treatment, we must, among other things,
distribute at least 90% of our net ordinary income and realized
net short-term capital gains in excess of realized net long-term
capital losses, if any. Depending on the level of taxable income
earned in a tax year, we may choose to carry forward taxable
income in excess of current year distributions into the next tax
year and pay a 4% excise tax on such income. Any such carryover
taxable income must be distributed through a dividend declared
prior to filing the final tax return related to the year in
which such taxable income was generated. We may, in the future,
make actual distributions to our stockholders of our net capital
gains. We can offer no assurance that we will achieve results
that will permit the payment of any cash distributions and, if
we issue senior securities, we may be prohibited from making
distributions if doing so causes us to fail to maintain the
asset coverage ratios stipulated by the 1940 Act or if
distributions are limited by the terms of any of our borrowings.
See Item 1.
Business Regulation and
Taxation as a Regulated Investment
Company.
39
We have adopted an opt out dividend reinvestment
plan for our common stockholders. As a result, if we make a cash
distribution, then stockholders cash distributions will be
automatically reinvested in additional shares of our common
stock, unless they specifically opt out of the
dividend reinvestment plan so as to receive cash distributions.
The following table summarizes our dividends declared for our
two most recent fiscal years:
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Dividend Type
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Date Declared
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Record Date
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Payment Date
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Amount
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Quarterly
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5/1/2008
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5/19/2008
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6/3/2008
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$
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0.30
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Quarterly
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8/6/2008
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9/10/2008
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9/26/2008
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$
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0.31
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Quarterly
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12/9/2008
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12/19/2008
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12/29/2008
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$
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0.32
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Quarterly
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12/9/2008
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12/30/2008
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1/29/2009
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$
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0.33
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Special
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12/18/2008
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12/30/2008
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1/29/2009
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$
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0.05
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Quarterly
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4/14/2009
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5/26/2009
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6/25/2009
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$
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0.25
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Quarterly
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8/3/2009
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9/8/2009
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9/25/2009
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$
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0.25
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40
Stock
Performance Graph
The following graph compares the stockholder return on our
common stock from June 12, 2008 to September 30, 2009
with the NASDAQ Financial Stock Index, the NYSE Stock Market (US
Companies) Index and the Fifth Street Finance Corp. Peer Group
index. The comparison assumes $100.00 was invested on
June 12, 2008 (the date our common stock began to trade on
the NYSE Stock Market in connection with our initial public
offering) in our common stock and in the comparison groups and
assumes the reinvestment of all cash dividends prior to any tax
effect. The comparisons in the graph below are based on
historical data and are not intended to forecast the possible
future performance of our common stock.
Comparison
of Stockholder Return
Among Fifth Street Finance Corp., the NASDAQ Financial Stock
Index, the NYSE
Index and Fifth Street Finance Corp. Peer Group(1)
(For the Period June 12, 2008 to September 30,
2009)
Comparison
of 1 Year Cumulative Total Return
Assumes Initial Investment of $100
September 2009
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(1) |
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The Fifth Street Finance Corp. Peer Group index consists of the
following investment companies that have elected to be regulated
as business development companies under the 1940 Act: BlackRock
Kelso Capital Corporation, Ares Capital Corporation, Apollo
Investment Corporation, Gladstone Capital Corporation, MCG
Capital Corporation, and MVC Capital, Inc. |
Open
Market Stock Repurchase Program
In October 2008, our Board of Directors authorized a stock
repurchase program to acquire up to $8 million of our
outstanding common stock. Stock repurchases under this program
may be made through the open market at times and in such amounts
as our management deems appropriate. The stock repurchase
program expires December 2009 and may be limited or terminated
by the Board of Directors at any time without prior notice.
41
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Item 6.
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Selected
Financial Data
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The following selected financial data should be read together
with our financial statements and the related notes and the
discussion under Managements Discussion and Analysis
of Financial Condition and Results of Operations which is
included elsewhere in this
Form 10-K.
Effective as of January 2, 2008, Fifth Street Mezzanine
Partners III, L.P. merged with and into Fifth Street Finance
Corp. The financial information as of and for the period from
inception (February 15, 2007) to September 30,
2007 and for the fiscal years ended September 30, 2008 and
2009, set forth below was derived from our audited financial
statements and related notes for Fifth Street Mezzanine Partners
III, L.P. and Fifth Street Finance Corp., respectively.
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At September 30, 2007
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At and for the
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At and for the
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and for the Period
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Year Ended
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Year Ended
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February 15, 2007
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September 30,
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September 30,
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through September 30,
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2009
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2008
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2007
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(In thousands, except per share amounts)
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Statement of Operations data:
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Total investment income
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$
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49,828
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$
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33,219
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$
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4,296
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Base management fee, net
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5,889
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4,258
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1,564
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Incentive fee
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7,841
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|
|
4,118
|
|
|
|
|
|
All other expenses
|
|
|
4,736
|
|
|
|
4,699
|
|
|
|
1,773
|
|
Net investment income
|
|
|
31,362
|
|
|
|
20,144
|
|
|
|
959
|
|
Unrealized appreciation (depreciation) on investments
|
|
|
(10,795
|
)
|
|
|
(16,948
|
)
|
|
|
123
|
|
Realized gain (loss) on investments
|
|
|
(14,373
|
)
|
|
|
62
|
|
|
|
|
|
Net increase in partners capital/net assets resulting from
operations
|
|
|
6,194
|
|
|
|
3,258
|
|
|
|
1,082
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share at period end
|
|
$
|
10.84
|
|
|
$
|
13.02
|
|
|
|
N/A
|
|
Market price at period end(1)
|
|
|
10.93
|
|
|
|
10.05
|
|
|
|
N/A
|
|
Net investment income
|
|
|
1.27
|
|
|
|
1.29
|
|
|
|
N/A
|
|
Net realized and unrealized loss on investments
|
|
|
(1.02
|
)
|
|
|
(1.08
|
)
|
|
|
N/A
|
|
Net increase in partners capital/net assets resulting from
operations
|
|
|
0.25
|
|
|
|
0.21
|
|
|
|
N/A
|
|
Dividends declared
|
|
|
1.20
|
|
|
|
0.61
|
|
|
|
N/A
|
|
Balance Sheet data at period end:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
299,611
|
|
|
$
|
273,759
|
|
|
$
|
88,391
|
|
Cash and cash equivalents
|
|
|
113,205
|
|
|
|
22,906
|
|
|
|
17,654
|
|
Other assets
|
|
|
3,071
|
|
|
|
2,484
|
|
|
|
1,285
|
|
Total assets
|
|
|
415,887
|
|
|
|
299,149
|
|
|
|
107,330
|
|
Total liabilities
|
|
|
5,331
|
|
|
|
4,813
|
|
|
|
514
|
|
Total stockholders equity
|
|
|
410,556
|
|
|
|
294,336
|
|
|
|
106,816
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average annual yield on
investments(2)
|
|
|
15.7
|
%
|
|
|
16.2
|
%
|
|
|
16.8
|
%
|
Number of investments at period end
|
|
|
28
|
|
|
|
24
|
|
|
|
10
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Quarterly Data
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31,
|
(unaudited)
|
|
2009
|
|
2009
|
|
2009
|
|
2008
|
|
2008
|
|
2008
|
|
2008
|
|
2007
|
|
2007
|
|
2007
|
|
2007(3)
|
|
Total investment income
|
|
$
|
12,484
|
|
|
$
|
12,839
|
|
|
$
|
11,920
|
|
|
$
|
12,585
|
|
|
$
|
11,748
|
|
|
$
|
9,190
|
|
|
$
|
6,854
|
|
|
$
|
5,427
|
|
|
$
|
2,753
|
|
|
$
|
1,481
|
|
|
$
|
62
|
|
Net investment income (loss)
|
|
|
7,777
|
|
|
|
7,887
|
|
|
|
7,488
|
|
|
|
8,210
|
|
|
|
7,255
|
|
|
|
5,135
|
|
|
|
4,080
|
|
|
|
3,674
|
|
|
|
1,070
|
|
|
|
(72
|
)
|
|
|
(39
|
)
|
Net realized and unrealized gain (loss)
|
|
|
(86
|
)
|
|
|
(1,949
|
)
|
|
|
(4,651
|
)
|
|
|
(18,482
|
)
|
|
|
(4,396
|
)
|
|
|
(10,445
|
)
|
|
|
(1,569
|
)
|
|
|
(476
|
)
|
|
|
123
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in partners capital/net assets
resulting from operations
|
|
|
7,691
|
|
|
|
5,938
|
|
|
|
2,837
|
|
|
|
(10,272
|
)
|
|
|
2,859
|
|
|
|
(5,310
|
)
|
|
|
2,511
|
|
|
|
3,198
|
|
|
|
1,193
|
|
|
|
(72
|
)
|
|
|
(39
|
)
|
Net asset value per common share at period end
|
|
$
|
10.84
|
|
|
$
|
11.95
|
|
|
$
|
11.94
|
|
|
$
|
11.86
|
|
|
$
|
13.02
|
|
|
$
|
13.20
|
|
|
$
|
14.12
|
|
|
$
|
13.92
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
Our common stock commenced trading on the New York Stock
Exchange on June 12, 2008. There was no established public
trading price for the stock prior to that date. |
|
(2) |
|
Weighted average annual yield is calculated based upon our debt
investments at the end of the period. |
|
(3) |
|
For the period February 15, 2007 (inception) through
March 31, 2007. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in connection with
our financial statements and the notes thereto included
elsewhere in this annual report on
Form 10-K.
Some of the statements in this annual report on
Form 10-K
constitute forward-looking statements because they relate to
future events or our future performance or financial condition.
The forward-looking statements contained in this annual report
on
Form 10-K
may include statements as to:
|
|
|
|
|
our future operating results and dividend projections;
|
|
|
|
our business prospects and the prospects of our portfolio
companies;
|
|
|
|
the impact of the investments that we expect to make;
|
|
|
|
the ability of our portfolio companies to achieve their
objectives;
|
|
|
|
our expected financings and investments;
|
|
|
|
the adequacy of our cash resources and working capital; and
|
|
|
|
the timing of cash flows, if any, from the operations of our
portfolio companies.
|
In addition, words such as anticipate,
believe, expect and intend
indicate a forward-looking statement, although not all
forward-looking statements include these words. The
forward-looking statements contained in this annual report on
Form 10-K
involve risks and uncertainties. Our actual results could differ
materially from those implied or expressed in the
forward-looking statements for any reason, including the factors
set forth in Item 1A. Risk Factors and
elsewhere in this annual report on
Form 10-K.
Other factors that could cause actual results to differ
materially include:
|
|
|
|
|
changes in the economy and the financial markets;
|
|
|
|
risks associated with possible disruption in our operations or
the economy generally due to terrorism or natural disasters;
|
|
|
|
future changes in laws or regulations (including the
interpretation of these laws and regulations by regulatory
authorities) and conditions in our operating areas, particularly
with respect to business development companies and RICs; and
|
43
|
|
|
|
|
other considerations that may be disclosed from time to time in
our publicly disseminated documents and filings.
|
We have based the forward-looking statements included in this
annual report on
Form 10-K
on information available to us on the date of this annual report
on
Form 10-K,
and we assume no obligation to update any such forward-looking
statements. Although we undertake no obligation to revise or
update any forward-looking statements, whether as a result of
new information, future events or otherwise, you are advised to
consult any additional disclosures that we may make directly to
you or through reports that we in the future may file with the
SEC, including annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
Except as otherwise specified, references to the
Company, we, us, and
our, refer to Fifth Street Finance Corp.
Overview
We are a specialty finance company that lends to and invests in
small and mid-sized companies in connection with investments by
private equity sponsors. Our investment objective is to maximize
our portfolios total return by generating current income
from our debt investments and capital appreciation from our
equity investments.
We were formed as a Delaware limited partnership (Fifth Street
Mezzanine Partners III, L.P.) on February 15, 2007.
Effective as of January 2, 2008, Fifth Street Mezzanine
Partners III, L.P. merged with and into Fifth Street Finance
Corp. At the time of the merger, all outstanding partnership
interests in Fifth Street Mezzanine Partners III, L.P. were
exchanged for 12,480,972 shares of common stock in Fifth
Street Finance Corp.
Our consolidated financial statements prior to January 2,
2008 reflect our operations as a Delaware limited partnership
(Fifth Street Mezzanine Partners III, L.P.) prior to our merger
with and into a corporation (Fifth Street Finance Corp.).
On June 17, 2008, we completed an initial public offering
of 10,000,000 shares of our common stock at the offering
price of $14.12 per share. Our shares are currently listed on
the New York Stock Exchange under the symbol FSC.
On July 21, 2009, we completed a follow-on public offering
of 9,487,500 shares of our common stock, which included the
underwriters exercise of their over-allotment option, at
the offering price of $9.25 per share.
On September 25, 2009, we completed a follow-on public
offering of 5,520,000 shares of our common stock, which
included the underwriters exercise of their over-allotment
option, at the offering price of $10.50 per share.
Current
Market Conditions
Since mid-2007, the financial services sector has been
negatively impacted by significant write-offs related to
sub-prime
mortgages and the re-pricing of credit risk. Global debt and
equity markets have suffered substantial stress, volatility,
illiquidity and disruption, with
sub-prime
mortgage-related issues being the most significant contributing
factor. These forces reached unprecedented levels by the fall of
2008, resulting in the insolvency or acquisition of, or
government assistance to, several major domestic and
international financial institutions. These events have
significantly diminished overall confidence in the debt and
equity markets and caused increasing economic uncertainty. This
reduced confidence and uncertainty could further exacerbate the
overall market disruptions and risks to businesses in need of
capital.
In particular, the disruptions in the financial markets have
increased the spread between the yields realized on risk-free
and higher risk securities, resulting in illiquidity in parts of
the financial markets. This widening of spreads makes it more
difficult for lower middle market companies to access capital as
traditional senior lenders become more selective, equity
sponsors delay transactions for better earnings visibility, and
44
sellers are hesitant to accept lower purchase multiples. As a
result, we are seeing a smaller number of attractive
transactions in the lower end of the middle market.
Despite these factors, our deal pipeline is robust, with high
quality transactions backed by private equity sponsors in the
lower middle market. As always, we remain cautious in selecting
new investment opportunities, and will only deploy capital in
deals which are consistent with our disciplined philosophy of
pursuing superior risk-adjusted returns. In this regard, we had
$113.2 million of cash and cash equivalents on hand at
September 30, 2009 to fund investments. As evidenced by
recent activities (see Recent
Developments), we expect to grow the business in part by
increasing the average investment size when and where
appropriate. At the same time, we expect to focus more on first
lien transactions. We also expect to invest in more floating
rate facilities, with rate floors, to protect against interest
rate decreases.
Although we currently have sufficient capital available to fund
investments, a prolonged period of market disruptions may cause
us to reduce the volume of loans we originate
and/or fund,
which could have an adverse effect on our business, financial
condition, and results of operations. Furthermore, because our
common stock has generally traded at a price below our current
net asset value per share over the last several months and we
are not generally able under the 1940 Act to sell our common
stock at a price below net asset value per share, we may be
limited in our ability to raise equity capital. See
Item 1. Business Regulation
Common Stock for a discussion of the approval we received
from our stockholders to issue shares of our common stock below
net asset value per share.
Critical
Accounting Policies
FASB
Accounting Standards Codification
The issuance of FASB Accounting Standards
Codificationtm
(the Codification) on July 1, 2009 (effective
for interim or annual reporting periods ending after
September 15, 2009), changes the way that U.S. generally
accepted accounting principles (GAAP) are
referenced. Beginning on that date, the Codification officially
became the single source of authoritative nongovernmental GAAP;
however, SEC registrants must also consider rules, regulations,
and interpretive guidance issued by the SEC or its staff. The
switch affects the way companies refer to U.S. GAAP in financial
statements and in their accounting policies. All existing
standards that were used to create the Codification were
superseded by the Codification. Instead, references to standards
will consist solely of the number used in the
Codifications structural organization. For example, it is
no longer proper to refer to FASB Statement No. 157,
Fair Value Measurement, which is now ASC Topic 820
Fair Value Measurements and Disclosures
(ASC 820).
Consistent with the effective date of the Codification,
financial statements for periods ending after September 15,
2009, refers to the Codification structure, not pre-Codification
historical GAAP.
Basis
of Presentation
Effective January 2, 2008, Fifth Street Mezzanine Partners
III, L.P. (the Partnership), a Delaware limited
partnership organized on February 15, 2007, merged with and
into Fifth Street Finance Corp. The merger involved the exchange
of shares between companies under common control. In accordance
with the guidance on exchanges of shares between entities under
common control, our results of operations and cash flows for the
fiscal year ended September 30, 2008 are presented as if
the merger had occurred as of October 1, 2007. Accordingly,
no adjustments were made to the carrying value of assets and
liabilities (or the cost basis of investments) as a result of
the merger. Prior to January 2, 2008, references to the
Company are to the Partnership. Since January 2, 2008,
references to the Company, FSC, we or
our are to Fifth Street Finance Corp., unless the
context otherwise requires. The Companys financial results
for the fiscal year ended September 30, 2007 refer to the
Partnership.
The preparation of financial statements in accordance with GAAP
requires management to make certain estimates and assumptions
affecting amounts reported in the consolidated financial
statements. We have identified investment valuation and revenue
recognition as our most critical accounting estimates. We
continuously evaluate our estimates, including those related to
the matters described below. These estimates
45
are based on the information that is currently available to us
and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could differ
materially from those estimates under different assumptions or
conditions. A discussion of our critical accounting policies
follows.
Investment
Valuation
We are required to report our investments that are not publicly
traded or for which current market values are not readily
available at fair value. The fair value is deemed to be the
value at which an enterprise could be sold in a transaction
between two willing parties other than through a forced or
liquidation sale.
Under ASC 820, which we adopted effective October 1, 2008,
we perform detailed valuations of our debt and equity
investments on an individual basis, using market based, income
based, and bond yield approaches as appropriate.
Under the market approach, we estimate the enterprise value of
the portfolio companies in which we invest. There is no one
methodology to estimate enterprise value and, in fact, for any
one portfolio company, enterprise value is best expressed as a
range of fair values, from which we derive a single estimate of
enterprise value. To estimate the enterprise value of a
portfolio company, we analyze various factors, including the
portfolio companys historical and projected financial
results. Typically, private companies are valued based on
multiples of EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization), cash flows, net income,
revenues, or in limited cases, book value. We generally require
portfolio companies to provide annual audited and quarterly and
monthly unaudited financial statements, as well as annual
projections for the upcoming fiscal year.
Under the income approach, we generally prepare and analyze
discounted cash flow models based on our projections of the
future free cash flows of the business. Under the bond yield
approach, we use bond yield models to determine the present
value of the future cash flow streams of our debt investments.
We review various sources of transactional data, including
private mergers and acquisitions involving debt investments with
similar characteristics, and assess the information in the
valuation process.
We also may, when conditions warrant, utilize an expected
recovery model, whereby we use alternate procedures to determine
value when the customary approaches are deemed to be not as
relevant or reliable.
Our Board of Directors undertakes a multi-step valuation process
each quarter in connection with determining the fair value of
our investments:
|
|
|
|
|
Our quarterly valuation process begins with each portfolio
company or investment being initially valued by the deal team
within our investment adviser responsible for the portfolio
investment;
|
|
|
|
Preliminary valuations are then reviewed and discussed with the
principals of our investment adviser;
|
|
|
|
Separately, an independent valuation firm engaged by the Board
of Directors prepares preliminary valuations on a selected basis
and submits a report to us;
|
|
|
|
The deal team compares and contrasts its preliminary valuations
to the report of the independent valuation firm and resolves any
differences;
|
|
|
|
The deal team prepares a final valuation report for the
Valuation Committee of our Board of Directors;
|
|
|
|
The Valuation Committee of our Board of Directors reviews the
preliminary valuations, and the deal team responds and
supplements the preliminary valuations to reflect any comments
provided by the Valuation Committee;
|
|
|
|
The Valuation Committee of our Board of Directors makes a
recommendation to the Board of Directors; and
|
|
|
|
The Board of Directors discusses valuations and determines the
fair value of each investment in our portfolio in good faith.
|
46
The fair value of all of our investments at September 30,
2009, and September 30, 2008, was determined by our Board
of Directors. Our Board of Directors is solely responsible for
the valuation of our portfolio investments at fair value as
determined in good faith pursuant to our valuation policy and
our consistently applied valuation process.
Our Board of Directors has engaged an independent valuation firm
to provide us with valuation assistance. Upon completion of its
process each quarter, the independent valuation firm provides us
with a written report regarding the preliminary valuations of
selected portfolio securities as of the close of such quarter.
We will continue to engage an independent valuation firm to
provide us with assistance regarding our determination of the
fair value of selected portfolio securities each quarter;
however, our Board of Directors is ultimately and solely
responsible for determining the fair value of our investments in
good faith.
An independent valuation firm, Murray, Devine & Co.,
Inc., provided us with assistance in our determination of the
fair value of 91.9% of our portfolio for the quarter ended
December 31, 2007, 92.1% of our portfolio for the quarter
ended March 31, 2008, 91.7% of our portfolio for the
quarter ended June 30, 2008, 92.8% of our portfolio for the
quarter ended September 30, 2008, 100% of our portfolio for
the quarter ended December 31, 2008, 88.7% of our portfolio
for the quarter ended March 31, 2009 (or 96.0% of our
portfolio excluding our investment in IZI Medical Products,
Inc., which closed on March 31, 2009 and therefore was not
part of the independent valuation process), 92.1% of our
portfolio for the quarter ended June 30, 2009, and 28.1% of
our portfolio for the quarter ended September 30, 2009.
Our $50 million credit facility with Bank of Montreal was
terminated effective September 16, 2009. The facility
required independent valuations for at least 90% of the
portfolio on a quarterly basis. With the termination of this
facility, this valuation test is no longer required. However, we
still intend to have a portion of the portfolio valued by an
independent third party on an quarterly basis, with a
substantial portion being valued on an annual basis.
As of September 30, 2009 and September 30, 2008,
approximately 72.0% and 91.5%, respectively, of our total assets
represented investments in portfolio companies valued at fair
value.
Effective October 1, 2008, we adopted ASC 820. In
accordance with that standard, we changed our presentation for
all periods presented to net unearned fees against the
associated debt investments. Prior to the adoption of
ASC 820 on October 1, 2008, we reported unearned fees
as a single line item on our Consolidated Balance Sheets and
Consolidated Schedules of Investments. This change in
presentation had no impact on the overall net cost or fair value
of our investment portfolio and had no impact on our financial
position or results of operations.
The following table summarizes the effect of the adoption of
ASC 820 on the presentation of our investment portfolio in
the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as
|
|
|
|
|
|
Fair Value as Reported
|
|
|
|
Reported in the
|
|
|
|
|
|
in the September 30, 2008
|
|
|
|
September 30, 2008
|
|
|
|
|
|
Consolidated Financial
|
|
|
|
Financial Statements
|
|
|
Change in Presentation
|
|
|
Statements as
|
|
|
|
as Filed in the
|
|
|
of Unearned Fee Income
|
|
|
Filed in the
|
|
|
|
September 30, 2008
|
|
|
to Conform with
|
|
|
September 30, 2009
|
|
|
|
Form 10-K
|
|
|
ASC 820
|
|
|
Form 10-K
|
|
|
Affiliate investments
|
|
$
|
73,106,057
|
|
|
$
|
(1,755,640
|
)
|
|
$
|
71,350,417
|
|
Non-control/Non-affiliate investments
|
|
|
205,889,362
|
|
|
|
(3,480,625
|
)
|
|
|
202,408,737
|
|
Unearned fee income
|
|
|
(5,236,265
|
)
|
|
|
5,236,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments net of unearned fee income
|
|
$
|
273,759,154
|
|
|
$
|
|
|
|
$
|
273,759,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Revenue
Recognition
Interest
and Dividend Income
Interest income, adjusted for amortization of premium and
accretion of original issue discount, is recorded on the accrual
basis to the extent that such amounts are expected to be
collected. We stop accruing interest on investments when it is
determined that interest is no longer collectible. Distributions
from portfolio companies are recorded as dividend income when
the distribution is received.
Fee
Income
We receive a variety of fees in the ordinary course of our
business, including origination fees. We account for our fee
income in accordance with ASC Topic 605-25 Multiple-Element
Arrangements (ASC 605-25) which addresses
certain aspects of a companys accounting for arrangements
containing multiple revenue-generating activities. In some
arrangements, the different revenue-generating activities
(deliverables) are sufficiently separable and there exists
sufficient evidence of their fair values to separately account
for some or all of the deliverables (i.e., there are separate
units of accounting). ASC 605-25 states that the total
consideration received for the arrangement be allocated to each
unit based upon each units relative fair value. In other
arrangements, some or all of the deliverables are not
independently functional, or there is not sufficient evidence of
their fair values to account for them separately. The timing of
revenue recognition for a given unit of accounting depends on
the nature of the deliverable(s) in that accounting unit (and
the corresponding revenue recognition model) and whether the
general conditions for revenue recognition have been met. Fee
income for which fair value cannot be reasonably ascertained is
recognized using the interest method in accordance with
ASC 310-20
Nonrefundable Fees and Other Costs.
As of September 30, 2009, we are also entitled to receive
approximately $6.8 million in aggregate exit fees across 11
portfolio investments upon the future exit of those investments.
Exit fees are fees which are earned and payable upon the exit of
a debt security and, similar to a prepayment penalty, are not
accrued or otherwise included in net investment income until
received. Such fees will be paid to us when a portfolio company
exits our loan, for example in a refinancing, or when the loan
matures. The receipt of such fees as well the timing of our
receipt of such fees is contingent upon a successful exit event
for each of the 11 investments.
Payment-in-Kind
(PIK) Interest
Our loans typically contain a contractual PIK interest
provision. The PIK interest, which represents contractually
deferred interest added to the loan balance that is generally
due at the end of the loan term, is generally recorded on the
accrual basis to the extent such amounts are expected to be
collected. We generally cease accruing PIK interest if there is
insufficient value to support the accrual or if we do not expect
the portfolio company to be able to pay all principal and
interest due. Our decision to cease accruing PIK interest
involves subjective judgments and determinations based on
available information about a particular portfolio company,
including whether the portfolio company is current with respect
to its payment of principal and interest on its loans and debt
securities; monthly and quarterly financial statements and
financial projections for the portfolio company; our assessment
of the portfolio companys business development success,
including product development, profitability and the portfolio
companys overall adherence to its business plan;
information obtained by us in connection with periodic formal
update interviews with the portfolio companys management
and, if appropriate, the private equity sponsor; and information
about the general economic and market conditions in which the
portfolio company operates. Based on this and other information,
we determine whether to cease accruing PIK interest on a loan or
debt security. Our determination to cease accruing PIK interest
on a loan or debt security is generally made well before our
full write-down of such loan or debt security.
For a discussion of risks we are subject to as a result of our
use of PIK interest in connection with our investments, see
Item 1A. Risk Factors Risks Relating to
Our Business and Structure We may have difficulty
paying our required distributions if we recognize income before
or without receiving cash representing such income,
We may in the future choose to pay dividends
in our own stock, in which case you may be required to pay tax
in excess of the cash you receive and
Our incentive fee may induce our investment
adviser to make speculative investments. In addition, if
it is subsequently determined that we will
48
not be able to collect any previously accrued PIK interest, the
fair value of our loans or debt securities would decline by the
amount of such previously accrued, but uncollectible, PIK
interest.
To maintain our status as a RIC, PIK income must be paid out to
our stockholders in the form of dividends even though we have
not yet collected the cash and may never collect the cash
relating to the PIK interest. Accumulated PIK interest was
approximately $12.1 million and represented 4.0% of the
fair value of our portfolio of investments as of
September 30, 2009 and approximately $5.4 million or
2.0% as of September 30, 2008. The net increase in loan
balances as a result of contracted PIK arrangements are
separately identified in our Consolidated Statements of Cash
Flows.
Portfolio
Composition
Our investments principally consist of loans, purchased equity
investments and equity grants in privately-held companies. Our
loans are typically secured by either a first or second lien on
the assets of the portfolio company, generally have terms of up
to six years (but an expected average life of between three and
four years) and typically bear interest at fixed rates and to a
lesser extent, at floating rates. We are currently focusing our
new debt origination efforts on first lien loans.
A summary of the composition of our investment portfolio at cost
and fair value as a percentage of total investments is shown in
the following tables:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
First lien debt
|
|
|
46.82
|
%
|
|
|
37.41
|
%
|
Second lien debt
|
|
|
50.08
|
%
|
|
|
59.38
|
%
|
Purchased equity
|
|
|
1.27
|
%
|
|
|
1.42
|
%
|
Equity grants
|
|
|
1.83
|
%
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
Fair value:
|
|
|
|
|
|
|
|
|
First lien debt
|
|
|
47.40
|
%
|
|
|
39.54
|
%
|
Second lien debt
|
|
|
51.37
|
%
|
|
|
58.78
|
%
|
Purchased equity
|
|
|
0.17
|
%
|
|
|
0.73
|
%
|
Equity grants
|
|
|
1.06
|
%
|
|
|
0.95
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
The industry composition of our portfolio at cost and fair value
were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
By Industry
|
|
2009
|
|
|
2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
Healthcare technology
|
|
|
11.37
|
%
|
|
|
3.33
|
%
|
Healthcare services
|
|
|
10.04
|
%
|
|
|
8.01
|
%
|
Footwear and apparel
|
|
|
6.85
|
%
|
|
|
6.21
|
%
|
Restaurants
|
|
|
6.20
|
%
|
|
|
6.65
|
%
|
Construction and engineering
|
|
|
5.89
|
%
|
|
|
6.45
|
%
|
Healthcare facilities
|
|
|
5.50
|
%
|
|
|
6.27
|
%
|
Trailer leasing services
|
|
|
5.21
|
%
|
|
|
5.85
|
%
|
Manufacturing mechanical products
|
|
|
4.71
|
%
|
|
|
5.33
|
%
|
Data processing and outsourced services
|
|
|
4.12
|
%
|
|
|
4.77
|
%
|
Media Advertising
|
|
|
4.10
|
%
|
|
|
4.40
|
%
|
49
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
By Industry
|
|
2009
|
|
|
2008
|
|
|
Merchandise display
|
|
|
3.98
|
%
|
|
|
4.40
|
%
|
Home furnishing retail
|
|
|
3.93
|
%
|
|
|
3.93
|
%
|
Housewares & specialties
|
|
|
3.68
|
%
|
|
|
3.93
|
%
|
Emulsions manufacturing
|
|
|
3.59
|
%
|
|
|
3.28
|
%
|
Air freight and logistics
|
|
|
3.29
|
%
|
|
|
0.00
|
%
|
Capital goods
|
|
|
3.05
|
%
|
|
|
3.32
|
%
|
Environmental & facilities services
|
|
|
2.73
|
%
|
|
|
3.08
|
%
|
Food distributors
|
|
|
2.73
|
%
|
|
|
4.13
|
%
|
Household products/ specialty chemicals
|
|
|
2.38
|
%
|
|
|
4.08
|
%
|
Entertainment theaters
|
|
|
2.32
|
%
|
|
|
4.05
|
%
|
Leisure facilities
|
|
|
2.20
|
%
|
|
|
2.58
|
%
|
Building products
|
|
|
2.13
|
%
|
|
|
2.39
|
%
|
Lumber products
|
|
|
0.00
|
%
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Fair value:
|
|
|
|
|
|
|
|
|
Healthcare technology
|
|
|
12.27
|
%
|
|
|
3.60
|
%
|
Healthcare services
|
|
|
11.26
|
%
|
|
|
8.54
|
%
|
Footwear and apparel
|
|
|
7.37
|
%
|
|
|
6.55
|
%
|
Healthcare facilities
|
|
|
5.96
|
%
|
|
|
6.66
|
%
|
Construction and engineering
|
|
|
5.96
|
%
|
|
|
6.82
|
%
|
Restaurants
|
|
|
5.94
|
%
|
|
|
6.44
|
%
|
Manufacturing mechanical products
|
|
|
5.03
|
%
|
|
|
5.66
|
%
|
Data processing and outsourced services
|
|
|
4.44
|
%
|
|
|
5.00
|
%
|
Media Advertising
|
|
|
4.37
|
%
|
|
|
4.57
|
%
|
Merchandise display
|
|
|
4.36
|
%
|
|
|
4.68
|
%
|
Emulsions manufacturing
|
|
|
4.05
|
%
|
|
|
3.48
|
%
|
Air freight and logistics
|
|
|
3.60
|
%
|
|
|
0.00
|
%
|
Home furnishing retail
|
|
|
3.45
|
%
|
|
|
3.92
|
%
|
Trailer leasing services
|
|
|
3.29
|
%
|
|
|
6.20
|
%
|
Capital goods
|
|
|
3.26
|
%
|
|
|
3.57
|
%
|
Food distributors
|
|
|
3.00
|
%
|
|
|
4.38
|
%
|
Entertainment theaters
|
|
|
2.52
|
%
|
|
|
4.30
|
%
|
Leisure facilities
|
|
|
2.38
|
%
|
|
|
2.74
|
%
|
Building products
|
|
|
2.06
|
%
|
|
|
2.55
|
%
|
Environmental & facilities services
|
|
|
2.04
|
%
|
|
|
3.24
|
%
|
Housewares & specialties
|
|
|
1.90
|
%
|
|
|
4.17
|
%
|
Household products/specialty chemicals
|
|
|
1.49
|
%
|
|
|
1.33
|
%
|
Lumber products
|
|
|
0.00
|
%
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
Portfolio
Asset Quality
We employ a grading system to assess and monitor the credit risk
of our loan portfolio. We rate all loans on a scale from 1 to 5.
The system is intended to reflect the performance of the
borrowers business, the collateral coverage of the loan,
and other factors considered relevant to making a credit
judgment.
|
|
|
|
|
Investment Rating 1 is used for investments that are performing
above expectations
and/or a
capital gain is expected.
|
|
|
|
Investment Rating 2 is used for investments that are performing
substantially within our expectations, and whose risks remain
neutral or favorable compared to the potential risk at the time
of the original investment. All new loans are initially rated 2.
|
50
|
|
|
|
|
Investment Rating 3 is used for investments that are performing
below our expectations and that require closer monitoring, but
where we expect no loss of investment return (interest
and/or
dividends) or principal. Companies with a rating of 3 may
be out of compliance with financial covenants.
|
|
|
|
Investment Rating 4 is used for investments that are performing
below our expectations and for which risk has increased
materially since the original investment. We expect some loss of
investment return, but no loss of principal.
|
|
|
|
Investment Rating 5 is used for investments that are performing
substantially below our expectations and whose risks have
increased substantially since the original investment.
Investments with a rating of 5 are those for which some loss of
principal is expected.
|
The following table shows the distribution of our investments on
the 1 to 5 investment rating scale at fair value, as of
September 30, 2009 and September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
Rating
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Leverage Ratio
|
|
|
Fair Value
|
|
|
% of Portfolio
|
|
|
Leverage Ratio
|
|
|
1
|
|
$
|
22,913,497
|
|
|
|
7.65
|
%
|
|
|
1.70
|
|
|
$
|
7,705,461
|
|
|
|
2.76
|
%
|
|
|
4.05
|
|
2
|
|
|
248,506,393
|
|
|
|
82.94
|
%
|
|
|
4.34
|
|
|
|
249,024,303
|
|
|
|
89.26
|
%
|
|
|
4.23
|
|
3
|
|
|
6,122,236
|
|
|
|
2.04
|
%
|
|
|
10.04
|
|
|
|
17,707,790
|
|
|
|
6.35
|
%
|
|
|
5.86
|
|
4
|
|
|
16,377,904
|
|
|
|
5.47
|
%
|
|
|
8.31
|
|
|
|
4,557,565
|
|
|
|
1.63
|
%
|
|
|
9.80
|
|
5
|
|
|
5,691,107
|
|
|
|
1.90
|
%
|
|
|
NM
|
(1)
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299,611,137
|
|
|
|
100.00
|
%
|
|
|
4.42
|
|
|
$
|
278,995,119
|
|
|
|
100.00
|
%
|
|
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Due to operating performance this ratio is not measurable. |
As a result of current economic conditions and their impact on
certain of our portfolio companies, we have agreed to modify the
payment terms of our investments in nine of our portfolio
companies as of September 30, 2009. Such modified terms
include increased
payment-in-kind
interest provisions and reduced cash interest rates. These
modifications, and any future modifications to our loan
agreements as a result of the current economic conditions or
otherwise, may limit the amount of interest income that we
recognize from the modified investments, which may, in turn,
limit our ability to make distributions to our stockholders. See
note 9 to the Consolidated Schedule of Investments as of
September 30, 2009 in our financial statements included
herein.
Loans and
Debt Securities on Non-Accrual Status
As of September 30, 2009, we had stopped accruing PIK
interest and original issue discount on five investments,
including two investments that had not paid their scheduled
monthly cash interest payments or were otherwise on non-accrual
status. At September 30, 2008, none of our loans or debt
securities were on non-accrual status.
Income non-accrual amounts for the year ended September 30,
2009 were as follows:
|
|
|
|
|
|
|
|
|
|
Cash interest income
|
|
$
|
2,938,190
|
|
|
|
|
|
PIK interest income
|
|
|
1,398,347
|
|
|
|
|
|
OID income
|
|
|
402,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,739,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
and Analysis of Results and Operations
Results
of Operations
The principal measure of our financial performance is the net
income (loss) which includes net investment income (loss), net
realized gain (loss) and net unrealized appreciation
(depreciation). Net investment income is
51
the difference between our income from interest, dividends,
fees, and other investment income and total expenses. Net
realized gain (loss) on investments is the difference between
the proceeds received from dispositions of portfolio investments
and their stated costs. Net unrealized appreciation
(depreciation) on investments is the net change in the fair
value of our investment portfolio.
We were formed as a Delaware limited partnership (Fifth Street
Mezzanine Partners III, L.P.) on February 15, 2007 and we
had limited operations through September 30, 2007. As a
result, there is limited comparability for fiscal year ended
September 30, 2008 and the prior period from
February 15, 2007 (inception) through September 30,
2007.
Comparison
of years ended September 30, 2009 and September 30,
2008
Total
Investment Income
Total investment income includes interest and dividend income on
our investments, fee income and other investment income. Fee
income consists principally of loan and arrangement fees, annual
administrative fees, unused fees, prepayment fees, amendment
fees, equity structuring fees and waiver fees. Other investment
income consists primarily of the accelerated recognition of
deferred financing fees received from our portfolio companies on
the repayment of the outstanding investment, the sale of the
investment or reduction of available credit, and interest on
cash and cash equivalents on deposit with financial institutions.
Total investment income for the years ended September 30,
2009 and September 30, 2008 was approximately
$49.8 million and $33.2 million, respectively. For the
year ended September 30, 2009, this amount primarily
consisted of approximately $46.0 million of interest income
from portfolio investments (which included approximately
$7.4 million of
payment-in-kind
or PIK interest), and $3.5 million of fee income. For the
year ended September 30, 2008, this amount primarily
consisted of approximately $30.5 million of interest income
from portfolio investments (which included approximately
$4.9 million of PIK interest), and $1.8 million of fee
income.
The increase in our total investment income for the year ended
September 30, 2009 as compared to the year ended
September 30, 2008 was primarily attributable to higher
average levels of outstanding debt investments, which was
principally due to an increase of two debt investments in our
portfolio in the
year-over-year
period, partially offset by debt repayments received during the
same period.
Expenses
Expenses (net of the waived portion of the base management fee)
for the years ended September 30, 2009 and
September 30, 2008 were approximately $18.4 million
and $13.1 million, respectively. Expenses increased for the
year ended September 30, 2009 as compared to the year ended
September 30, 2008 by approximately $5.3 million,
primarily as a result of increases in base management fee,
incentive fees and other general and administrative expenses.
The increase in base management fee resulted from an increase in
our total assets as reflected in the growth of the investment
portfolio offset partially by our investment advisers
unilateral decision to waive approximately $172,000 of the base
management fee for the year ended September 30, 2009.
Incentive fees were implemented effective January 2, 2008
when Fifth Street Mezzanine Partners III, L.P. merged with and
into Fifth Street Finance Corp., and reflect the growth of our
net investment income before such fees.
Net
Investment Income
As a result of the $16.6 million increase in total
investment income as compared to the $5.3 million increase
in total expenses, net investment income for the year ended
September 30, 2009 reflected a $11.3 million, or
55.7%, increase compared to the year ended September 30,
2008.
Realized
Gain (Loss) on Sale of Investments
Net realized gain (loss) on the sale of investments is the
difference between the proceeds received from dispositions of
portfolio investments and their stated costs. During the year
ended September 30, 2009, we
52
exited our investment in American Hardwoods Industries, LLC and
recorded a realized loss of $10.4 million, and recorded a
$4.0 million realized loss on our investment in CPAC, Inc.
in connection with our determination that the investment was
permanently impaired based on, among other things, our analysis
of changes in the portfolio companys business operations
and prospects. During the year ended September 30, 2008, we
sold our equity investment in Filet of Chicken and realized a
gain of approximately $62,000.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
Net unrealized appreciation or depreciation on investments is
the net change in the fair value of our investment portfolio
during the reporting period, including the reversal of
previously recorded unrealized appreciation or depreciation when
gains or losses are realized. During the year ended
September 30, 2009, we recorded net unrealized depreciation
of $10.8 million. This consisted of $14.3 million of
reclassifications to realized losses, offset by
$23.1 million of net unrealized depreciation on debt
investments and $2.0 million of net unrealized depreciation
on equity investments. During the year ended September 30,
2008, we recorded net unrealized depreciation of
$16.9 million. This consisted of $12.1 million of net
unrealized depreciation on debt investments and
$4.8 million of net unrealized depreciation on equity
investments.
Comparison
of year ended September 30, 2008 and the period
February 15, 2007 (inception) through September 30,
2007
Total
Investment Income
Total investment income for the year ended September 30,
2008 and the period February 15, 2007 (inception) through
September 30, 2007 was approximately $33.2 million and
$4.3 million, respectively. For the year ended
September 30, 2008, this amount primarily consisted of
approximately $30.5 million of interest income from
portfolio investments (which included approximately
$4.9 million of
payment-in-kind
or PIK interest), and $1.8 million of fee income. For the
period ended September 30, 2007, this amount primarily
consisted of approximately $4.1 million of interest income
from portfolio investments (which included approximately
$0.6 million of PIK interest), and $0.2 million of fee
income.
The increase in our total investment income for the year ended
September 30, 2008 as compared to the period ended
September 30, 2007 was primarily attributable to higher
average levels of outstanding debt investments, which was
principally due to fourteen new debt investments in our
portfolio in the
year-over-year
period, partially offset by debt repayments received during the
same period.
Expenses
Expenses for the year ended September 30, 2008 and the
period February 15, 2007 (inception) through
September 30, 2007 were approximately $13.1 million
and $3.3 million, respectively. Expenses increased for the
year ended September 30, 2008 as compared to the period
ended September 30, 2007 by approximately
$9.8 million, primarily as a result of increases in base
management fee, incentive fees, professional fees and other
general and administrative expenses.
The increase in base management fee resulted from an increase in
our total assets as reflected in the growth of the investment
portfolio. Incentive fees were implemented effective
January 2, 2008 when Fifth Street Mezzanine Partners III,
L.P. merged with and into Fifth Street Finance Corp., and
reflect the growth of our net investment income before such fees.
Net
Investment Income
As a result of the $28.9 million increase in total
investment income as compared to the $9.8 million increase
in total expenses, net investment income for the year ended
September 30, 2008 reflected a $19.1 million, or
2000%, increase compared to the period ended September 30,
2007.
53
Realized
Gain (Loss) on Sale of Investments
During the year ended September 30, 2008 we sold our equity
investment in Filet of Chicken and realized a gain of
approximately $62,000. During the period ended
September 30, 2007 we had no realized gains or losses.
Net
Change in Unrealized Appreciation or Depreciation on
Investments
During the year ended September 30, 2008, we recorded net
unrealized depreciation of $16.9 million. This consisted of
$12.1 million of net unrealized depreciation on debt
investments and $4.8 million of net unrealized depreciation
on equity investments. During the period ended
September 30, 2007, we recorded net unrealized depreciation
on equity investments of $0.1 million.
Financial
Condition, Liquidity and Capital Resources
Cash
Flows
To fund growth, we have a number of alternatives available to
increase capital, including, but not limited to, raising equity,
increasing debt, or funding from operational cash flow.
Additionally, we may reduce investment size by syndicating a
portion of any given transaction.
For the year ended September 30, 2009, we experienced a net
increase in cash and cash equivalents of $90.3 million.
During that period, we used $19.7 million of cash in
operating activities, primarily for the funding of
$62.0 million of investments, partially offset by
$18.3 million of principal payments received and
$31.4 million of net investment income. During the same
period cash provided by financing activities was
$110.0 million, primarily consisting of $138.6 million
of proceeds from issuance of our common stock, partially offset
by $27.1 million of cash dividends paid, $1.0 million
of offering costs paid and $0.5 million paid to repurchase
shares of our common stock on the open market. We intend to fund
our future distribution obligations through operating cash flow
or with funds obtained through future equity offerings or credit
lines, as we deem appropriate.
For the year ended September 30, 2008, we experienced a net
increase in cash and equivalents of $5.3 million. During
that period, we used $179.4 million of cash in operating
activities primarily for the funding of $202.4 million of
investments, partially offset by $2.2 million of principal
payments received and $20.1 million of net investment
income. During the same period cash provided by financing
activities was $184.6 million, primarily consisting of
$131.3 million of proceeds from issuance of our common
stock, partially offset by $8.9 million of cash dividends
paid and $1.5 million of offering costs paid.
From inception (February 15, 2007) through
September 30, 2007, our cash and equivalents increased by
approximately $17.7 million. During that period, our cash
flow from operations was minimal at approximately
$1.0 million excluding investments in portfolio companies.
$89.0 million was invested in portfolio companies financed
primarily from capital contributions of approximately
$105.7 million from partners.
As of September 30, 2009, we had $113.2 million in
cash and cash equivalents, portfolio investments (at fair value)
of $299.6 million, $2.9 million of interest
receivable, no borrowings outstanding and unfunded commitments
of $9.75 million. At November 30, 2009, we had $114.2
million in cash and cash equivalents, $3.1 million of interest
receivable, $10.2 of dividends payable, no borrowings
outstanding and unfunded commitments of $9.3 million.
As of September 30, 2008, we had $22.9 million in cash
and cash equivalents, portfolio investments (at fair value) of
$273.8 million, $2.4 million of interest receivable,
no borrowings outstanding under our secured revolving credit
facility and unfunded commitments of $24.7 million.
Significant
capital transactions that occurred from Inception through
September 30, 2009
On March 30, 2007, we closed on approximately
$78 million in capital commitments from the sale of limited
partnership interests of Fifth Street Mezzanine Partners III,
L.P. As of September 30, 2007, we had closed on additional
capital commitments, bringing the total amount of capital
commitments to $165 million.
54
We then closed on capital commitments from the sale of
additional limited partnership interests of Fifth Street
Mezzanine Partners III, L.P., bringing the total amount of
capital commitments to $169.4 million as of
November 28, 2007.
On January 2, 2008, Fifth Street Mezzanine Partners III,
L.P. merged with and into Fifth Street Finance Corp. At the time
of the merger, all outstanding partnership interests in Fifth
Street Mezzanine Partners III, L.P. were exchanged for
12,480,972 shares of common stock of Fifth Street Finance
Corp.
On January 15, 2008, we entered into a $50 million
secured revolving credit facility with the Bank of Montreal, at
a rate of LIBOR (London Inter Bank Offered Rate) plus 1.5%, with
a one year maturity date. The credit facility was secured by our
existing investments.
On April 25, 2008, we sold 30,000 shares of
non-convertible, non-participating preferred stock, with a par
value of $0.01 and a liquidation preference of $500 per share
(Series A Preferred Stock) at a price of $500
per share to a company controlled by Bruce E. Toll, one of our
directors at that time, for total proceeds of $15 million.
For the three months ended June 30, 2008, we paid dividends
of approximately $234,000 on the 30,000 shares of
Series A Preferred Stock. The dividend payment is
considered and included in interest expense for accounting
purposes since the preferred stock has a mandatory redemption
feature. On June 30, 2008, we redeemed 30,000 shares
outstanding of our Series A Preferred Stock at the
mandatory redemption price of 101% of the liquidation
preference, or $15,150,000. The $150,000 is considered and
included in interest expense for accounting purposes due to the
stocks mandatory redemption feature.
On May 1, 2008, our Board of Directors declared a dividend
of $0.30 per share of common stock payable to stockholders of
record as of May 19, 2008. On June 3, 2008, we paid a
cash dividend of $1.9 million and issued
133,316 shares of common stock totaling $1.9 million
to those stockholders who did not opt out of reinvesting the
dividend under our dividend reinvestment plan.
On June 17, 2008, we completed an initial public offering
of 10,000,000 shares of our common stock at the offering
price of $14.12 per share and received gross proceeds of
approximately $141.2 million. Our shares are currently
listed on the New York Stock Exchange under the symbol
FSC.
On August 6, 2008, our Board of Directors declared a
dividend of $0.31 per share of common stock payable to
stockholders of record as of September 10, 2008. On
September 26, 2008, we paid a cash dividend of
$5.1 million and purchased 196,786 shares of common
stock totaling $1.9 million on the open market to satisfy
the share obligations under the dividend reinvestment plan.
In October 2008, we repurchased 78,000 shares of our common
stock on the open market as part of our share repurchase program
following its announcement on October 15, 2008.
On December 9, 2008, our Board of Directors declared a
dividend of $0.32 per share of common stock payable to
stockholders of record as of December 19, 2008 and a
dividend of $0.33 per share of common stock payable to
stockholders of record as of December 30, 2008. On
December 18, 2008, our Board of Directors declared a
special dividend of $0.05 per share of common stock payable to
stockholders of record as of December 30, 2008. On
December 29, 2008, we paid a cash dividend of
$6.4 million and issued 105,326 shares of common stock
totaling $0.8 million under the dividend reinvestment plan.
On January 29, 2009, we paid a cash dividend of
$7.6 million and issued 161,206 shares of common stock
totaling $1.0 million under the dividend reinvestment plan.
On December 30, 2008, Bank of Montreal approved a renewal
of our $50 million credit facility. The terms included a
50 basis points commitment fee, an interest rate of LIBOR
+3.25% and a term of 364 days.
On April 14, 2009, our Board of Directors declared a
dividend of $0.25 per share of common stock payable to
stockholders of record as of May 26, 2009. On June 25,
2009, we paid a cash dividend of $5.6 million and issued
11,776 shares of common stock totaling $0.1 million
under the dividend reinvestment plan.
55
On July 21, 2009, we completed a public offering of
9,487,500 shares of common stock, which included the
underwriters full exercise of their option to purchase up
to 1,237,500 shares of common stock, at a price of $9.25
per share, raising approximately $87.8 million in gross
proceeds.
On August 3, 2009, our Board of Directors declared a
dividend of $0.25 per share of common stock payable to
stockholders of record as of September 8, 2009. On
September 25, 2009, we paid a cash dividend of
$7.5 million and issued 56,890 shares of common stock
totaling $0.6 million under the dividend reinvestment plan.
On September 16, 2009, we gave notice of termination to
Bank of Montreal with respect to our $50 million credit
facility.
On September 25, 2009 we completed a public offering of
5,520,000 shares of common stock, which included the
underwriters full exercise of their option to purchase up
to 720,000 shares of common stock, at a price of $10.50 per
share, raising approximately $58.0 million in gross
proceeds.
On November 16, 2009, we entered into a three year credit
facility with Wachovia Bank, N.A., a Wells Fargo company, or
Wachovia, in the amount of $50 million with an accordion
feature, which will allow for potential future expansion of the
facility up to $100 million, and will bear interest at
LIBOR plus 4.00% per annum. See Borrowings
for a more detailed discussion of the credit facility.
We intend to continue to generate cash primarily from cash flows
from operations, including interest earned from the temporary
investment of cash in U.S. government securities and other
high-quality debt investments that mature in one year or less,
future borrowings and future offerings of securities. In the
future, we may also securitize a portion of our investments in
first and second lien senior loans or unsecured debt or other
assets. To securitize loans, we would likely create a wholly
owned subsidiary and contribute a pool of loans to the
subsidiary. We would then sell interests in the subsidiary on a
non-recourse basis to purchasers and we would retain all or a
portion of the equity in the subsidiary. Our primary use of
funds is investments in our targeted asset classes and cash
distributions to holders of our common stock.
Although we expect to fund the growth of our investment
portfolio through the net proceeds from future equity offerings,
including our dividend reinvestment plan, and issuances of
senior securities or future borrowings, to the extent permitted
by the 1940 Act, we cannot assure you that our plans to raise
capital will be successful. In this regard, because our common
stock has traded at a price below our current net asset value
per share over the last several months and we are limited in our
ability to sell our common stock at a price below net asset
value per share, we may be limited in our ability to raise
equity capital. Our stockholders approved a proposal at a
special meeting of stockholders held on June 24, 2009 that
authorizes us to sell shares of our common stock below the
then-current net asset value per share in one or more offerings
for a period ending on the earlier of June 24, 2010 or the
date of our next annual meeting of stockholders. We would need
stockholder approval of a similar proposal to issue shares below
net asset value per share at any time after our next annual
meeting of stockholders, which we anticipate will be held in
March 2010. See Item 1A. Risk Factors
Risks Relating to Our Business and Structure
Regulations governing our operation as a business development
company and RIC will affect our ability to, and the way in which
we, raise additional capital and borrow for investment purposes,
which may have a negative effect on our growth and
Because we intend to distribute between 90%
and 100% of our income to our stockholders in connection with
our election to be treated as a RIC, we will continue to need
additional capital to finance our growth. If additional funds
are unavailable or not available on favorable terms, our ability
to grow will be impaired for a discussion of the
provisions of the 1940 Act that limit our ability to sell our
common stock at a price below net asset value per share.
In addition, we intend to distribute between 90% and 100% of our
taxable income to our stockholders in order to satisfy the
requirements applicable to RICs under Subchapter M of the Code.
See Regulated Investment Company Status and
Dividends below. Consequently, we may not have the funds
or the ability to fund new investments, to make additional
investments in our portfolio companies, to fund our unfunded
commitments to portfolio companies or to repay borrowings under
our credit facility. In addition, the
56
illiquidity of our portfolio investments may make it difficult
for us to sell these investments when desired and, if we are
required to sell these investments, we may realize significantly
less than their recorded value.
Also, as a business development company, we generally are
required to meet a coverage ratio of total assets, less
liabilities and indebtedness not represented by senior
securities, to total senior securities, which include all of our
borrowings and any outstanding preferred stock, of at least
200%. This requirement limits the amount that we may borrow. As
of September 30, 2009, we were in compliance with this
requirement. To fund growth in our investment portfolio in the
future, we anticipate needing to raise additional capital from
various sources, including the equity markets and the
securitization or other debt-related markets, which may or may
not be available on favorable terms, if at all.
Finally, in light of the conditions in the financial markets and
the U.S. economy overall, we are considering other measures
to help ensure adequate liquidity, including the formation of
and application to license an SBIC subsidiary.
On May 19, 2009, we received a letter from the Investment
Division of the SBA, that invited us to continue moving forward
with the licensing of an SBIC subsidiary. Although our
application to license this entity as an SBIC with the SBA is
subject to the SBA approval, we remain cautiously optimistic
that we will complete the licensing process. Our SBIC subsidiary
will have an investment objective similar to ours and will make
similar types of investments in accordance with SBIC regulations.
To the extent that we receive an SBIC license, our SBIC
subsidiary will be allowed to issue
SBA-guaranteed
debentures, subject to the required capitalization of the SBIC
subsidiary. SBA guaranteed debentures carry long-term fixed
rates that are generally lower than rates on comparable bank and
other debt. Under the regulations applicable to SBICs, an SBIC
may have outstanding debentures guaranteed by the SBA generally
in an amount up to twice its regulatory capital, which generally
equates to the amount of its equity capital. The SBIC
regulations currently limit the amount that our SBIC subsidiary
may borrow to a maximum of $150 million. This means that
our SBIC subsidiary may access the full $150 million
maximum available if it has $75 million in regulatory
capital. However, we are not required to capitalize this
subsidiary with $75 million and may determine to capitalize
it with a lesser amount. In addition, if we are able to obtain
financing under the SBIC program, our SBIC subsidiary will be
subject to regulation and oversight by the SBA, including
requirements with respect to maintaining certain minimum
financial ratios and other covenants. On July 14, 2009, we
received a letter from the SBA indicating that our SBIC
subsidiarys application had been approved for further
processing and our SBIC subsidiary is eligible to make
pre-licensing investments. During the year ended
September 30, 2009, our SBIC subsidiary funded one
pre-licensing investment.
In connection with the filing of our SBA license application, we
will apply for exemptive relief from the SEC to permit us to
exclude the debt of our SBIC subsidiary guaranteed by the SBA
from our consolidated asset coverage ratio, which will enable us
to fund more investments with debt capital. There can be no
assurance that we will be granted an SBIC license or that, if
granted, it will be granted in a timely manner, that if we are
granted an SBIC license we will be able to capitalize the
subsidiary to $75 million to access the full
$150 million maximum borrowing amount available, or that we
will receive the exemptive relief from the SEC.
We cannot provide any assurance that these measures will provide
sufficient sources of liquidity to support our operations and
growth given the unprecedented instability in the financial
markets and the weak U.S. economy.
Borrowings
On November 16, 2009, Fifth Street Funding, LLC, a
wholly-owned bankruptcy remote, special purpose subsidiary
(Funding) and we, entered into a Loan and Servicing
Agreement (Agreement), with respect to a three-year
credit facility (Facility) with Wachovia, Wells
Fargo Securities, LLC, as administrative agent (Wells
Fargo), each of the additional institutional and conduit
lenders party thereto from time to time, and each of the lender
agents party thereto from time to time, in the amount of
$50 million with an accordion feature, which will allow for
potential future expansion of the Facility up to
$100 million. The Facility is secured by all of the assets
of Funding, and all of our equity interest in Funding. The
Facility bears interest at
57
LIBOR plus 4.00% per annum and has a maturity date of
November 16, 2012. The Facility may be extended for up to
two additional years upon the mutual consent of Wells Fargo and
each of the lender parties thereto. We intend to use the net
proceeds of the Facility to fund a portion of our loan
origination activities and for general corporate purposes.
In connection with the Facility, we concurrently entered into
(i) a Purchase and Sale Agreement with Funding, pursuant to
which we will sell to Funding certain loan assets we have
originated or acquired, or will originate or acquire and
(ii) a Pledge Agreement with Wells Fargo Bank, National
Association, pursuant to which we pledged all of our equity
interests in Funding as security for the payment of
Fundings obligations under the Agreement and other
documents entered into in connection with the Facility.
The Agreement and related agreements governing the Facility
required both Funding and us to, among other things
(i) make representations and warranties regarding the
collateral as well as each of our businesses, (ii) agree to
certain indemnification obligations, and (iii) comply with
various covenants, servicing procedures, limitations on
acquiring and disposing of assets, reporting requirements and
other customary requirements for similar credit facilities. The
Facility documents also included usual and customary default
provisions such as the failure to make timely payments under the
Facility, a change in control of Funding, and the failure by
Funding or us to materially perform under the Agreement and
related agreements governing the Facility, which, if not
complied with, could accelerate repayment under the Facility,
thereby materially and adversely affecting our liquidity,
financial condition and results of operations.
Each loan origination under the Facility is subject to the
satisfaction of certain conditions. We cannot assure you that
Funding will be able to borrow funds under the Facility at any
particular time or at all.
We also gave notice of termination, effective September 16,
2009, to Bank of Montreal with respect to a $50 million
revolving credit facility. The revolving credit facility was
scheduled to expire on December 29, 2009 and had an
interest rate of LIBOR plus 3.25%.
Since our inception we have had funds available under the
following agreements which we repaid or terminated prior to our
election to be regulated as a business development company:
Note Agreements. We received loans of
$10 million on March 31, 2007 and $5 million on
March 30, 2007 from Bruce E. Toll, a former member of our
Board of Directors, on each occasion for the purpose of funding
our investments in portfolio companies. These note agreements
accrued interest at 12% per annum. On April 3, 2007, we
repaid all outstanding borrowings under these note agreements.
Loan Agreements. On January 15, 2008, we
entered into a $50 million secured revolving credit
facility with the Bank of Montreal, at a rate of LIBOR plus
1.5%, with a one year maturity date. The secured revolving
credit facility was secured by our existing investments. On
December 30, 2008, Bank of Montreal renewed our
$50 million credit facility. The terms included a
50 basis points commitment fee, an interest rate of LIBOR
+3.25% and a term of 364 days. On September 16, 2009,
we gave notice of termination to Bank of Montreal with respect
to this credit facility.
On April 2, 2007, we entered into a $50 million loan
agreement with Wachovia Bank, N.A., which was available for
funding investments. The borrowings under the loan agreement
accrued interest at LIBOR plus 0.75% per annum and had a
maturity date in April 2008. In order to obtain such favorable
rates, Mr. Toll, a former member of our Board of Directors,
Mr. Tannenbaum, our president and chief executive officer,
and FSMPIII GP, LLC, the general partner of our predecessor
fund, each guaranteed our repayment of the $50 million
loan. We paid Mr. Toll a fee of 1% per annum of the
$50 million loan for such guarantee, which was paid
quarterly or monthly at our election. Mr. Tannenbaum and
FSMPIII GP received no compensation for their respective
guarantees. As of November 27, 2007, we repaid and
terminated this loan with Wachovia Bank, N.A.
Off-Balance
Sheet Arrangements
We may be a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financial needs of our portfolio companies. As of
September 30, 2009, our only off-balance sheet
58
arrangements consisted of $9.8 million of unfunded
commitments, which was comprised of $7.8 million to provide
debt financing to certain of our portfolio companies and
$2.0 million related to unfunded limited partnership
interests. As of September 30, 2008, our only off-balance
sheet arrangements consisted of $24.7 million of unfunded
commitments to provide debt financing to certain of our
portfolio companies. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount
recognized in the balance sheet and are not reflected on our
Consolidated Balance Sheets.
Contractual
Obligations
A summary of the composition of unfunded commitments (consisting
of revolvers, term loans and limited partnership interests) as
of September 30, 2009 and September 30, 2008 is shown
in the table below:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
MK Network, LLC
|
|
$
|
|
|
|
$
|
2,000,000
|
|
Rose Tarlow, Inc.
|
|
|
|
|
|
|
2,650,000
|
|
Martini Park, LLC
|
|
|
|
|
|
|
11,000,000
|
|
Fitness Edge, LLC
|
|
|
|
|
|
|
1,500,000
|
|
Western Emulsions, Inc.
|
|
|
|
|
|
|
2,000,000
|
|
Storyteller Theaters Corporation
|
|
|
1,750,000
|
|
|
|
4,000,000
|
|
HealthDrive Corporation
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
IZI Medical Products, Inc.
|
|
|
2,500,000
|
|
|
|
|
|
Trans-Trade, Inc.
|
|
|
2,000,000
|
|
|
|
|
|
Riverlake Equity Partners II, LP (limited partnership interest)
|
|
|
1,000,000
|
|
|
|
|
|
Riverside Fund IV, LP (limited partnership interest)
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,750,000
|
|
|
$
|
24,650,000
|
|
|
|
|
|
|
|
|
|
|
We have entered into two contracts under which we have material
future commitments, the investment advisory agreement, pursuant
to which Fifth Street Management LLC has agreed to serve as our
investment adviser, and the administration agreement, pursuant
to which FSC, Inc. has agreed to furnish us with the facilities
and administrative services necessary to conduct our
day-to-day
operations.
As discussed above, on November 16, 2009, we entered into a
three year credit facility with Wachovia, in the amount of
$50 million with an accordion feature, which will allow for
potential future expansion of the facility up to
$100 million, and will bear interest at LIBOR plus 4.00%
per annum. We also gave notice of termination, effective
September 16, 2009, to Bank of Montreal with respect to our
existing $50 million revolving credit facility with Bank of
Montreal. The revolving credit facility with Bank of Montreal
was scheduled to expire on December 29, 2009 and had an
interest rate of LIBOR plus 3.25%.
Regulated
Investment Company Status and Dividends
Effective as of January 2, 2008, Fifth Street Mezzanine
Partners III, L.P. merged with and into Fifth Street Finance
Corp., which has elected to be treated as a business development
company under the 1940 Act. We elected, effective as of
January 2, 2008, to be treated as a RIC under Subchapter M
of the Code. As long as we qualify as a RIC, we will not be
taxed on our investment company taxable income or realized net
capital gains, to the extent that such taxable income or gains
are distributed, or deemed to be distributed, to stockholders on
a timely basis.
Taxable income generally differs from net income for financial
reporting purposes due to temporary and permanent differences in
the recognition of income and expenses, and generally excludes
net unrealized appreciation or depreciation until realized.
Dividends declared and paid by us in a year may differ from
taxable income for that year as such dividends may include the
distribution of current year taxable income or the distribution
of prior year taxable income carried forward into and
distributed in the current year. Distributions also may include
returns of capital.
59
To maintain RIC tax treatment, we must, among other things,
distribute, with respect to each taxable year, at least 90% of
our investment company taxable income (i.e., our net ordinary
income and our realized net short-term capital gains in excess
of realized net long-term capital losses, if any). As a RIC, we
are also subject to a federal excise tax, based on distributive
requirements of our taxable income on a calendar year basis
(i.e., calendar year 2009). We anticipate timely distribution of
our taxable income within the tax rules; however, we may incur a
U.S. federal excise tax for the calendar year 2009. We
intend to make distributions to our stockholders on a quarterly
basis of between 90% and 100% of our annual taxable income
(which includes our taxable interest and fee income). We may
retain for investment some or all of our net taxable capital
gains (i.e., realized net long-term capital gains in excess of
realized net short-term capital losses) and treat such amounts
as deemed distributions to our stockholders. If we do this, our
stockholders will be treated as if they received actual
distributions of the capital gains we retained and then
reinvested the net after-tax proceeds in our common stock. Our
stockholders also may be eligible to claim tax credits (or, in
certain circumstances, tax refunds) equal to their allocable
share of the tax we paid on the capital gains deemed distributed
to them. To the extent our taxable earnings for a fiscal taxable
year fall below the total amount of our dividends for that
fiscal year, a portion of those dividend distributions may be
deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow
us to make distributions at a specific level or to increase the
amount of these distributions from time to time. In addition, we
may be limited in our ability to make distributions due to the
asset coverage test for borrowings applicable to us as a
business development company under the 1940 Act and due to
provisions in our credit facility. If we do not distribute a
certain percentage of our taxable income annually, we will
suffer adverse tax consequences, including possible loss of our
status as a RIC. We cannot assure stockholders that they will
receive any distributions or distributions at a particular level.
Related
Party Transactions
We have entered into an investment advisory agreement with Fifth
Street Management LLC, our investment adviser. Fifth Street
Management is controlled by Leonard M. Tannenbaum, its managing
member and our president and chief executive officer. Pursuant
to the investment advisory agreement, payments will be equal to
(a) a base management fee of 2.0% of the value of our gross
assets, which includes any borrowings for investment purposes,
and (b) an incentive fee based on our performance.
Pursuant to the administration agreement with FSC, Inc., FSC,
Inc. will furnish us with the facilities and administrative
services necessary to conduct our
day-to-day
operations, including equipment, clerical, bookkeeping and
recordkeeping services at such facilities. In addition, FSC,
Inc. will assist us in connection with the determination and
publishing of our net asset value, the preparation and filing of
tax returns and the printing and dissemination of reports to our
stockholders. We will pay FSC, Inc. our allocable portion of
overhead and other expenses incurred by it in performing its
obligations under the administration agreement, including a
portion of the rent and the compensation of our chief financial
officer and his staff, and the staff of our chief compliance
officer. Each of these contracts may be terminated by either
party without penalty upon no fewer than 60 days
written notice to the other.
We have also entered into a license agreement with Fifth Street
Capital LLC pursuant to which Fifth Street Capital LLC has
agreed to grant us a non-exclusive, royalty-free license to use
the name Fifth Street. Fifth Street Capital LLC is
controlled by Mr. Tannenbaum, its managing member. Under
this agreement, we will have a right to use the Fifth
Street name, for so long as Fifth Street Management LLC or
one of its affiliates remains our investment adviser. Other than
with respect to this limited license, we will have no legal
right to the Fifth Street name.
Recent
Developments
On October 2, 2009, Storyteller Theaters Corporation drew
$250,000 on its line of credit. Prior to the draw, our unfunded
commitment was $1.75 million.
60
On October 8, 2009, we funded $153,972 of our previously
unfunded limited partnership interest in Riverside Fund IV,
LP upon receipt of the first closing notice of the fund.
On October 16, 2009, Elephant & Castle, Inc.
repaid $3.9 million of principal outstanding under its term
loan to us. The balance of the loan was assumed by Repechage
Investments Limited (RIL), the equity sponsors
holding company. We received a first lien on the assets of RIL
and a guaranty on the balance of our debt.
On October 21, 2009, we invested an additional
$6.0 million of second lien debt in Western Emulsions,
Inc., an existing portfolio company, to support its growth
initiatives.
On October 26, 2009, we executed a non-binding term sheet
for $41.25 million for a portion of an investment in a
post-secondary education company. The proposed terms of this
investment include a $10 million revolver at Libor+950 with
a Libor floor of 3% and a $31.25 million first lien term
loan at Libor+950 with a Libor floor of 3%. This is a senior
secured first lien facility with a scheduled maturity of five
years. This proposed investment is subject to the completion of
our due diligence, approval process and documentation, and may
not result in a completed investment. We may syndicate a portion
of this investment.
On November 6, 2009, we executed a non-binding term sheet
for $34.0 million for an investment in a specialty chemical
distributor. The proposed terms of this investment include a
$10 million revolver at 10%, a $10 million Term Loan A
at 10%, and a $14 million Term Loan B at 12%. This is a
first lien facility with a scheduled maturity of five years.
This proposed investment is subject to the completion of our due
diligence, approval process and documentation, and may not
result in a completed investment. We may syndicate a portion of
this investment.
On November 12, 2009, we declared a $0.27 per share
dividend to common stockholders of record as of
December 10, 2009. The dividend is payable
December 29, 2009.
On November 12, 2009, we executed a letter agreement for
the potential sale of our second lien term loan to CPAC, Inc.
and/or our 2,297 shares of common stock of CPAC, Inc. We
received a non-refundable deposit of $150,000 in connection with
the letter agreement.
On November 16, 2009, we entered into a three-year credit
facility with Wachovia in the amount of $50 million with an
accordion feature, which will allow for potential future
expansion of the facility up to $100 million, and will bear
interest at a rate of LIBOR plus 4% per annum. See
Borrowings for a more detailed discussion of the credit
facility.
On November 23, 2009, we received a cash payment in the
amount of $0.1 million, representing payment in full of all
amounts due in connection with the cancellation of our loan
agreement with American Hardwoods Industries Holdings, LLC on
August 3, 2009.
On December 1, 2009, we executed a non-binding term sheet
for $28.75 million for an investment in a specialty food
company. The proposed terms of this investment include a
$2.0 million revolver at 10%, a $10 million Term Loan
A at 10%, and a $16.75 million Term Loan B at 12% cash and
3% PIK. This is a first lien facility with a scheduled maturity
of five years. This proposed investment is subject to the
completion of our due diligence, approval process and
documentation, and may not result in a completed investment. We
may syndicate a portion of this investment.
On December 3, 2009, we executed a non-binding term sheet
for $57.3 million for an investment in a contract
manufacturer for medical device original equipment
manufacturers. The proposed terms of this investment include a
$4.0 million revolver at Libor+700 with a 3% Libor floor, a
$33 million Term Loan A at Libor+700 with a 3% Libor floor,
and a $20.3 million Term Loan B at 12% cash interest and 2%
PIK. This is a first lien loan facility with a scheduled
maturity of five years. This proposed investment is subject to
the
61
completion of our due diligence, approval process and
documentation, and may not result in a completed investment. We
may syndicate a portion of this investment.
On December 4, 2009, we executed a non-binding term sheet
for $34.0 million for an investment in a franchisor of
consumer services. The proposed terms of this investment include
a $2.0 million revolver at Libor+650 with a 3% Libor floor,
a $10 million first lien Term Loan A at Libor+675 with a 3%
Libor floor, and a $22.0 million Term Loan B at 12% cash
and 2% PIK. This is a first lien loan facility with a scheduled
maturity of five years. This proposed investment is subject to
the completion of our due diligence, approval process and
documentation, and may not result in a completed investment. We
may syndicate a portion of this investment.
Recently
Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements for a
description of recent accounting pronouncements, including the
expected dates of adoption and the anticipated impact on the
Consolidated Financial Statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We are subject to financial market risks, including changes in
interest rates. Changes in interest rates may affect both our
cost of funding and our interest income from portfolio
investments, cash and cash equivalents and idle funds
investments. Our risk management systems and procedures are
designed to identify and analyze our risk, to set appropriate
policies and limits and to continually monitor these risks and
limits by means of reliable administrative and information
systems and other policies and programs. Our investment income
will be affected by changes in various interest rates, including
LIBOR and prime rates, to the extent any of our debt investments
include floating interest rates. The significant majority of our
debt investments are made with fixed interest rates for the term
of the investment. However, as of September 30, 2009,
approximately 5.0% of our debt investment portfolio (at fair
value) and 4.9% of our debt investment portfolio (at cost) bore
interest at floating rates. As of September 30, 2009, we
had not entered into any interest rate hedging arrangements. At
September 30, 2009, based on our applicable levels of
floating-rate debt investments, a 1.0% change in interest rates
would not have a material effect on our level of interest income
from debt investments.
Our investments are carried at fair value as determined in good
faith by our Board of Directors in accordance with the 1940 Act
(See Investment Valuation under
Critical Accounting Policies). Our valuation methodology
utilizes discount rates in part in valuing our investments, and
changes in those discount rates may have an impact on the
valuation of our investments. Assuming no changes in our
investment and capital structure, a hypothetical increase or
decrease in discount rates of 100 basis points would
increase or decrease our net assets resulting from operations by
approximately $7 million.
62
|
|
Item 8.
|
Consolidated
Financial Statements and Supplementary Data
|
Index to
Consolidated Financial Statements
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Fifth Street Finance Corp.
We have audited the accompanying consolidated balance sheets,
including the consolidated schedule of investments, of Fifth
Street Finance Corp. (a Delaware corporation and successor to
Fifth Street Mezzanine Partners III, L.P.) (the
Company) as of September 30, 2009 and 2008, and
the related consolidated statements of operations, changes in
net assets, and cash flows and the financial highlights
(included in Note 12) for the years ended
September 30, 2009 and 2008, and the period
February 15, 2007 (inception) through September 30,
2007. Our audits of the basic financial statements included the
Schedule of Investments In and Advances to Affiliates. These
financial statements, financial highlights and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. Our procedures
included physical inspection or confirmation of securities owned
as of September 30, 2009 and 2008. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of Fifth Street Finance Corp.
as of September 30, 2009 and 2008, and the results of its
operations, changes in net assets and its cash flows and
financial highlights for the years ended September 30, 2009
and 2008, and the period February 15, 2007 (inception)
through September 30, 2007 in conformity with accounting
principles generally accepted in the United States of America.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the accompanying consolidated
financial statements, effective October 1, 2008, the
Company adopted ASC 820, Fair Value Measurements and
Disclosures.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Fifth
Street Finance Corp.s internal control over financial
reporting as of September 30, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
and our report dated December 9, 2009 expressed and
unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
December 9, 2009
64
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Fifth Street Finance Corp.
We have audited Fifth Street Finance Corp.s (a Delaware
corporation and successor to Fifth Street Mezzanine Partners
III, L.P.) (the Company) internal control over
financial reporting as of September 30, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Fifth Street Capital Corp.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on Fifth
Street Capital Corp.s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Fifth Street Capital Corp. maintained effective
internal control over financial reporting in all material
respects as of September 30, 2009, based on criteria
established in Internal Control Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets, including the
consolidated schedule of investments, of Fifth Street Finance
Corp. as of September 30, 2009 and 2008, and the related
consolidated statements of operations, changes in net assets,
and cash flows and the financial highlights (included in
Note 12) for the years ended September 30, 2009
and 2008, and the period February 15, 2007 (inception)
through September 30, 2007 and our report dated
December 9, 2009 expressed an unqualified opinion and
included explanatory paragraphs regarding the Companys
adoption of ASC 820, Fair Value Measurements and
Disclosures.
/s/ GRANT THORNTON LLP
New York, New York
December 9, 2009
65
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Investments at Fair Value:
|
|
|
|
|
|
|
|
|
Control investments (cost 9/30/09: $12,045,029; cost 9/30/08: $0)
|
|
$
|
5,691,107
|
|
|
$
|
|
|
Affiliate investments (cost 9/30/09: $71,212,035; cost 9/30/08:
$81,820,636)
|
|
|
64,748,560
|
|
|
|
71,350,417
|
|
Non-control/Non-affiliate investments (cost 9/30/09
$243,975,221; cost 9/30/08 $208,764,349)
|
|
|
229,171,470
|
|
|
|
202,408,737
|
|
|
|
|
|
|
|
|
|
|
Total Investments at Fair Value
|
|
|
299,611,137
|
|
|
|
273,759,154
|
|
Cash and cash equivalents
|
|
|
113,205,287
|
|
|
|
22,906,376
|
|
Interest receivable
|
|
|
2,866,991
|
|
|
|
2,367,806
|
|
Due from portfolio company
|
|
|
154,324
|
|
|
|
80,763
|
|
Prepaid expenses and other assets
|
|
|
49,609
|
|
|
|
34,706
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
415,887,348
|
|
|
$
|
299,148,805
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
$
|
723,856
|
|
|
$
|
567,691
|
|
Base management fee payable
|
|
|
1,552,160
|
|
|
|
1,381,212
|
|
Incentive fee payable
|
|
|
1,944,263
|
|
|
|
1,814,013
|
|
Due to FSC, Inc.
|
|
|
703,900
|
|
|
|
574,102
|
|
Interest payable
|
|
|
|
|
|
|
38,750
|
|
Payments received in advance from portfolio companies
|
|
|
190,378
|
|
|
|
133,737
|
|
Offering costs payable
|
|
|
216,720
|
|
|
|
303,461
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,331,277
|
|
|
|
4,812,966
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 200,000 shares authorized, no
shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 49,800,000 shares
authorized, 37,878,987 and 22,614,289 shares issued and
outstanding at September 30, 2009 and September 30,
2008
|
|
|
378,790
|
|
|
|
226,143
|
|
Additional
paid-in-capital
|
|
|
439,989,597
|
|
|
|
300,524,155
|
|
Net unrealized depreciation on investments
|
|
|
(27,621,147
|
)
|
|
|
(16,825,831
|
)
|
Net realized gain (loss) on investments
|
|
|
(14,310,713
|
)
|
|
|
62,487
|
|
Accumulated undistributed net investment income
|
|
|
12,119,544
|
|
|
|
10,348,885
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
410,556,071
|
|
|
|
294,335,839
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
415,887,348
|
|
|
$
|
299,148,805
|
|
|
|
|
|
|
|
|
|
|
See notes to Consolidated Financial Statements.
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
Year
|
|
|
Year
|
|
|
February 15, 2007
|
|
|
|
Ended
|
|
|
Ended
|
|
|
(Inception) through
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Affiliate investments
|
|
|
10,632,844
|
|
|
|
8,804,543
|
|
|
|
2,407,709
|
|
Non-control/Non-affiliate investments
|
|
|
27,931,097
|
|
|
|
16,800,945
|
|
|
|
1,068,368
|
|
Interest on cash and cash equivalents
|
|
|
208,824
|
|
|
|
750,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
38,772,765
|
|
|
|
26,356,093
|
|
|
|
3,476,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIK interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
1,634,116
|
|
|
|
1,539,934
|
|
|
|
492,605
|
|
Non-control/Non-affiliate investments
|
|
|
5,821,173
|
|
|
|
3,357,464
|
|
|
|
96,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total PIK interest income
|
|
|
7,455,289
|
|
|
|
4,897,398
|
|
|
|
588,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
1,101,656
|
|
|
|
702,463
|
|
|
|
164,222
|
|
Non-control/Non-affiliate investments
|
|
|
2,440,538
|
|
|
|
1,105,576
|
|
|
|
64,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
3,542,194
|
|
|
|
1,808,039
|
|
|
|
228,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend and other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
|
|
|
|
26,740
|
|
|
|
2,228
|
|
Non-control/Non-affiliate investments
|
|
|
22,791
|
|
|
|
130,971
|
|
|
|
|
|
Other income
|
|
|
35,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividend and other income
|
|
|
58,187
|
|
|
|
157,711
|
|
|
|
2,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
49,828,435
|
|
|
|
33,219,241
|
|
|
|
4,295,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Base management fee
|
|
|
6,060,690
|
|
|
|
4,258,334
|
|
|
|
1,564,189
|
|
Incentive fee
|
|
|
7,840,579
|
|
|
|
4,117,554
|
|
|
|
|
|
Professional fees
|
|
|
1,492,554
|
|
|
|
1,389,541
|
|
|
|
211,057
|
|
Board of Directors fees
|
|
|
310,250
|
|
|
|
249,000
|
|
|
|
|
|
Organizational costs
|
|
|
|
|
|
|
200,747
|
|
|
|
413,101
|
|
Interest expense
|
|
|
636,901
|
|
|
|
917,043
|
|
|
|
522,316
|
|
Administrator expense
|
|
|
796,898
|
|
|
|
978,387
|
|
|
|
|
|
Line of credit guarantee expense
|
|
|
|
|
|
|
83,333
|
|
|
|
250,000
|
|
Transaction fees
|
|
|
|
|
|
|
206,726
|
|
|
|
357,012
|
|
General and administrative expenses
|
|
|
1,500,197
|
|
|
|
674,360
|
|
|
|
18,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
18,638,069
|
|
|
|
13,075,025
|
|
|
|
3,336,542
|
|
Base management fee waived
|
|
|
(171,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expenses
|
|
|
18,466,121
|
|
|
|
13,075,025
|
|
|
|
3,336,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
31,362,314
|
|
|
|
20,144,216
|
|
|
|
959,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
(1,792,015
|
)
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
286,190
|
|
|
|
(10,570,012
|
)
|
|
|
99,792
|
|
Non-control/Non-affiliate investments
|
|
|
(9,289,492
|
)
|
|
|
(6,378,755
|
)
|
|
|
23,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized appreciation (depreciation) on
investments
|
|
|
(10,795,317
|
)
|
|
|
(16,948,767
|
)
|
|
|
122,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Control investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate investments
|
|
|
(4,000,000
|
)
|
|
|
|
|
|
|
|
|
Non-control/Non-affiliate investments
|
|
|
(10,373,200
|
)
|
|
|
62,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized gain (loss) on investments
|
|
|
(14,373,200
|
)
|
|
|
62,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
6,193,797
|
|
|
$
|
3,257,936
|
|
|
$
|
1,082,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income per common share basic and
diluted(1)
|
|
$
|
1.27
|
|
|
$
|
1.29
|
|
|
|
N/A
|
|
Unrealized depreciation per common share
|
|
|
(0.44
|
)
|
|
|
(1.09
|
)
|
|
|
N/A
|
|
Realized gain (loss) per common share
|
|
|
(0.58
|
)
|
|
|
0.01
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic and diluted(1)
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic and diluted
|
|
|
24,654,325
|
|
|
|
15,557,469
|
|
|
|
N/A
|
|
|
|
|
(1) |
|
The earnings and net investment income per share calculations
for the year ended September 30, 2008 are based on the
assumption that if the number of shares issued at the time of
the merger on January 2, 2008 (12,480,972 shares of
common stock) had been issued at the beginning of the fiscal
year on October 1, 2007, the Companys earnings and
net investment income per share would have been $0.21 and $1.29
per share, respectively. |
See notes to Consolidated Financial Statements.
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
February 15, 2007
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Inception) through
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
31,362,314
|
|
|
$
|
20,144,216
|
|
|
$
|
959,390
|
|
Net unrealized appreciation (depreciation) on investments
|
|
|
(10,795,317
|
)
|
|
|
(16,948,767
|
)
|
|
|
122,936
|
|
Net realized gains (losses) on investments
|
|
|
(14,373,200
|
)
|
|
|
62,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
6,193,797
|
|
|
|
3,257,936
|
|
|
|
1,082,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholder transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to stockholders from net investment income
|
|
|
(29,591,657
|
)
|
|
|
(10,754,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets from stockholder transactions
|
|
|
(29,591,657
|
)
|
|
|
(10,754,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital share transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of preferred stock
|
|
|
|
|
|
|
15,000,000
|
|
|
|
|
|
Issuance of common stock
|
|
|
137,625,075
|
|
|
|
129,448,456
|
|
|
|
|
|
Issuance of common stock under dividend reinvestment plan
|
|
|
2,455,499
|
|
|
|
1,882,200
|
|
|
|
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
(15,000,000
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(462,482
|
)
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of partnership interests
|
|
|
|
|
|
|
169,420,000
|
|
|
|
|
|
Redemption of partnership interest for common stock
|
|
|
|
|
|
|
(169,420,000
|
)
|
|
|
|
|
Fractional shares paid to partners from conversion
|
|
|
|
|
|
|
(358
|
)
|
|
|
|
|
Capital contributions from partners
|
|
|
|
|
|
|
66,497,000
|
|
|
|
105,733,369
|
|
Capital withdrawals by partners
|
|
|
|
|
|
|
(2,810,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets from capital share transactions
|
|
|
139,618,092
|
|
|
|
195,016,929
|
|
|
|
105,733,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase in net assets
|
|
|
116,220,232
|
|
|
|
187,520,144
|
|
|
|
106,815,695
|
|
Net assets at beginning of period
|
|
|
294,335,839
|
|
|
|
106,815,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of period
|
|
$
|
410,556,071
|
|
|
$
|
294,335,839
|
|
|
$
|
106,815,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value per common share
|
|
$
|
10.84
|
|
|
$
|
13.02
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at end of period
|
|
|
37,878,987
|
|
|
|
22,614,289
|
|
|
|
N/A
|
|
See notes to Consolidated Financial Statements.
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
February 15, 2007
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Inception) through
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
6,193,797
|
|
|
$
|
3,257,936
|
|
|
$
|
1,082,326
|
|
Change in unrealized (appreciation) depreciation on investments
|
|
|
10,795,317
|
|
|
|
16,948,767
|
|
|
|
(122,936
|
)
|
Realized (gains) losses on investments
|
|
|
14,373,200
|
|
|
|
(62,487
|
)
|
|
|
|
|
PIK interest income, net of cash received
|
|
|
(7,027,149
|
)
|
|
|
(4,782,986
|
)
|
|
|
(588,795
|
)
|
Recognition of fee income
|
|
|
(3,542,194
|
)
|
|
|
(1,808,039
|
)
|
|
|
(228,832
|
)
|
Fee income received
|
|
|
3,895,559
|
|
|
|
5,478,011
|
|
|
|
1,795,125
|
|
Accretion of original issue discount on investments
|
|
|
(842,623
|
)
|
|
|
(954,436
|
)
|
|
|
(265,739
|
)
|
Other income
|
|
|
(35,396
|
)
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in interest receivable
|
|
|
(499,185
|
)
|
|
|
(1,613,183
|
)
|
|
|
(754,623
|
)
|
(Increase) decrease in due from portfolio company
|
|
|
(73,561
|
)
|
|
|
46,952
|
|
|
|
(127,715
|
)
|
(Increase) decrease in prepaid management fees
|
|
|
|
|
|
|
252,586
|
|
|
|
(252,586
|
)
|
Increase in prepaid expenses and other assets
|
|
|
(14,903
|
)
|
|
|
(34,706
|
)
|
|
|
|
|
Increase in accounts payable, accrued expenses and other
liabilities
|
|
|
156,170
|
|
|
|
150,584
|
|
|
|
417,107
|
|
Increase in base management fee payable
|
|
|
170,948
|
|
|
|
1,381,212
|
|
|
|
|
|
Increase in incentive fee payable
|
|
|
130,250
|
|
|
|
1,814,013
|
|
|
|
|
|
Increase in due to FSC, Inc.
|
|
|
129,798
|
|
|
|
574,102
|
|
|
|
|
|
Increase (decrease) in interest payable
|
|
|
(38,750
|
)
|
|
|
28,816
|
|
|
|
9,934
|
|
Increase in payments received in advance from portfolio companies
|
|
|
56,641
|
|
|
|
133,737
|
|
|
|
|
|
Purchase of investments
|
|
|
(61,950,000
|
)
|
|
|
(202,402,611
|
)
|
|
|
(88,979,675
|
)
|
Proceeds from the sale of investments
|
|
|
144,000
|
|
|
|
62,487
|
|
|
|
|
|
Principal payments received on investments (scheduled repayments
and revolver paydowns)
|
|
|
6,951,902
|
|
|
|
2,152,992
|
|
|
|
|
|
Principal payments received on investments (payoffs)
|
|
|
11,350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,676,179
|
)
|
|
|
(179,376,253
|
)
|
|
|
(88,016,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid in cash
|
|
|
(27,136,158
|
)
|
|
|
(8,872,521
|
)
|
|
|
|
|
Repurchases of common stock
|
|
|
(462,482
|
)
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
66,497,000
|
|
|
|
105,733,369
|
|
Capital withdrawals
|
|
|
|
|
|
|
(2,810,369
|
)
|
|
|
|
|
Borrowings
|
|
|
29,500,000
|
|
|
|
79,250,000
|
|
|
|
86,562,983
|
|
Repayments of borrowings
|
|
|
(29,500,000
|
)
|
|
|
(79,250,000
|
)
|
|
|
(86,562,983
|
)
|
Proceeds from the issuance of common stock
|
|
|
138,578,307
|
|
|
|
131,316,000
|
|
|
|
|
|
Proceeds from the issuance of manditorily redeemable preferred
stock
|
|
|
|
|
|
|
15,000,000
|
|
|
|
|
|
Redemption of preferred stock
|
|
|
|
|
|
|
(15,000,000
|
)
|
|
|
|
|
Offering costs paid
|
|
|
(1,004,577
|
)
|
|
|
(1,501,179
|
)
|
|
|
(62,904
|
)
|
Redemption of partnership interests for cash
|
|
|
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
109,975,090
|
|
|
|
184,628,573
|
|
|
|
105,670,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
90,298,911
|
|
|
|
5,252,320
|
|
|
|
17,654,056
|
|
Cash and cash equivalents, beginning of period
|
|
|
22,906,376
|
|
|
|
17,654,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
113,205,287
|
|
|
$
|
22,906,376
|
|
|
$
|
17,654,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
425,651
|
|
|
$
|
888,227
|
|
|
$
|
512,382
|
|
Non-cash financing activites:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock under dividend reinvestment
plan
|
|
$
|
2,455,499
|
|
|
$
|
1,882,200
|
|
|
$
|
|
|
Reinvested shares of common stock under dividend reinvestment
plan
|
|
$
|
|
|
|
$
|
(1,882,200
|
)
|
|
$
|
|
|
Redemption of partnership interests
|
|
$
|
|
|
|
$
|
(173,699,632
|
)
|
|
$
|
|
|
Issuance of shares of common stock in exchange for partnership
interests
|
|
$
|
|
|
|
$
|
173,699,632
|
|
|
$
|
|
|
See notes to Consolidated Financial Statements.
69
Fifth
Street Finance Corp.
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Control Investments(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting by Gregory, LLC
|
|
Housewares &
Specialties
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 9.75% due 2/28/2013
|
|
|
|
$
|
4,800,003
|
|
|
$
|
4,728,589
|
|
|
$
|
2,419,627
|
|
First Lien Term Loan B, 14.5% due 2/28/2013
|
|
|
|
|
7,115,649
|
|
|
|
6,906,440
|
|
|
|
3,271,480
|
|
97.38% membership interest
|
|
|
|
|
|
|
|
|
410,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,045,029
|
|
|
|
5,691,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
|
|
|
|
|
|
$
|
12,045,029
|
|
|
$
|
5,691,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCurrance, Inc.
|
|
Data Processing
& Outsourced
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 16.875% due 3/21/2012
|
|
|
|
$
|
10,526,514
|
|
|
$
|
10,370,246
|
|
|
$
|
10,186,501
|
|
First Lien Term Loan B, 16.875% due 3/21/2012
|
|
|
|
|
2,765,422
|
|
|
|
2,722,952
|
|
|
|
2,919,071
|
|
1.75% Preferred Membership Interest in OCurrance Holding
Co., LLC
|
|
|
|
|
|
|
|
|
130,413
|
|
|
|
130,413
|
|
3.3% Membership Interest in OCurrance Holding Co., LLC
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
53,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,473,611
|
|
|
|
13,289,816
|
|
CPAC, Inc.(9)
|
|
Household
Products &
Specialty
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 17.5% due 4/13/2012
|
|
|
|
|
11,398,948
|
|
|
|
9,506,805
|
|
|
|
4,448,661
|
|
Charge-off of cost basis of impaired loan(12)
|
|
|
|
|
|
|
|
|
(4,000,000
|
)
|
|
|
|
|
2,297 shares of Common Stock
|
|
|
|
|
|
|
|
|
2,297,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,803,805
|
|
|
|
4,448,661
|
|
Elephant & Castle, Inc.
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15.5% due 4/20/2012
|
|
|
|
|
8,030,061
|
|
|
|
7,553,247
|
|
|
|
7,311,604
|
|
7,500 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
492,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,303,247
|
|
|
|
7,804,073
|
|
MK Network, LLC
|
|
Healthcare
technology
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 13.5% due 6/1/2012
|
|
|
|
|
9,500,000
|
|
|
|
9,220,111
|
|
|
|
9,033,826
|
|
First Lien Term Loan B, 17.5% due 6/1/2012
|
|
|
|
|
5,212,692
|
|
|
|
4,967,578
|
|
|
|
5,163,544
|
|
First Lien Revolver, Prime + 1.5% (10% floor), due 6/1/2010(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,030 Membership Units(6)
|
|
|
|
|
|
|
|
|
771,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,959,264
|
|
|
|
14,197,370
|
|
Martini Park, LLC(9)
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 14% due 2/20/2013
|
|
|
|
|
4,390,798
|
|
|
|
3,408,351
|
|
|
|
2,068,303
|
|
5% membership interest
|
|
|
|
|
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,058,351
|
|
|
|
2,068,303
|
|
Caregiver Services, Inc.
|
|
Healthcare
services
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan A, LIBOR+6.85% (12% floor) due 2/25/2013
|
|
|
|
|
8,570,595
|
|
|
|
8,092,364
|
|
|
|
8,225,400
|
|
Second Lien Term Loan B, 16.5% due 2/25/2013
|
|
|
|
|
14,242,034
|
|
|
|
13,440,995
|
|
|
|
13,508,338
|
|
1,080,399 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
1,080,398
|
|
|
|
1,206,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,613,757
|
|
|
|
22,940,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
$
|
71,212,035
|
|
|
$
|
64,748,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Control/Non-Affiliate Investments(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Best Vinyl Acquisition Corporation(9)
|
|
Building
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 12% due 3/30/2013
|
|
|
|
$
|
7,000,000
|
|
|
$
|
6,779,947
|
|
|
$
|
6,138,582
|
|
25,641 Shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
253,846
|
|
|
|
20,326
|
|
25,641 Shares of Common Stock
|
|
|
|
|
|
|
|
|
2,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,036,357
|
|
|
|
6,158,908
|
|
70
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Traffic Control & Safety Corporation
|
|
Construction
and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15% due 6/29/2014
|
|
|
|
|
19,310,587
|
|
|
|
19,025,031
|
|
|
|
17,693,780
|
|
24,750 shares of Series B Preferred Stock
|
|
|
|
|
|
|
|
|
247,500
|
|
|
|
158,512
|
|
25,000 shares of Common Stock
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,275,031
|
|
|
|
17,852,292
|
|
Nicos Polymers & Grinding Inc.(9)
|
|
Environmental
& facilities
services
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, LIBOR+5% (10% floor), due 7/17/2012
|
|
|
|
|
3,091,972
|
|
|
|
3,040,465
|
|
|
|
2,162,593
|
|
First Lien Term Loan B, 13.5% due 7/17/2012
|
|
|
|
|
5,980,128
|
|
|
|
5,716,250
|
|
|
|
3,959,643
|
|
3.32% Interest in Crownbrook Acquisition I LLC
|
|
|
|
|
|
|
|
|
168,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,924,801
|
|
|
|
6,122,236
|
|
TBA Global, LLC(9)
|
|
Media:
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan A, LIBOR+5% (10% floor), due 8/3/2010
|
|
|
|
|
2,583,805
|
|
|
|
2,576,304
|
|
|
|
2,565,305
|
|
Second Lien Term Loan B, 14.5% due 8/3/2012
|
|
|
|
|
10,797,936
|
|
|
|
10,419,185
|
|
|
|
10,371,277
|
|
53,994 Senior Preferred Shares
|
|
|
|
|
|
|
|
|
215,975
|
|
|
|
162,621
|
|
191,977 Shares A Shares
|
|
|
|
|
|
|
|
|
191,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,403,441
|
|
|
|
13,099,203
|
|
Fitness Edge, LLC
|
|
Leisure
Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, LIBOR+5.25% (10% floor), due 8/8/2012
|
|
|
|
|
1,750,000
|
|
|
|
1,740,069
|
|
|
|
1,753,262
|
|
First Lien Term Loan B, 15% due 8/8/2012
|
|
|
|
|
5,490,743
|
|
|
|
5,404,192
|
|
|
|
5,321,281
|
|
1,000 Common Units
|
|
|
|
|
|
|
|
|
42,908
|
|
|
|
70,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,187,169
|
|
|
|
7,144,897
|
|
Filet of Chicken(9)
|
|
Food
Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 7/31/2012
|
|
|
|
|
9,307,547
|
|
|
|
8,922,946
|
|
|
|
8,979,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,922,946
|
|
|
|
8,979,657
|
|
Boot Barn(9)
|
|
Footwear
and Apparel
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 10/3/2013
|
|
|
|
|
22,518,091
|
|
|
|
22,175,818
|
|
|
|
22,050,462
|
|
24,706 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
247,060
|
|
|
|
32,259
|
|
1,308 shares of Common Stock
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,423,009
|
|
|
|
22,082,721
|
|
Premier Trailer Leasing, Inc.
|
|
Trailer
Leasing
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 16.5% due 10/23/2012
|
|
|
|
|
17,855,617
|
|
|
|
17,063,645
|
|
|
|
9,860,940
|
|
285 shares of Common Stock
|
|
|
|
|
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,064,785
|
|
|
|
9,860,940
|
|
Pacific Press Technologies, Inc.
|
|
Capital
Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.75% due 1/10/2013
|
|
|
|
|
9,813,993
|
|
|
|
9,621,279
|
|
|
|
9,606,186
|
|
33,463 shares of Common Stock
|
|
|
|
|
|
|
|
|
344,513
|
|
|
|
160,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,965,792
|
|
|
|
9,766,485
|
|
Rose Tarlow, Inc.(9)
|
|
Home
Furnishing
Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 12% due 1/25/2014
|
|
|
|
|
10,191,188
|
|
|
|
10,016,956
|
|
|
|
8,827,182
|
|
First Lien Revolver, LIBOR+4% (9% floor) due 1/25/2014(10)
|
|
|
|
|
1,550,000
|
|
|
|
1,538,806
|
|
|
|
1,509,219
|
|
0.00% membership interest in RTMH Acquisition Company(14)
|
|
|
|
|
|
|
|
|
1,275,000
|
|
|
|
|
|
0.00% membership interest in RTMH Acquisition Company(14)
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,855,762
|
|
|
|
10,336,401
|
|
Goldco, LLC
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
71
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Second Lien Term Loan, 17.5% due 1/31/2013
|
|
|
|
|
8,024,147
|
|
|
|
7,926,647
|
|
|
|
7,938,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,926,647
|
|
|
|
7,938,639
|
|
Rail Acquisition Corp.
|
|
Manufacturing -
Mechanical
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 17% due 4/1/2013
|
|
|
|
|
15,668,956
|
|
|
|
15,416,411
|
|
|
|
15,081,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,416,411
|
|
|
|
15,081,138
|
|
Western Emulsions, Inc.
|
|
Emulsions
Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15% due 6/30/2014
|
|
|
|
|
11,928,600
|
|
|
|
11,743,630
|
|
|
|
12,130,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,743,630
|
|
|
|
12,130,945
|
|
Storytellers Theaters Corporation
|
|
Entertainment -
Theaters
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 15% due 7/16/2014
|
|
|
|
|
7,275,313
|
|
|
|
7,166,749
|
|
|
|
7,162,190
|
|
First Lien Revolver, LIBOR+3.5% (10% floor), due 7/16/2014
|
|
|
|
|
250,000
|
|
|
|
234,167
|
|
|
|
223,136
|
|
1,692 shares of Common Stock
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
20,000 shares of Preferred Stock
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
156,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,601,085
|
|
|
|
7,541,582
|
|
HealthDrive Corporation(9)
|
|
Healthcare
facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 10% due 7/17/2013
|
|
|
|
|
7,800,000
|
|
|
|
7,574,591
|
|
|
|
7,731,153
|
|
First Lien Term Loan B, 13% due 7/17/2013
|
|
|
|
|
10,076,089
|
|
|
|
9,926,089
|
|
|
|
9,587,523
|
|
First Lien Revolver, 12% due 7/17/2013
|
|
|
|
|
500,000
|
|
|
|
485,000
|
|
|
|
534,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,985,680
|
|
|
|
17,853,369
|
|
idX Corporation
|
|
Merchandise
Display
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 7/1/2014
|
|
|
|
|
13,316,247
|
|
|
|
13,014,576
|
|
|
|
13,074,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,014,576
|
|
|
|
13,074,682
|
|
Cenegenics, LLC
|
|
Healthcare
services
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 17% due 10/27/2013
|
|
|
|
|
10,372,069
|
|
|
|
10,076,277
|
|
|
|
10,266,770
|
|
116,237 Common Units(6)
|
|
|
|
|
|
|
|
|
151,108
|
|
|
|
515,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,227,385
|
|
|
|
10,782,552
|
|
IZI Medical Products, Inc.
|
|
Healthcare
technology
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 12% due 3/31/2014
|
|
|
|
|
5,600,000
|
|
|
|
5,504,943
|
|
|
|
5,547,944
|
|
First Lien Term Loan B, 16% due 3/31/2014
|
|
|
|
|
17,042,500
|
|
|
|
16,328,120
|
|
|
|
16,532,244
|
|
First Lien Revolver, 10% due 3/31/2014(11)
|
|
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
(45,000
|
)
|
453,755 Preferred units of IZI Holdings, LLC
|
|
|
|
|
|
|
|
|
453,755
|
|
|
|
530,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,241,818
|
|
|
|
22,565,204
|
|
Trans-Trade, Inc.
|
|
Air freight
& logistics
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 15.5% due 9/10/2014
|
|
|
|
|
11,016,042
|
|
|
|
10,798,229
|
|
|
|
10,838,952
|
|
First Lien Revolver, 12% due 9/10/2014(11)
|
|
|
|
|
|
|
|
|
(39,333
|
)
|
|
|
(39,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,758,896
|
|
|
|
10,799,619
|
|
Riverlake Equity Partners II, LP(13)
|
|
Multi-sector
holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
0.14% limited partnership interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Riverside Fund IV, LP(13)
|
|
Multi-sector
holdings
|
|
|
|
|
|
|
|
|
|
|
|
|
0.92% limited partnership interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
$
|
243,975,221
|
|
|
$
|
229,171,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
$
|
327,232,285
|
|
|
$
|
299,611,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30,
2009
|
|
|
(1) |
|
All debt investments are income producing. Equity is non-income
producing unless otherwise noted. |
|
(2) |
|
See Note 3 to Consolidated Financial Statements for summary
geographic location. |
|
(3) |
|
Control Investments are defined by the Investment Company Act of
1940 (1940 Act) as investments in companies in which
the Company owns more than 25% of the voting securities or
maintains greater than 50% of the board representation. |
|
(4) |
|
Affiliate Investments are defined by the 1940 Act as investments
in companies in which the Company owns between 5% and 25% of the
voting securities. |
|
(5) |
|
Equity ownership may be held in shares or units of companies
related to the portfolio companies. |
|
(6) |
|
Income producing through payment of dividends or distributions. |
|
(7) |
|
Non-Control/Non-Affiliate Investments are defined by the 1940
Act as investments that are neither Control Investments nor
Affiliate Investments. |
|
(8) |
|
Principal includes accumulated PIK interest and is net of
repayments. |
|
(9) |
|
Interest rates have been adjusted on certain term loans and
revolvers. These rate adjustments are temporary in nature due to
financial or payment covenant violations in the original credit
agreements, or permanent in nature per loan amendment or waiver
documents. The table below summarizes these rate adjustments by
portfolio company: |
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Effective date
|
|
Cash interest
|
|
PIK interest
|
|
Reason
|
|
CPAC, Inc.
|
|
November 21, 2008
|
|
|
|
+ 1.0% on Term Loan
|
|
Per waiver agreement
|
Rose Tarlow, Inc.
|
|
January 1, 2009
|
|
+0.5% on Term Loan, +
3.0% on Revolver
|
|
+ 2.5% on Term Loan
|
|
Tier pricing per waiver agreement
|
Martini Park, LLC
|
|
October 1, 2008
|
|
− 6.0% on Term Loan
|
|
+ 6.0% on Term Loan
|
|
Per waiver agreement
|
Best Vinyl Acquisition Corporation
|
|
April 1, 2008
|
|
+ 0.5% on Term Loan
|
|
|
|
Per loan amendment
|
Nicos Polymers & Grinding, Inc.
|
|
February 10, 2008
|
|
|
|
+ 2.0% on Term Loan A & B
|
|
Per waiver agreement
|
TBA Global, LLC
|
|
February 15, 2008
|
|
|
|
+ 2.0% on Term Loan A & B
|
|
Per waiver agreement
|
Filet of Chicken
|
|
January 1, 2009
|
|
+ 1.0% on Term Loan
|
|
|
|
Tier pricing per waiver agreement
|
Boot Barn
|
|
January 1, 2009
|
|
+ 1.0% on Term Loan
|
|
+ 2.5% on Term Loan
|
|
Tier pricing per waiver agreement
|
HealthDrive Corporation
|
|
April 30, 2009
|
|
+ 2.0% on Term Loan A
|
|
|
|
Per waiver agreement
|
|
|
|
(10) |
|
Revolving credit line has been suspended and is deemed unlikely
to be renewed in the future. |
|
(11) |
|
Amounts represent unearned income related to undrawn commitments. |
|
(12) |
|
All or a portion of the loan is considered permanently impaired
and, accordingly, the charge-off of the cost basis has been
recorded as a realized loss for financial reporting purposes. |
|
(13) |
|
Represents unfunded limited partnership interests that were
closed prior to September 30, 2009. |
|
(14) |
|
Represents a de minimis membership interest percentage. |
See notes to Consolidated Financial Statements.
73
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Control Investments(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCurrance, Inc.
|
|
Data Processing & Outsourced Services
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 16.875% due 3/21/2012
|
|
|
|
$
|
10,108,838
|
|
|
$
|
9,888,488
|
|
|
$
|
9,888,488
|
|
First Lien Term Loan B, 16.875% due 3/21/2012
|
|
|
|
|
3,640,702
|
|
|
|
3,581,245
|
|
|
|
3,581,245
|
|
1.75% Preferred Membership Interest in OCurrance Holding
Co., LLC
|
|
|
|
|
|
|
|
|
130,413
|
|
|
|
130,413
|
|
3.3% Membership Interest in OCurrance Holding Co., LLC
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
97,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,850,146
|
|
|
|
13,697,302
|
|
CPAC, Inc.
|
|
Household Products & Specialty Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 17.5% due 4/13/2012
|
|
|
|
|
10,613,769
|
|
|
|
9,556,805
|
|
|
|
3,626,497
|
|
2,297 shares of Common Stock
|
|
|
|
|
|
|
|
|
2,297,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,853,805
|
|
|
|
3,626,497
|
|
Elephant & Castle, Inc.
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15.5% due 4/20/2012
|
|
|
|
|
7,809,513
|
|
|
|
7,145,198
|
|
|
|
7,145,198
|
|
7,500 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
750,000
|
|
|
|
196,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,895,198
|
|
|
|
7,341,584
|
|
MK Network, LLC
|
|
Healthcare technology
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 13.5% due 6/1/2012
|
|
|
|
|
9,500,000
|
|
|
|
9,115,152
|
|
|
|
9,115,152
|
|
First Lien Revolver, Prime + 1.5% (10% floor), due
6/1/2010 undrawn revolver of $2,000,000(10)
|
|
|
|
|
|
|
|
|
(11,113
|
)
|
|
|
(11,113
|
)
|
6,114 Membership Units(6)
|
|
|
|
|
|
|
|
|
584,795
|
|
|
|
760,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,688,834
|
|
|
|
9,864,480
|
|
Rose Tarlow, Inc.
|
|
Home Furnishing Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 12% due 1/25/2014
|
|
|
|
|
10,000,000
|
|
|
|
9,796,648
|
|
|
|
9,796,648
|
|
First Lien Revolver, LIBOR+4% (9% floor) due
1/25/2014 undrawn revolver of $2,650,000
|
|
|
|
|
350,000
|
|
|
|
323,333
|
|
|
|
323,333
|
|
6.9% membership interest in RTMH Acquisition Company
|
|
|
|
|
|
|
|
|
1,275,000
|
|
|
|
591,939
|
|
0.1% membership interest in RTMH Acquisition Company
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
11,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,419,981
|
|
|
|
10,723,527
|
|
Martini Park, LLC
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 14% due 2/20/2013
|
|
|
|
|
4,049,822
|
|
|
|
3,188,351
|
|
|
|
2,719,236
|
|
5% membership interest
|
|
|
|
|
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,838,351
|
|
|
|
2,719,236
|
|
Caregiver Services, Inc.
|
|
Healthcare services
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan A, LIBOR+6.85% (12% floor) due 2/25/2013
|
|
|
|
|
10,000,000
|
|
|
|
9,381,973
|
|
|
|
9,381,973
|
|
Second Lien Term Loan B, 16.5% due 2/25/2013
|
|
|
|
|
13,809,891
|
|
|
|
12,811,950
|
|
|
|
12,811,951
|
|
1,080,399 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
1,080,398
|
|
|
|
1,183,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,274,321
|
|
|
|
23,377,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
|
|
|
|
|
|
$
|
81,820,636
|
|
|
$
|
71,350,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Non-Control/Non-Affiliate Investments(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Best Vinyl Acquisition Corporation(9)
|
|
Building Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 12% due 3/30/2013
|
|
|
|
$
|
7,000,000
|
|
|
$
|
6,716,712
|
|
|
$
|
6,716,712
|
|
25,641 Shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
253,846
|
|
|
|
253,846
|
|
25,641 Shares of Common Stock
|
|
|
|
|
|
|
|
|
2,564
|
|
|
|
4,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,973,122
|
|
|
|
6,975,311
|
|
Traffic Control & Safety Corporation
|
|
Construction and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15% due 6/29/2014
|
|
|
|
|
18,741,969
|
|
|
|
18,503,268
|
|
|
|
18,503,268
|
|
24,750 shares of Series B Preferred Stock
|
|
|
|
|
|
|
|
|
247,500
|
|
|
|
179,899
|
|
25,000 shares of Common Stock
|
|
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,753,268
|
|
|
|
18,683,167
|
|
Nicos Polymers & Grinding Inc.(9)
|
|
Environmental & Facilities services
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, LIBOR+5% (10% floor), due 7/17/2012
|
|
|
|
|
3,216,511
|
|
|
|
3,192,408
|
|
|
|
3,192,408
|
|
First Lien Term Loan B, 13.5% due 7/17/2012
|
|
|
|
|
5,786,547
|
|
|
|
5,594,313
|
|
|
|
5,594,313
|
|
3.32% Interest in Crownbrook Acquisition I LLC
|
|
|
|
|
|
|
|
|
168,086
|
|
|
|
72,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,954,807
|
|
|
|
8,859,477
|
|
TBA Global, LLC(9)
|
|
Media: Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan A, LIBOR+5% (10% floor), due 8/3/2010
|
|
|
|
|
2,531,982
|
|
|
|
2,516,148
|
|
|
|
2,516,148
|
|
Second Lien Term Loan B, 14.5% due 8/3/2012
|
|
|
|
|
10,369,491
|
|
|
|
9,857,130
|
|
|
|
9,857,130
|
|
53,994 Senior Preferred Shares
|
|
|
|
|
|
|
|
|
215,975
|
|
|
|
143,418
|
|
191,977 Shares A Shares
|
|
|
|
|
|
|
|
|
191,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,781,230
|
|
|
|
12,516,696
|
|
Fitness Edge, LLC
|
|
Leisure Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, LIBOR+5.25% (10% floor), due 8/8/2012
|
|
|
|
|
2,250,000
|
|
|
|
2,233,636
|
|
|
|
2,233,636
|
|
First Lien Term Loan B, 15% due 8/8/2012
|
|
|
|
|
5,353,461
|
|
|
|
5,206,261
|
|
|
|
5,206,261
|
|
1,000 Common Units
|
|
|
|
|
|
|
|
|
42,908
|
|
|
|
55,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,482,805
|
|
|
|
7,494,930
|
|
Filet of Chicken(9)
|
|
Food Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 7/31/2012
|
|
|
|
|
12,516,185
|
|
|
|
11,994,788
|
|
|
|
11,994,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,994,788
|
|
|
|
11,994,788
|
|
Boot Barn
|
|
Footwear and Apparel
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 10/3/2013
|
|
|
|
|
18,095,935
|
|
|
|
17,788,078
|
|
|
|
17,788,078
|
|
24,706 shares of Series A Preferred Stock
|
|
|
|
|
|
|
|
|
247,060
|
|
|
|
146,435
|
|
1,308 shares of Common Stock
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,035,269
|
|
|
|
17,934,513
|
|
American Hardwoods Industries Holdings, LLC
|
|
Lumber Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15% due 10/15/2012
|
|
|
|
|
10,334,704
|
|
|
|
10,094,129
|
|
|
|
4,384,489
|
|
24,375 Membership Units
|
|
|
|
|
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,344,129
|
|
|
|
4,384,489
|
|
Premier Trailer Leasing, Inc.
|
|
Trailer Leasing Services
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 16.5% due 10/23/2012
|
|
|
|
|
17,277,619
|
|
|
|
16,985,473
|
|
|
|
16,985,473
|
|
285 shares of Common Stock
|
|
|
|
|
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,986,613
|
|
|
|
16,985,473
|
|
Pacific Press Technologies, Inc.
|
|
Capital Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.75% due 1/10/2013
|
|
|
|
|
9,544,447
|
|
|
|
9,294,486
|
|
|
|
9,294,486
|
|
33,463 shares of Common Stock
|
|
|
|
|
|
|
|
|
344,513
|
|
|
|
481,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,638,999
|
|
|
|
9,775,696
|
|
75
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company/Type of Investment(1)(2)(5)
|
|
Industry
|
|
Principal(8)
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Goldco, LLC
|
|
Restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 17.5% due 1/31/2013
|
|
|
|
|
7,705,762
|
|
|
|
7,578,261
|
|
|
|
7,578,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,578,261
|
|
|
|
7,578,261
|
|
Lighting by Gregory, LLC
|
|
Housewares & Specialties
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 9.75% due 2/28/2013
|
|
|
|
|
4,500,002
|
|
|
|
4,420,441
|
|
|
|
4,420,441
|
|
First Lien Term Loan B, 14.5% due 2/28/2013
|
|
|
|
|
7,010,207
|
|
|
|
6,888,876
|
|
|
|
6,888,876
|
|
1.1% membership interest
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
98,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,419,317
|
|
|
|
11,407,776
|
|
Rail Acquisition Corp.
|
|
Manufacturing - Mechanical Products
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 17% due 4/1/2013
|
|
|
|
|
15,800,700
|
|
|
|
15,494,737
|
|
|
|
15,494,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,494,737
|
|
|
|
15,494,737
|
|
Western Emulsions, Inc.
|
|
Emulsions Manufacturing
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15% due 6/30/2014
|
|
|
|
|
9,661,464
|
|
|
|
9,523,464
|
|
|
|
9,523,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,523,464
|
|
|
|
9,523,464
|
|
Storytellers Theaters Corporation
|
|
Entertainment - Theaters
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 15% due 7/16/2014
|
|
|
|
|
11,824,414
|
|
|
|
11,598,248
|
|
|
|
11,598,248
|
|
First Lien Revolver, LIBOR+3.5% (10% floor), due
7/16/2014 undrawn revolver of $2,000,000(10)
|
|
|
|
|
|
|
|
|
(17,566
|
)
|
|
|
(17,566
|
)
|
1,692 shares of Common Stock
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
20,000 shares of Preferred Stock
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
196,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,780,851
|
|
|
|
11,777,270
|
|
HealthDrive Corporation
|
|
Healthcare facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 10% due 7/17/2013
|
|
|
|
|
8,000,000
|
|
|
|
7,923,357
|
|
|
|
7,923,357
|
|
First Lien Term Loan B, 13% due 7/17/2013
|
|
|
|
|
10,008,333
|
|
|
|
9,818,333
|
|
|
|
9,818,333
|
|
First Lien Revolver, 12% due 7/17/2013 undrawn
revolver of $1,500,000
|
|
|
|
|
500,000
|
|
|
|
481,000
|
|
|
|
481,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,222,690
|
|
|
|
18,222,690
|
|
idX Corporation
|
|
Merchandise Display
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 14.5% due 7/1/2014
|
|
|
|
|
13,049,166
|
|
|
|
12,799,999
|
|
|
|
12,799,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,799,999
|
|
|
|
12,799,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Control/Non-Affiliate Investments
|
|
|
|
|
|
|
|
$
|
208,764,349
|
|
|
$
|
202,408,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
$
|
290,584,985
|
|
|
$
|
273,759,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All debt investments are income producing. Equity is non-income
producing unless otherwise noted. |
|
(2) |
|
See Note 3 to Consolidated Financial Statements for summary
geographic location. |
|
(3) |
|
Control Investments are defined by the Investment Company Act of
1940 (1940 Act) as investments in companies in which
the Company owns more than 25% of the voting securities or
maintains greater than 50% of the board representation. As of
September 30, 2008, the Company did not have a controlling
interest in any of its investments. |
|
(4) |
|
Affiliate Investments are defined by the 1940 Act as investments
in companies in which the Company owns between 5% and 25% of the
voting securities. |
|
(5) |
|
Equity ownership may be held in shares or units of companies
related to the portfolio companies. |
|
(6) |
|
Income producing through payment of dividends or distributions. |
|
(7) |
|
Non-Control/Non-Affiliate Investments are defined by the 1940
Act as investments that are neither Control Investments nor
Affiliate Investments. |
|
(8) |
|
Principal includes accumulated PIK interest and is net of
repayments. |
76
Fifth
Street Finance Corp.
Consolidated
Schedule of Investments
September 30, 2008
|
|
|
(9) |
|
Rates have been adjusted on the term loans, as follows: |
|
|
|
|
|
|
|
|
|
Portfolio Company
|
|
Effective date
|
|
Cash interest
|
|
PIK interest
|
|
Reason
|
|
Best Vinyl Acquisition Corporation
|
|
April 1, 2008
|
|
+0.5% on Term Loan
|
|
|
|
Per loan amendment
|
Nicos Polymers & Grinding, Inc.
|
|
February 10, 2008
|
|
|
|
+2.0% on Term Loan A & B
|
|
Per waiver agreement
|
TBA Global, LLC
|
|
February 15, 2008
|
|
|
|
+2.0% on Term Loan A & B
|
|
Per waiver agreement
|
Filet of Chicken
|
|
August 1, 2008
|
|
+1.0% on Term Loan
|
|
+1.0% on Term Loan
|
|
Per loan amendment
|
|
|
|
(10) |
|
Amounts represent unearned income related to undrawn commitments. |
See notes to Consolidated Financial Statements.
77
Fifth Street Mezzanine Partners III, L.P. (the
Partnership), a Delaware limited partnership, was
organized on February 15, 2007 to primarily invest in debt
securities of small
and/or
middle market companies. FSMPIII GP, LLC was the
Partnerships general partner (the General
Partner). The Partnerships investments were managed
by Fifth Street Management LLC (the Investment
Adviser). The General Partner and Investment Adviser were
under common ownership.
Effective January 2, 2008, the Partnership merged with and
into Fifth Street Finance Corp. (the Company), an
externally managed, closed-end, non-diversified management
investment company that has elected to be treated as a business
development company under the Investment Company Act of 1940
(the 1940 Act). The merger involved the exchange of
shares between companies under common control. In accordance
with the guidance on exchanges of shares between entities under
common control, the Companys results of operations and
cash flows for the year ended September 30, 2008 are
presented as if the merger had occurred as of October 1,
2007. Accordingly, no adjustments were made to the carrying
value of assets and liabilities (or the cost basis of
investments) as a result of the merger. Fifth Street Finance
Corp. is managed by the Investment Adviser. Prior to
January 2, 2008, references to the Company are to the
Partnership. Since January 2, 2008, references to the
Company, FSC, we or our are to Fifth
Street Finance Corp., unless the context otherwise requires.
The Company also has certain wholly-owned subsidiaries which
hold certain portfolio investments of the Company. The
subsidiaries are consolidated with the Company, and the
portfolio investments held by the subsidiaries are included in
the Companys consolidated financial statements. All
significant intercompany balances and transactions have been
eliminated.
On June 17, 2008, the Company completed an initial public
offering of 10,000,000 shares of its common stock at the
offering price of $14.12 per share. On July 21, 2009, the
Company completed a follow-on public offering of
9,487,500 shares of its common stock at the offering price
of $9.25 per share. On September 25, 2009, the Company
completed a follow-on public offering of 5,520,000 shares
of its common stock at the offering price of $10.50 per
share. The Companys shares are currently listed on the
New York Stock Exchange under the symbol FSC.
On May 19, 2009, the Company received a letter from the
Investment Division of the Small Business Administration (the
SBA) that invited the Company to continue moving
forward with the licensing of a small business investment
company (SBIC) subsidiary. The Companys
application to license this entity as an SBIC with the SBA is
subject to the SBA approval. The Companys SBIC subsidiary
will be a wholly-owned subsidiary and will be able to rely on an
exclusion from the definition of investment company
under the 1940 Act, and thus will not elect to be treated as a
business development company under the 1940 Act. The
Companys SBIC subsidiary will have an investment objective
similar to the Companys and will make similar types of
investments in accordance with SBIC regulations.
|
|
Note 2.
|
Significant
Accounting Policies
|
FASB
Accounting Standards Codification
The issuance of FASB Accounting Standards
Codificationtm
(the Codification) on July 1, 2009 (effective
for interim or annual reporting periods ending after
September 15, 2009), changes the way that
U.S. generally accepted accounting principles
(GAAP) are referenced. Beginning on that date, the
Codification officially became the single source of
authoritative nongovernmental GAAP; however, SEC registrants
must also consider rules, regulations, and interpretive guidance
issued by the SEC or its staff. The switch affects the way
companies refer to GAAP in financial statements and in their
accounting policies. All existing standards that were used to
create the Codification became superseded. Instead, references
to standards will consist solely of the number used in the
Codifications structural organization. For example, it is
no longer proper to refer to
78
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FASB Statement No. 157, Fair Value Measurement,
which is now Codification Topic 820 Fair Value Measurements
and Disclosures (ASC 820).
Consistent with the effective date of the Codification,
financial statements for periods ending after September 15,
2009, refers to the Codification structure, not pre-Codification
historical GAAP.
Basis
of Presentation and Liquidity:
The Consolidated Financial Statements of the Company have been
prepared in accordance with GAAP and pursuant to the
requirements for reporting on
Form 10-K
and
Regulation S-X.
The financial results of the Companys portfolio
investments are not consolidated in the Companys financial
statements.
The Company has evaluated all subsequent events through
December 9, 2009, the date of this filing.
Although the Company expects to fund the growth of its
investment portfolio through the net proceeds from the recent
and future equity offerings, the Companys dividend
reinvestment plan, and issuances of senior securities or future
borrowings, to the extent permitted by the 1940 Act, the Company
cannot assure that its plans to raise capital will be
successful. In addition, the Company intends to distribute to
its stockholders between 90% and 100% of its taxable income each
year in order to satisfy the requirements applicable to RICs
under Subchapter M of the Internal Revenue Code
(Code). Consequently, the Company may not have the
funds or the ability to fund new investments, to make additional
investments in its portfolio companies, to fund its unfunded
commitments to portfolio companies or to repay borrowings. In
addition, the illiquidity of its portfolio investments may make
it difficult for the Company to sell these investments when
desired and, if the Company is required to sell these
investments, we may realize significantly less than their
recorded value.
Use of
Estimates:
The preparation of financial statements in conformity with GAAP
requires management to make certain estimates and assumptions
affecting amounts reported in the financial statements and
accompanying notes. These estimates are based on the information
that is currently available to the Company and on various other
assumptions that the Company believes to be reasonable under the
circumstances. Actual results could differ materially from those
estimates under different assumptions and conditions. The most
significant estimate inherent in the preparation of the
Companys consolidated financial statements is the
valuation of investments and the related amounts of unrealized
appreciation and depreciation.
The consolidated financial statements include portfolio
investments at fair value of $299.6 million and
$273.8 million at September 30, 2009 and
September 30, 2008, respectively. The portfolio investments
represent 73.0% and 93.0% of stockholders equity at
September 30, 2009 and September 30, 2008,
respectively, and their fair values have been determined by the
Companys Board of Directors in good faith in the absence
of readily available market values. Because of the inherent
uncertainty of valuation, the determined values may differ
significantly from the values that would have been used had a
ready market existed for the investments, and the differences
could be material. The illiquidity of these portfolio
investments may make it difficult for the Company to sell these
investments when desired and, if the Company is required to sell
these investments, it may realize significantly less than the
investments recorded value.
The Company classifies its investments in accordance with the
requirements of the 1940 Act. Under the 1940 Act, Control
Investments are defined as investments in companies in
which the Company owns more than 25% of the voting securities or
has rights to maintain greater than 50% of the board
representation; Affiliate Investments are defined as
investments in companies in which the Company owns between 5%
and 25% of the voting securities; and
Non-Control/Non-Affiliate Investments are defined as
investments that are neither Control Investments nor Affiliate
Investments.
79
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant
Accounting Policies:
a) Valuation:
As described below, effective October 1, 2008, the Company
adopted ASC Topic 820 Fair Value Measurements and Disclosures
(ASC 820). In accordance with that standard, the
Company changed its presentation for all periods presented to
net unearned fees against the associated debt investments. Prior
to the adoption of ASC 820 on October 1, 2008, the Company
reported unearned fees as a single line item on the Consolidated
Balance Sheets and Consolidated Schedules of Investments. This
change in presentation had no impact on the overall net cost or
fair value of the Companys investment portfolio and had no
impact on the Companys financial position or results of
operations.
The following table summarizes the effect of the adoption of ASC
820 on the presentation of the Companys investment
portfolio in the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as
|
|
|
|
|
|
Fair Value as Reported
|
|
|
|
Reported in the
|
|
|
|
|
|
in the September 30, 2008
|
|
|
|
September 30, 2008
|
|
|
|
|
|
Consolidated Financial
|
|
|
|
Financial Statements
|
|
|
Change in Presentation
|
|
|
Statements as
|
|
|
|
as Filed in the
|
|
|
of Unearned Fee Income
|
|
|
Filed in the
|
|
|
|
September 30, 2008
|
|
|
to Conform with
|
|
|
September 30, 2009
|
|
|
|
Form 10-K
|
|
|
ASC 820
|
|
|
Form 10-K
|
|
|
Affiliate investments
|
|
$
|
73,106,057
|
|
|
$
|
(1,755,640
|
)
|
|
$
|
71,350,417
|
|
Non-control/Non-affiliate investments
|
|
|
205,889,362
|
|
|
|
(3,480,625
|
)
|
|
|
202,408,737
|
|
Unearned fee income
|
|
|
(5,236,265
|
)
|
|
|
5,236,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments net of unearned fee income
|
|
$
|
273,759,154
|
|
|
$
|
|
|
|
$
|
273,759,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b) Fair Value Measurements:
In September 2006, the Financial Accounting Standards Board
issued ASC 820, which was effective for fiscal years
beginning after November 15, 2007. ASC 820 defines
fair value as the price at which an asset could be exchanged in
a current transaction between knowledgeable, willing parties. A
liabilitys fair value is defined as the amount that would
be paid to transfer the liability to a new obligor, not the
amount that would be paid to settle the liability with the
creditor. Where available, fair value is based on observable
market prices or parameters or derived from such prices or
parameters. Where observable prices or inputs are not available,
valuation techniques are applied. These valuation techniques
involve some level of management estimation and judgment, the
degree of which is dependent on the price transparency for the
investments or market and the investments complexity.
Assets and liabilities recorded at fair value in the
Companys Consolidated Balance Sheets are categorized based
upon the level of judgment associated with the inputs used to
measure their fair value. Hierarchical levels, defined by ASC
820 and directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and
liabilities, are as follows:
|
|
|
|
|
Level 1 Unadjusted, quoted prices in active
markets for identical assets or liabilities at the measurement
date.
|
|
|
|
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data at the measurement date for substantially
the full term of the assets or liabilities.
|
80
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
Level 3 Unobservable inputs that reflect
managements best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
|
Realized gain or loss on the sale of investments is the
difference between the proceeds received from dispositions of
portfolio investments and their stated costs. Realized losses
may also be recorded in connection with the Companys
determination that certain investments are permanently impaired.
Interest income, adjusted for amortization of premium and
accretion of original issue discount, is recorded on an accrual
basis to the extent that such amounts are expected to be
collected. The Company stops accruing interest on investments
when it is determined that interest is no longer collectible.
Distributions of earnings from portfolio companies are recorded
as dividend income when the distribution is received.
The Company has investments in debt securities which contain a
payment in kind or PIK interest provision. PIK
interest is computed at the contractual rate specified in each
investment agreement and added to the principal balance of the
investment and recorded as income.
Fee income consists of the monthly collateral management fees
that the Company receives in connection with its debt
investments and the accreted portion of the debt origination
fees.
The Company capitalizes upfront loan origination fees received
in connection with investments. The unearned fee income from
such fees is accreted into fee income based on the effective
interest method over the life of the investment. In connection
with its investment, the Company sometimes receives nominal cost
equity that is valued as part of the negotiation process with
the particular portfolio company. When the Company receives
nominal cost equity, the Company allocates its cost basis in its
investment between its debt securities and its nominal cost
equity at the time of origination. Any resulting discount from
recording the loan is accreted into fee income over the life of
the loan.
Cash
and Cash Equivalents:
Cash and cash equivalents consist of demand deposits and highly
liquid investments with maturities of three months or less, when
acquired. The Company places its cash and cash equivalents with
financial institutions and, at times, cash held in bank accounts
may exceed the Federal Deposit Insurance Corporation insured
limit.
Offering
Costs:
Offering costs consist of fees paid to the underwriters, in
addition to legal, accounting, regulatory and printing fees that
are related to the Companys follow-on offerings which
closed on July 21, 2009 and September 25, 2009.
Accordingly, approximately $1.0 million of offering costs
(net of the underwriting fees) have been charged to capital
during the year ended September 30, 2009.
Income
Taxes:
Prior to the merger of the Partnership with and into the
Company, the Partnership was treated as a partnership for
federal and state income tax purposes. The Partnership generally
did not record a provision for income taxes because the partners
report their shares of the partnership income or loss on their
income tax returns. Accordingly, the taxable income was passed
through to the partners and the Partnership was not subject to
an entity level tax as of December 31, 2007.
As a partnership, Fifth Street Mezzanine Partners III, LP filed
a calendar year tax return for a short year initial period from
February 15, 2007 through December 31, 2007. Upon the
merger, Fifth Street Finance
81
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Corp., the surviving C-Corporation, made an election to be
treated as a RIC under the Code and adopted a September 30 tax
year end. Accordingly, the first RIC tax return has been filed
for the tax year beginning January 1, 2008 and ended
September 30, 2008.
As a RIC, the Company is not subject to federal income tax on
the portion of its taxable income and gains distributed
currently to its stockholders as a dividend. The Company
anticipates distributing between 90% and 100% of its taxable
income and gains, within the Subchapter M rules, and thus the
Company anticipates that it will not incur any federal or state
income tax at the RIC level. As a RIC, the Company is also
subject to a federal excise tax based on distributive
requirements of its taxable income on a calendar year basis
(i.e., calendar year 2009). The Company anticipates timely
distribution of its taxable income within the tax rules,
however, the Company incurred a de minimis federal excise tax
for calendar year 2008 and may incur a federal excise tax for
the calendar year 2009.
The purpose of the Companys taxable subsidiaries is to
permit the Company to hold equity investments in portfolio
companies which are pass through entities for
federal tax purposes in order to comply with the source
income requirements contained in the RIC tax requirements.
The taxable subsidiaries are not consolidated with the Company
for income tax purposes and may generate income tax expense as a
result of their ownership of certain portfolio investments. This
income tax expense, if any, is reflected in the Companys
Consolidated Statements of Operations. The Company uses the
asset and liability method to account for its taxable
subsidiaries income taxes. Using this method, the Company
recognizes deferred tax assets and liabilities for the estimated
future tax effects attributable to temporary differences between
financial reporting and tax bases of assets and liabilities. In
addition, the Company recognizes deferred tax benefits
associated with net operating carry forwards that it may use to
offset future tax obligations. The Company measures deferred tax
assets and liabilities using the enacted tax rates expected to
apply to taxable income in the years in which we expect to
recover or settle those temporary differences.
The Company adopted Financial Accounting Standards Board ASC
Topic 740 Accounting for Uncertainty in Income Taxes
(ASC 740) at inception on February 15, 2007.
ASC 740 provides guidance for how uncertain tax positions should
be recognized, measured, presented, and disclosed in the
consolidated financial statements. ASC 740 requires the
evaluation of tax positions taken or expected to be taken in the
course of preparing the Companys tax returns to determine
whether the tax positions are more-likely-than-not
of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold
are recorded as a tax benefit or expense in the current year.
Adoption of ASC 740 was applied to all open taxable years as of
the effective date. The adoption of ASC 740 did not have an
effect on the financial position or results of operations of the
Company as there was no liability for unrecognized tax benefits
and no change to the beginning capital of the Company.
Managements determinations regarding ASC 740 may be
subject to review and adjustment at a later date based upon
factors including, but not limited to, an ongoing analysis of
tax laws, regulations and interpretations thereof.
Guarantees
and Indemnification Agreements:
The Company follows ASC 460 Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (ASC 460).
ASC 460 elaborates on the disclosure requirements of a guarantor
in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also
requires a guarantor to recognize, at the inception of a
guarantee, for those guarantees that are covered by ASC 460, the
fair value of the obligation undertaken in issuing certain
guarantees. The Interpretation has had no impact on the
Companys consolidated financial statements.
Recent
Accounting Pronouncements
In October 2009 the FASB issued Accounting Standards Update
2009-13,
Revenue Recognition (Topic 605)
Multiple-Deliverable Revenue Arrangements which addresses
accounting for multiple deliverable
82
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
arrangements to enable vendors to account for products
separately rather than as a combined unit. The amendments are
effective prospectively for fiscal years beginning on or after
June 15, 2010. The Company does not expect the adoption of
this guidance to have a material impact on either its financial
position or results of operations.
In September 2009 the FASB issued Accounting Standards Update
2009-12,
Fair Value Measurements and Disclosures (Topic
820) Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent)
provides guidance on estimating the fair value of an
alternative investment, amending ASC
820-10. The
amendment is effective for interim and annual periods ending
after December 15, 2009. The Company does not expect the
adoption of this guidance to have a material impact on either
its financial position or results of operations.
In February 2007, the FASB issued ASC Topic
825-10
Financial Instruments (ASC
825-10)
, which provides companies with an option to report selected
financial assets and liabilities at fair value. The objective of
ASC 825-10
is to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring
related assets and liabilities differently, and is effective as
of the beginning of an entitys first fiscal year beginning
after November 15, 2007. Early adoption is permitted as of
the beginning of the previous fiscal year provided that the
entity makes that choice in the first 120 days of that
fiscal year and also elects to apply the provisions of ASC 820.
While ASC
825-10
become effective for the Companys 2009 fiscal year, the
Company did not elect the fair value measurement option for any
of its financial assets or liabilities.
In December 2007, the FASB issued ASC Topic 810
Noncontrolling Interests in Consolidated Financial
(ASC 810). ASC 810 establishes accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. ASC 810
requires that noncontrolling interests in subsidiaries be
reported in the equity section of the controlling companys
balance sheet. It also changes the manner in which the net
income of the subsidiary is reported and disclosed in the
controlling companys income statement. ASC 810 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
Company does not believe that the adoption of ASC 810 will have
a material impact on either its financial position or results of
operations.
Effective January 1, 2009 the Company adopted the guidance
included in ASC Topic 815 Derivatives and Hedging
(ASC 815), which requires additional disclosures for
derivative instruments and hedging activities. The Company does
not have any derivative instruments nor has it engaged in any
hedging activities. ASC 815 has no impact on the Companys
financial statements.
Effective July 1, 2009 the Company adopted the provisions
of ASC Topic 855 Subsequent Events
(ASC 855). ASC 855 incorporates the subsequent
events guidance contained in the auditing standards literature
into authoritative accounting literature. It also requires
entities to disclose the date through which they have evaluated
subsequent events and whether the date corresponds with the
release of their financial statements. See
Note 2 Significant Accounting
Policies Basis of Presentation and Liquidity
for this new disclosure.
In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial
Assets an amendment of FASB Statement
No. 140 (SFAS 166) (to be included
in ASC 860 Transfers and Servicing). SFAS 166
will require more information about transfers of financial
assets, eliminates the qualifying special purpose entity (QSPE)
concept, changes the requirements for derecognizing financial
assets and requires additional disclosures. SFAS 166 is
effective for the first annual reporting period that begins
after November 15, 2009. The Company does not anticipate
that SFAS 166 will have a material impact on the
Companys financial statements. This statement has not yet
been codified.
83
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Note 3.
|
Portfolio
Investments
|
At September 30, 2009, 73.0% of stockholders equity
or $299.6 million was invested in 28 long-term portfolio
investments and 27.6% of stockholders equity or
$113.2 million was invested in cash and cash equivalents.
In comparison, at September 30, 2008, 93.0% of
stockholders equity or $273.8 million was invested in
24 long-term portfolio investments and 7.8% of
stockholders equity or $22.9 million was invested in
cash and cash equivalents. As of September 30, 2009, all of
the Companys debt investments were secured by first or
second priority liens on the assets of the portfolio companies.
Moreover, the Company held equity investments in its portfolio
companies consisting of common stock, preferred stock or limited
liability company interests designed to provide the Company with
an opportunity for an enhanced rate of return. These instruments
generally do not produce a current return, but are held for
potential investment appreciation and capital gain.
At September 30, 2009 and September 30, 2008,
$281.0 million and $251.5 million, respectively, of
the Companys portfolio debt investments at fair value were
at fixed rates, which represented approximately 95% and 93%,
respectively, of the Companys total portfolio of debt
investments at fair value. During the year ended
September 30, 2009, the Company recorded realized losses of
$14.4 million. During the year ended September 30,
2008, the Company recorded realized gains on investments of
approximately $62,000. During the years ended September 30,
2009 and 2008, the Company recorded unrealized depreciation of
$10.8 million and $16.9 million, respectively.
The composition of the Companys investments as of
September 30, 2009 and September 30, 2008 at cost and
fair value was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Investments in debt securities
|
|
$
|
317,069,667
|
|
|
$
|
295,921,400
|
|
|
$
|
281,264,010
|
|
|
$
|
269,154,948
|
|
Investments in equity securities
|
|
|
10,162,618
|
|
|
|
3,689,737
|
|
|
|
9,320,975
|
|
|
|
4,604,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,232,285
|
|
|
$
|
299,611,137
|
|
|
$
|
290,584,985
|
|
|
$
|
273,759,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the financial instruments carried
at fair value as of September 30, 2009, by caption on the
Companys Consolidated Balance Sheet for each of the three
levels of hierarchy established by ASC 820.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Control investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,691,107
|
|
|
$
|
5,691,107
|
|
Affiliate investments
|
|
|
|
|
|
|
|
|
|
|
64,748,560
|
|
|
|
64,748,560
|
|
Non-control/Non-affiliate investments
|
|
|
|
|
|
|
|
|
|
|
229,171,470
|
|
|
|
229,171,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments at fair value
|
|
$
|
|
|
|
$
|
|
|
|
$
|
299,611,137
|
|
|
$
|
299,611,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a roll-forward in the changes in
fair value from September 30, 2008 to September 30,
2009, for all investments for which the Company determines fair
value using unobservable (Level 3) factors. When a
determination is made to classify a financial instrument within
Level 3 of the valuation hierarchy, the determination is
based upon the fact that the unobservable factors are the most
significant to the overall fair value measurement. However,
Level 3 financial instruments typically include, in
addition to the unobservable or Level 3 components,
observable components (that is, components that are actively
quoted and
84
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
can be validated by external sources). Accordingly, the
appreciation (depreciation) in the table below includes changes
in fair value due in part to observable factors that are part of
the valuation methodology.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-control/
|
|
|
|
|
|
|
Control
|
|
|
Affiliate
|
|
|
Non-affiliate
|
|
|
|
|
|
|
Investments
|
|
|
Investments
|
|
|
Investments
|
|
|
Total
|
|
|
Fair value as of September 30, 2008
|
|
$
|
|
|
|
$
|
71,350,417
|
|
|
$
|
202,408,737
|
|
|
$
|
273,759,154
|
|
Total realized losses
|
|
|
|
|
|
|
(4,000,000
|
)
|
|
|
(10,373,200
|
)
|
|
|
(14,373,200
|
)
|
Change in unrealized appreciation (depreciation)
|
|
|
(1,792,015
|
)
|
|
|
286,190
|
|
|
|
(9,289,492
|
)
|
|
|
(10,795,317
|
)
|
Purchases, issuances, settlements and other, net
|
|
|
7,483,122
|
|
|
|
(2,888,047
|
)
|
|
|
46,425,425
|
|
|
|
51,020,500
|
|
Transfers in (out) of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value as of September 30, 2009
|
|
$
|
5,691,107
|
|
|
$
|
64,748,560
|
|
|
$
|
229,171,470
|
|
|
$
|
299,611,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concurrent with its adoption of ASC 820, effective
October 1, 2008, the Company augmented the valuation
techniques it uses to estimate the fair value of its debt
investments where there is not a readily available market value
(Level 3). Prior to October 1, 2008, the Company
estimated the fair value of its Level 3 debt investments by
first estimating the enterprise value of the portfolio company
which issued the debt investment. To estimate the enterprise
value of a portfolio company, the Company analyzed various
factors, including the portfolio companies historical and
projected financial results. Typically, private companies are
valued based on multiples of EBITDA (Earning Before Interest,
Taxes, Depreciation and Amortization), cash flow, net income,
revenues or, in limited instances, book value.
In estimating a multiple to use for valuation purposes, the
Company looked to private merger and acquisition statistics,
discounted public trading multiples or industry practices. In
some cases, the best valuation methodology may have been a
discounted cash flow analysis based on future projections. If a
portfolio company was distressed, a liquidation analysis may
have provided the best indication of enterprise value.
If there was adequate enterprise value to support the repayment
of the Companys debt, the fair value of the Level 3
loan or debt security normally corresponded to cost plus the
amortized original issue discount unless the borrowers
condition or other factors lead to a determination of fair value
at a different amount.
Beginning on October 1, 2008, the Company also introduced a
bond yield model to value these investments based on the present
value of expected cash flows. The primary inputs into the model
are market interest rates for debt with similar characteristics
and an adjustment for the portfolio companys credit risk.
The credit risk component of the valuation considers several
factors including financial performance, business outlook, debt
priority and collateral position. During the years ended
September 30, 2009 and 2008 and during the period ended
September 30, 2007, the Company recorded net unrealized
appreciation (depreciation) of ($10.8 million),
($16.9 million) and $0.1 million, respectively, on its
investments. For the year ended September 30, 2009, the
Companys net unrealized appreciation (depreciation)
consisted of $14.3 million of reclassifications to realized
losses, offset by unrealized depreciation of
($21.2 million) resulting from declines in EBITDA or market
multiples of its portfolio companies requiring closer monitoring
or performing below expectations; and approximately ($3.9)
million of unrealized appreciation resulting from the adoption
of ASC 820.
85
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below summarizes the changes in the Companys
investment portfolio from September 30, 2008 to
September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
Equity
|
|
|
Total
|
|
|
Fair value at September 30, 2008
|
|
$
|
269,154,948
|
|
|
$
|
4,604,206
|
|
|
$
|
273,759,154
|
|
New investments
|
|
|
60,858,356
|
|
|
|
1,091,644
|
|
|
|
61,950,000
|
|
Redemptions/repayments
|
|
|
(18,445,907
|
)
|
|
|
|
|
|
|
(18,445,907
|
)
|
Net accrual of PIK interest income
|
|
|
7,027,149
|
|
|
|
|
|
|
|
7,027,149
|
|
Accretion of original issue discount
|
|
|
842,623
|
|
|
|
|
|
|
|
842,623
|
|
Recognition of unearned income
|
|
|
(353,365
|
)
|
|
|
|
|
|
|
(353,365
|
)
|
Net unrealized depreciation
|
|
|
(9,039,204
|
)
|
|
|
(1,756,113
|
)
|
|
|
(10,795,317
|
)
|
Net changes from unrealized to realized
|
|
|
(14,123,200
|
)
|
|
|
(250,000
|
)
|
|
|
(14,373,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2009
|
|
$
|
295,921,400
|
|
|
$
|
3,689,737
|
|
|
$
|
299,611,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys off-balance sheet arrangements consisted of
$9.8 million and $24.7 million of unfunded commitments
to provide debt financing to its portfolio companies or to fund
limited partnership interests as of September 30, 2009 and
September 30, 2008, respectively. Such commitments involve,
to varying degrees, elements of credit risk in excess of the
amount recognized in the balance sheet and are not reflected on
the Companys Consolidated Balance Sheet.
A summary of the composition of the unfunded commitments
(consisting of revolvers, term loans and limited partnership
interests) as of September 30, 2009 and September 30,
2008 is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
MK Network, LLC
|
|
$
|
|
|
|
$
|
2,000,000
|
|
Rose Tarlow, Inc.
|
|
|
|
|
|
|
2,650,000
|
|
Martini Park, LLC
|
|
|
|
|
|
|
11,000,000
|
|
Fitness Edge, LLC
|
|
|
|
|
|
|
1,500,000
|
|
Western Emulsions, Inc.
|
|
|
|
|
|
|
2,000,000
|
|
Storyteller Theaters Corporation
|
|
|
1,750,000
|
|
|
|
4,000,000
|
|
HealthDrive Corporation
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
IZI Medical Products, Inc.
|
|
|
2,500,000
|
|
|
|
|
|
Trans-Trade, Inc.
|
|
|
2,000,000
|
|
|
|
|
|
Riverlake Equity Partners II, LP (limited partnership interest)
|
|
|
1,000,000
|
|
|
|
|
|
Riverside Fund IV, LP (limited partnership interest)
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,750,000
|
|
|
$
|
24,650,000
|
|
|
|
|
|
|
|
|
|
|
86
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summaries of the composition of the Companys investment
portfolio at cost and fair value as a percentage of total
investments are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien debt
|
|
$
|
153,207,248
|
|
|
|
46.82
|
%
|
|
$
|
108,716,148
|
|
|
|
37.41
|
%
|
Second lien debt
|
|
|
163,862,419
|
|
|
|
50.08
|
%
|
|
|
172,547,862
|
|
|
|
59.38
|
%
|
Purchased equity
|
|
|
4,170,368
|
|
|
|
1.27
|
%
|
|
|
4,120,368
|
|
|
|
1.42
|
%
|
Equity grants
|
|
|
5,992,250
|
|
|
|
1.83
|
%
|
|
|
5,200,607
|
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,232,285
|
|
|
|
100.00
|
%
|
|
$
|
290,584,985
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First lien debt
|
|
$
|
142,016,942
|
|
|
|
47.40
|
%
|
|
$
|
108,247,033
|
|
|
|
39.54
|
%
|
Second lien debt
|
|
|
153,904,458
|
|
|
|
51.37
|
%
|
|
|
160,907,915
|
|
|
|
58.78
|
%
|
Purchased equity
|
|
|
517,181
|
|
|
|
0.17
|
%
|
|
|
2,001,213
|
|
|
|
0.73
|
%
|
Equity grants
|
|
|
3,172,556
|
|
|
|
1.06
|
%
|
|
|
2,602,993
|
|
|
|
0.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299,611,137
|
|
|
|
100.00
|
%
|
|
$
|
273,759,154
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company invests in portfolio companies located in the United
States. The following tables show the portfolio composition by
geographic region at cost and fair value as a percentage of
total investments. The geographic composition is determined by
the location of the corporate headquarters of the portfolio
company, which may not be indicative of the primary source of
the portfolio companys business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
103,509,164
|
|
|
|
31.63
|
%
|
|
$
|
89,699,936
|
|
|
|
30.87
|
%
|
West
|
|
|
98,694,596
|
|
|
|
30.16
|
%
|
|
|
81,813,016
|
|
|
|
28.15
|
%
|
Southeast
|
|
|
39,463,350
|
|
|
|
12.06
|
%
|
|
|
42,847,370
|
|
|
|
14.75
|
%
|
Midwest
|
|
|
22,980,368
|
|
|
|
7.02
|
%
|
|
|
22,438,998
|
|
|
|
7.72
|
%
|
Southwest
|
|
|
62,584,807
|
|
|
|
19.13
|
%
|
|
|
53,785,665
|
|
|
|
18.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,232,285
|
|
|
|
100.00
|
%
|
|
$
|
290,584,985
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
87,895,220
|
|
|
|
29.34
|
%
|
|
$
|
73,921,159
|
|
|
|
27.00
|
%
|
West
|
|
|
93,601,893
|
|
|
|
31.24
|
%
|
|
|
80,530,516
|
|
|
|
29.42
|
%
|
Southeast
|
|
|
39,858,633
|
|
|
|
13.30
|
%
|
|
|
42,950,840
|
|
|
|
15.69
|
%
|
Midwest
|
|
|
22,841,167
|
|
|
|
7.62
|
%
|
|
|
22,575,695
|
|
|
|
8.25
|
%
|
Southwest
|
|
|
55,414,224
|
|
|
|
18.50
|
%
|
|
|
53,780,944
|
|
|
|
19.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299,611,137
|
|
|
|
100.00
|
%
|
|
$
|
273,759,154
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of the Companys portfolio by industry at
cost and fair value as of September 30, 2009 and
September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare technology
|
|
$
|
37,201,082
|
|
|
|
11.37
|
%
|
|
$
|
9,688,834
|
|
|
|
3.33
|
%
|
Healthcare services
|
|
|
32,841,142
|
|
|
|
10.04
|
%
|
|
|
23,274,321
|
|
|
|
8.01
|
%
|
87
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Footwear and apparel
|
|
|
22,423,009
|
|
|
|
6.85
|
%
|
|
|
18,035,269
|
|
|
|
6.21
|
%
|
Restaurants
|
|
|
20,288,245
|
|
|
|
6.20
|
%
|
|
|
19,311,810
|
|
|
|
6.65
|
%
|
Construction and engineering
|
|
|
19,275,031
|
|
|
|
5.89
|
%
|
|
|
18,753,268
|
|
|
|
6.45
|
%
|
Healthcare facilities
|
|
|
17,985,680
|
|
|
|
5.50
|
%
|
|
|
18,222,690
|
|
|
|
6.27
|
%
|
Trailer leasing services
|
|
|
17,064,785
|
|
|
|
5.21
|
%
|
|
|
16,986,613
|
|
|
|
5.85
|
%
|
Manufacturing mechanical products
|
|
|
15,416,411
|
|
|
|
4.71
|
%
|
|
|
15,494,737
|
|
|
|
5.33
|
%
|
Data processing and outsourced services
|
|
|
13,473,611
|
|
|
|
4.12
|
%
|
|
|
13,850,146
|
|
|
|
4.77
|
%
|
Media Advertising
|
|
|
13,403,441
|
|
|
|
4.10
|
%
|
|
|
12,781,230
|
|
|
|
4.40
|
%
|
Merchandise display
|
|
|
13,014,576
|
|
|
|
3.98
|
%
|
|
|
12,799,999
|
|
|
|
4.40
|
%
|
Home furnishing retail
|
|
|
12,855,762
|
|
|
|
3.93
|
%
|
|
|
11,419,981
|
|
|
|
3.93
|
%
|
Housewares & specialties
|
|
|
12,045,029
|
|
|
|
3.68
|
%
|
|
|
11,419,317
|
|
|
|
3.93
|
%
|
Emulsions manufacturing
|
|
|
11,743,630
|
|
|
|
3.59
|
%
|
|
|
9,523,464
|
|
|
|
3.28
|
%
|
Air freight and logistics
|
|
|
10,758,896
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Capital goods
|
|
|
9,965,792
|
|
|
|
3.05
|
%
|
|
|
9,638,999
|
|
|
|
3.32
|
%
|
Environmental & facilities services
|
|
|
8,924,801
|
|
|
|
2.73
|
%
|
|
|
8,954,807
|
|
|
|
3.08
|
%
|
Food distributors
|
|
|
8,922,946
|
|
|
|
2.73
|
%
|
|
|
11,994,788
|
|
|
|
4.13
|
%
|
Household products/ specialty chemicals
|
|
|
7,803,805
|
|
|
|
2.38
|
%
|
|
|
11,853,805
|
|
|
|
4.08
|
%
|
Entertainment theaters
|
|
|
7,601,085
|
|
|
|
2.32
|
%
|
|
|
11,780,851
|
|
|
|
4.05
|
%
|
Leisure facilities
|
|
|
7,187,169
|
|
|
|
2.20
|
%
|
|
|
7,482,805
|
|
|
|
2.58
|
%
|
Building products
|
|
|
7,036,357
|
|
|
|
2.13
|
%
|
|
|
6,973,122
|
|
|
|
2.39
|
%
|
Lumber products
|
|
|
|
|
|
|
0.00
|
%
|
|
|
10,344,129
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,232,285
|
|
|
|
100.00
|
%
|
|
$
|
290,584,985
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare technology
|
|
$
|
36,762,574
|
|
|
|
12.27
|
%
|
|
$
|
9,864,480
|
|
|
|
3.60
|
%
|
Healthcare services
|
|
|
33,722,889
|
|
|
|
11.26
|
%
|
|
|
23,377,791
|
|
|
|
8.54
|
%
|
Footwear and apparel
|
|
|
22,082,721
|
|
|
|
7.37
|
%
|
|
|
17,934,513
|
|
|
|
6.55
|
%
|
Healthcare facilities
|
|
|
17,853,369
|
|
|
|
5.96
|
%
|
|
|
18,222,690
|
|
|
|
6.66
|
%
|
Construction and engineering
|
|
|
17,852,292
|
|
|
|
5.96
|
%
|
|
|
18,683,167
|
|
|
|
6.82
|
%
|
Restaurants
|
|
|
17,811,015
|
|
|
|
5.94
|
%
|
|
|
17,639,081
|
|
|
|
6.44
|
%
|
Manufacturing mechanical products
|
|
|
15,081,138
|
|
|
|
5.03
|
%
|
|
|
15,494,737
|
|
|
|
5.66
|
%
|
Data processing and outsourced services
|
|
|
13,289,816
|
|
|
|
4.44
|
%
|
|
|
13,697,302
|
|
|
|
5.00
|
%
|
Media Advertising
|
|
|
13,099,203
|
|
|
|
4.37
|
%
|
|
|
12,516,696
|
|
|
|
4.57
|
%
|
Merchandise display
|
|
|
13,074,682
|
|
|
|
4.36
|
%
|
|
|
12,799,999
|
|
|
|
4.68
|
%
|
Emulsions manufacturing
|
|
|
12,130,945
|
|
|
|
4.05
|
%
|
|
|
9,523,464
|
|
|
|
3.48
|
%
|
Air freight and logistics
|
|
|
10,799,619
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Home furnishing retail
|
|
|
10,336,401
|
|
|
|
3.45
|
%
|
|
|
10,723,527
|
|
|
|
3.92
|
%
|
Trailer leasing services
|
|
|
9,860,940
|
|
|
|
3.29
|
%
|
|
|
16,985,473
|
|
|
|
6.20
|
%
|
Capital goods
|
|
|
9,766,485
|
|
|
|
3.26
|
%
|
|
|
9,775,696
|
|
|
|
3.57
|
%
|
Food distributors
|
|
|
8,979,657
|
|
|
|
3.00
|
%
|
|
|
11,994,788
|
|
|
|
4.38
|
%
|
Entertainment theaters
|
|
|
7,541,582
|
|
|
|
2.52
|
%
|
|
|
11,777,270
|
|
|
|
4.30
|
%
|
Leisure facilities
|
|
|
7,144,897
|
|
|
|
2.38
|
%
|
|
|
7,494,930
|
|
|
|
2.74
|
%
|
88
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Building products
|
|
|
6,158,908
|
|
|
|
2.06
|
%
|
|
|
6,975,311
|
|
|
|
2.55
|
%
|
Environmental & facilities services
|
|
|
6,122,236
|
|
|
|
2.04
|
%
|
|
|
8,859,477
|
|
|
|
3.24
|
%
|
Housewares & specialties
|
|
|
5,691,107
|
|
|
|
1.90
|
%
|
|
|
11,407,776
|
|
|
|
4.17
|
%
|
Household products/ specialty chemicals
|
|
|
4,448,661
|
|
|
|
1.49
|
%
|
|
|
3,626,497
|
|
|
|
1.33
|
%
|
Lumber products
|
|
|
|
|
|
|
0.00
|
%
|
|
|
4,384,489
|
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
299,611,137
|
|
|
|
100.00
|
%
|
|
$
|
273,759,154
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investments are generally in small and
mid-sized companies in a variety of industries. At
September 30, 2009 and September 30, 2008, the Company
had no investments that were greater than 10% of the total
investment portfolio at fair value. Income, consisting of
interest, dividends, fees, other investment income, and
realization of gains or losses on equity interests, can
fluctuate upon repayment of an investment or sale of an equity
interest and in any given year can be highly concentrated among
several investments. For the years ended September 30, 2009
and September 30, 2008, no individual investment produced
income that exceeded 10% of investment income.
|
|
Note 4.
|
Unearned
Fee Income Debt Origination Fees
|
The Company capitalizes upfront debt origination fees received
in connection with financings and the unearned income from such
fees is accreted into fee income over the life of the financing.
In accordance with ASC 820, the net balance is reflected as
unearned income in the cost and fair value of the respective
investments.
Accumulated unearned fee income activity for the years ended
September 30, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
Beginning accumulated unearned fee income balance
|
|
$
|
5,236,265
|
|
|
$
|
1,566,293
|
|
Net fees received
|
|
|
3,895,559
|
|
|
|
5,478,011
|
|
Unearned fee income recognized
|
|
|
(3,542,194
|
)
|
|
|
(1,808,039
|
)
|
|
|
|
|
|
|
|
|
|
Ending unearned fee income balance
|
|
$
|
5,589,630
|
|
|
$
|
5,236,265
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5.
|
Share
Data and Stockholders Equity
|
Effective January 2, 2008, the Partnership merged with and
into the Company. At the time of the merger, all outstanding
partnership interests in the Partnership were exchanged for
12,480,972 shares of common stock of the Company. An
additional 26 fractional shares were payable to the stockholders
in cash.
On June 17, 2008, the Company completed an initial public
offering of 10,000,000 shares of its common stock at the
offering price of $14.12 per share. The net proceeds totaled
approximately $129.5 million net of investment banking
commissions of approximately $9.9 million and offering
costs of approximately $1.8 million.
On July 21, 2009, the Company completed a follow-on public
offering of 9,487,500 shares of its common stock, which
included the underwriters exercise of their over-allotment
option, at the offering price of $9.25. The net proceeds totaled
approximately $82.7 million after deducting investment
banking commissions of approximately $4.4 million and
offering costs of $0.7 million.
89
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On September 25, 2009, the Company completed a follow-on
public offering of 5,520,000 shares of its common stock,
which included the underwriters exercise of their
over-allotment option, at the offering price of $10.50. The net
proceeds totaled approximately $54.9 million after
deducting investment banking commissions of approximately
$2.8 million and offering costs of approximately
$0.3 million.
No dilutive instruments were outstanding and reflected in the
Companys Consolidated Balance Sheet at September 30,
2009. The following table sets forth the weighted average shares
outstanding for computing basic and diluted earnings per common
share for the years ended September 30, 2009 and
September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2009
|
|
2008
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
24,654,325
|
|
|
|
15,557,469
|
|
On December 13, 2007, the Company adopted a dividend
reinvestment plan that provides for reinvestment of its
distributions on behalf of its stockholders, unless a
stockholder elects to receive cash. As a result, if the Board of
Directors authorizes, and the Company declares, a cash
distribution, then its stockholders who have not opted
out of the dividend reinvestment plan will have their cash
distributions automatically reinvested in additional shares of
common stock, rather than receiving the cash distributions. On
May 1, 2008, the Company declared a dividend of $0.30 per
share to stockholders of record on May 19, 2008. On
June 3, 2008, the Company paid a cash dividend of
approximately $1.9 million and issued 133,317 common shares
totaling approximately $1.9 million under the dividend
reinvestment plan. On August 6, 2008, the Company declared
a dividend of $0.31 per share to stockholders of record on
September 10, 2008. On September 26, 2008, the Company
paid a cash dividend of $5.1 million, and purchased and
distributed a total of 196,786 shares ($1.9 million)
of its common stock under the dividend reinvestment plan. On
December 9, 2008, the Company declared a dividend of $0.32
per share to stockholders of record on December 19, 2008,
and a $0.33 per share dividend to stockholders of record on
December 30, 2008. On December 18, 2008, the Company
declared a special dividend of $0.05 per share to stockholders
of record on December 30, 2008. On December 29, 2008,
the Company paid a cash dividend of approximately
$6.4 million and issued 105,326 common shares totaling
approximately $0.8 million under the dividend reinvestment
plan. On January 29, 2009, the Company paid a cash dividend
of approximately $7.6 million and issued 161,206 common
shares totaling approximately $1.0 million under the
dividend reinvestment plan. On April 14, 2009, the Company
declared a dividend of $0.25 per share to stockholders of record
as of May 26, 2009. On June 25, 2009, the Company paid
a cash dividend of approximately $5.6 million and issued
11,776 common shares totaling approximately $0.1 million
under the dividend reinvestment plan. On August 3, 2009,
the Company declared a dividend of $0.25 per share to
stockholders of record as of September 8, 2009. On
September 25, 2009 the Company paid a cash dividend of
approximately $7.5 million and issued 56,890 common
shares totaling approximately $0.6 million under the
dividend reinvestment plan.
In October 2008, the Companys Board of Directors
authorized a stock repurchase program to acquire up to
$8 million of the Companys outstanding common stock.
Stock repurchases under this program may be made through the
open market at times and in such amounts as Company management
deems appropriate. The stock repurchase program expires December
2009 and may be limited or terminated by the Board of Directors.
In October 2008, the Company repurchased 78,000 shares of
common stock on the open market as part of its share repurchase
program.
On November 16, 2009,Fifth Street Funding, LLC, a
wholly-owned bankruptcy remote, special purpose subsidiary
(Funding) and the Company, entered into a Loan and
Servicing Agreement (Agreement), with respect to a
three-year credit facility (Facility) with Wachovia
Bank, National Association (Wachovia),
90
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Wells Fargo Securities, LLC, as administrative agent
(Wells Fargo), each of the additional institutional
and conduit lenders party thereto from time to time, and each of
the lender agents party thereto from time to time, in the amount
of $50 million with an accordion feature, which will allow
for potential future expansion of the Facility up to
$100 million. The Facility is secured by all of the assets
of Funding, and all of the Companys equity interest in
Funding. The Facility bears interest at LIBOR plus 4.00% per
annum and has a maturity date of November 16, 2012. The
Facility may be extended for up to two additional years upon the
mutual consent of Wells Fargo and each of the lender parties
thereto. The Company intends to use the net proceeds of the
Facility to fund a portion of its loan origination activities
and for general corporate purposes.
In connection with the Facility, the Company concurrently
entered into (i) a Purchase and Sale Agreement with
Funding, pursuant to which the Company will sell to Funding
certain loan assets it has originated or acquired, or will
originate or acquire and (ii) a Pledge Agreement with Wells
Fargo Bank, National Association, pursuant to which the Company
pledged all of its equity interests in Funding as security for
the payment of Fundings obligations under the Agreement
and other documents entered into in connection with the Facility.
The Agreement and related agreements governing the Facility
required both Funding and the Company to, among other things
(i) make representations and warranties regarding the
collateral as well as each of their businesses, (ii) agree
to certain indemnification obligations, and (iii) comply
with various covenants, servicing procedures, limitations on
acquiring and disposing of assets, reporting requirements and
other customary requirements for similar credit facilities. The
Facility documents also included usual and customary default
provisions such as the failure to make timely payments under the
Facility, a change in control of Funding, and the failure by
Funding or the Company to materially perform under the Agreement
and related agreements governing the Facility, which, if not
complied with, could accelerate repayment under the Facility,
thereby materially and adversely affecting the Companys
liquidity, financial condition and results of operations.
Each loan origination under the Facility is subject to the
satisfaction of certain conditions. The Company cannot assure
you that Funding will be able to borrow funds under the Facility
at any particular time or at all.
On January 15, 2008, the Company entered into a
$50 million secured revolving credit facility with the Bank
of Montreal, at a rate of LIBOR plus 1.5%, with a one year
maturity date. The credit facility was secured by the
Companys existing investments. On December 30, 2008,
Bank of Montreal renewed the Companys $50 million
credit facility. The terms included a 50 basis points
commitment fee, an interest rate of LIBOR +3.25% and a term of
364 days. The Company gave notice of termination, effective
September 16, 2009, to Bank of Montreal with respect to
this revolving credit facility.
Prior to the merger of the Partnership with and into the
Company, the Partnership entered into a $50 million
unsecured, revolving line of credit with Wachovia Bank, N.A.
(Loan Agreement) which had a final maturity date of
April 1, 2008. Borrowings under the Loan Agreement were at
a variable interest rate of LIBOR plus 0.75% per annum. In
connection with the Loan Agreement, the General Partner, a
former member of the Board of Directors of Fifth Street Finance
Corp. and an officer of Fifth Street Finance Corp. (collectively
guarantors), entered into a guaranty agreement (the
Guaranty) with the Partnership. Under the terms of
the Guaranty, the guarantors agreed to guarantee the
Partnerships obligations under the Loan Agreement. In
consideration for the guaranty, the Partnership was obligated to
pay a former member of the Board of Directors of Fifth Street
Finance Corp. a fee of $41,667 per month so long as the Loan
Agreement was in effect. For the period from October 1,
2007 to November 27, 2007, the Partnership paid $83,333
under this Guaranty. In October 2007, the Partnership drew
$28.25 million under the Loan Agreement. These loans were
paid back in full with interest in November 2007. As of
November 27, 2007, the Partnership terminated the Loan
Agreement and the Guaranty.
Interest expense for the years ended September 30, 2009 and
2008 and the period ended September 30, 2007, was $636,901,
$917,043 and $522,316, respectively.
91
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Note 7.
|
Interest
and Dividend Income
|
Interest income is recorded on the accrual basis to the extent
that such amounts are expected to be collected. In accordance
with the Companys policy, accrued interest is evaluated
periodically for collectibility. The Company stops accruing
interest on investments when it is determined that interest is
no longer collectible. Distributions from portfolio companies
are recorded as dividend income when the distribution is
received.
The Company holds debt in its portfolio that contains a
payment-in-kind
(PIK) interest provision. The PIK interest, which
represents contractually deferred interest added to the loan
balance that is generally due at the end of the loan term, is
generally recorded on the accrual basis to the extent such
amounts are expected to be collected. The Company generally
ceases accruing PIK interest if there is insufficient value to
support the accrual or if the Company does not expect the
portfolio company to be able to pay all principal and interest
due. The Companys decision to cease accruing PIK interest
involves subjective judgments and determinations based on
available information about a particular portfolio company,
including whether the portfolio company is current with respect
to its payment of principal and interest on its loans and debt
securities; monthly and quarterly financial statements and
financial projections for the portfolio company; the
Companys assessment of the portfolio companys
business development success, including product development,
profitability and the portfolio companys overall adherence
to its business plan; information obtained by the Company in
connection with periodic formal update interviews with the
portfolio companys management and, if appropriate, the
private equity sponsor; and information about the general
economic and market conditions in which the portfolio company
operates. Based on this and other information, the Company
determines whether to cease accruing PIK interest on a loan or
debt security. The Companys determination to cease
accruing PIK interest on a loan or debt security is generally
made well before the Companys full write-down of such loan
or debt security.
Accumulated PIK interest activity for the years ended
September 30, 2009 and September 30, 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
PIK balance at beginning of period
|
|
$
|
5,367,032
|
|
|
$
|
588,795
|
|
Gross PIK interest accrued
|
|
|
8,853,636
|
|
|
|
4,897,398
|
|
Accumulated deferred cash interest
|
|
|
243,953
|
|
|
|
|
|
PIK income reserves
|
|
|
(1,398,347
|
)
|
|
|
|
|
Deferred cash interest income reserves
|
|
|
(243,953
|
)
|
|
|
|
|
PIK interest received in cash
|
|
|
(428,140
|
)
|
|
|
(114,412
|
)
|
Loan exits and other PIK adjustments
|
|
|
(334,703
|
)
|
|
|
(4,749
|
)
|
|
|
|
|
|
|
|
|
|
PIK balance at end of period
|
|
$
|
12,059,478
|
|
|
$
|
5,367,032
|
|
|
|
|
|
|
|
|
|
|
Two investments did not pay all of their scheduled monthly cash
interest payments for the period ended September 30, 2009.
As of September 30, 2009, the Company had stopped accruing
PIK interest and original issue discount (OID) on
five investments, including the two investments that had not
paid all of their scheduled monthly cash interest payments. At
September 30, 2008, no loans or debt securities were on
non-accrual status.
92
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income non-accrual amounts for the year ended September 30,
2009 were as follows:
|
|
|
|
|
Cash interest income
|
|
$
|
2,938,190
|
|
PIK interest income
|
|
|
1,398,347
|
|
OID income
|
|
|
402,522
|
|
|
|
|
|
|
Total
|
|
$
|
4,739,059
|
|
|
|
|
|
|
|
|
Note 8.
|
Taxable/Tax
Distributable Income and Dividend Distributions
|
Taxable income differs from net increase (decrease) in net
assets resulting from operations primarily due to:
(1) unrealized appreciation (depreciation) on investments,
as investment gains and losses are not included in taxable
income until they are realized; (2) origination fees
received in connection with investments in portfolio companies,
which are amortized into interest income over the life of the
investment for book purposes, are treated as taxable income upon
receipt; (3) organizational and deferred offering costs;
(4) recognition of interest income on certain loans; and
(5) income or loss recognition on exited investments.
At September 30, 2009, the Company has a net loss
carryforward of $1.6 million to offset net capital gains,
to the extent provided by federal tax law. The capital loss
carryforward will expire in the Companys tax year ending
September 30, 2017.
Listed below is a reconciliation of net increase in net
assets resulting from operations to taxable income for the
year ended September 30, 2009.
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
6,194,000
|
|
Net change in unrealized depreciation from investments
|
|
|
10,795,000
|
|
Book/tax difference due to deferred loan origination fees, net
|
|
|
353,000
|
|
Book/tax difference due to organizational and offering costs
|
|
|
(87,000
|
)
|
Book/tax difference due to interest income on certain loans
|
|
|
3,394,000
|
|
Book/tax difference due to capital loss carryforward
|
|
|
1,645,000
|
|
Other book-tax differences
|
|
|
(13,000
|
)
|
|
|
|
|
|
Taxable/Tax Distributable Income(1)
|
|
$
|
22,281,000
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Companys taxable income for 2009 is an estimate and
will not be finally determined until the Company files its tax
return for the fiscal year ended September 30, 2009.
Therefore, the final taxable income may be different than the
estimate. |
As of September 30, 2009, the components of accumulated
undistributed income on a tax basis were as follows:
|
|
|
|
|
Undistributed ordinary income, net (RIC status)
|
|
$
|
862,000
|
|
Unrealized losses, net
|
|
|
(27,621,000
|
)
|
Accumulated partnership taxbale income not subject to
distribution
|
|
|
6,236,000
|
|
Other book-tax differences
|
|
|
(9,290,000
|
)
|
The Company uses the asset and liability method to account for
its taxable subsidiaries income taxes. Using this method,
the Company recognizes deferred tax assets and liabilities for
the estimated future tax effects attributable to temporary
differences between financial reporting and tax bases of assets
and liabilities. In addition, the Company recognizes deferred
tax benefits associated with net operating carry forwards that
it may use to offset future tax obligations. The Company
measures deferred tax assets and liabilities using the enacted
tax rates expected to apply to taxable income in the years in
which it expects to recover or settle those
93
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
temporary differences. The Company has recorded a deferred tax
asset for the difference in the book and tax basis of certain
equity investments and tax net operating losses held by its
taxable subsidiaries of $1.4 million. However, this amount
has been fully offset by a valuation allowance of
$1.4 million, since it is more likely than not that these
deferred tax assets will not be realized.
Distributions to stockholders are recorded on the declaration
date. The Company is required to distribute annually to its
stockholders at least 90% of its net ordinary income and net
realized short-term capital gains in excess of net realized
long-term capital losses for each taxable year in order to be
eligible for the tax benefits allowed to a RIC under Subchapter
M of the Code. The Company anticipates paying out as a dividend
all or substantially all of those amounts. The amount to be paid
out as a dividend is determined by the Board of Directors each
quarter and is based on managements estimate of the
Companys annual taxable income. Based on that, a dividend
is declared and paid each quarter. The Company maintains an
opt out dividend reimbursement plan for its
stockholders.
To date, the Companys Board of Directors declared the
following distributions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Type
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
|
|
|
Quarterly
|
|
|
|
5/1/2008
|
|
|
|
5/19/2008
|
|
|
|
6/3/2008
|
|
|
$
|
0.30
|
|
|
Quarterly
|
|
|
|
8/6/2008
|
|
|
|
9/10/2008
|
|
|
|
9/26/2008
|
|
|
$
|
0.31
|
|
|
Quarterly
|
|
|
|
12/9/2008
|
|
|
|
12/19/2008
|
|
|
|
12/29/2008
|
|
|
$
|
0.32
|
|
|
Quarterly
|
|
|
|
12/9/2008
|
|
|
|
12/30/2008
|
|
|
|
1/29/2009
|
|
|
$
|
0.33
|
|
|
Special
|
|
|
|
12/18/2008
|
|
|
|
12/30/2008
|
|
|
|
1/29/2009
|
|
|
$
|
0.05
|
|
|
Quarterly
|
|
|
|
4/14/2009
|
|
|
|
5/26/2009
|
|
|
|
6/25/2009
|
|
|
$
|
0.25
|
|
|
Quarterly
|
|
|
|
8/3/2009
|
|
|
|
9/8/2009
|
|
|
|
9/25/2009
|
|
|
$
|
0.25
|
|
For income tax purposes, the Company estimates that these
distributions will be composed entirely of ordinary income, and
will be reflected as such on the
Form 1099-DIV
for the calendar year 2009. To date, the Companys
operations have resulted in no long-term capital gains or
losses. The Company anticipates declaring further distributions
to its stockholders to meet the RIC distribution requirements.
|
|
Note 9.
|
Realized
Gains or Losses from Investments and Net Change in Unrealized
Appreciation or Depreciation from Investments
|
Realized gains or losses are measured by the difference between
the net proceeds from the sale or redemption and the cost basis
of the investment without regard to unrealized appreciation or
depreciation previously recognized, and includes investments
written-off during the period, net of recoveries. Net change in
unrealized appreciation or depreciation from investments
reflects the net change in the valuation of the portfolio
pursuant to the Companys valuation guidelines and the
reclassification of any prior period unrealized appreciation or
depreciation on exited investments.
During the year ended September 30, 2009 the Company exited
its investment in American Hardwoods Industries, LLC and
recorded a realized loss of $10.4 million, and recorded a
$4.0 million realized loss on one of its portfolio company
investments in connection with the determination that the
investment was permanently impaired based on, among other
things, analysis of changes in the portfolio companys
business operations and prospects. During the year ended
September 30, 2008 the Company sold its equity investment
in Filet of Chicken and realized a gain of approximately $62,000.
|
|
Note 10.
|
Concentration
of Credit Risks
|
The Company places its cash in financial institutions, and at
times, such balances may be in excess of the FDIC insured limit.
94
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
Note 11.
|
Related
Party Transactions
|
The Company has entered into an investment advisory agreement
with the Investment Adviser. Under the investment advisory
agreement, the Company pays the Investment Adviser a fee for its
services under the investment advisory agreement consisting of
two components-a base management fee and an incentive fee.
Base
management Fee
The base management fee is calculated at an annual rate of 2% of
the Companys gross assets, which includes any borrowings
for investment purposes. The base management fee is payable
quarterly in arrears, and will be calculated based on the value
of the Companys gross assets at the end of each fiscal
quarter, and appropriately adjusted on a pro rata basis for any
equity capital raises or repurchases during such quarter. The
base management fee for any partial month or quarter will be
appropriately prorated.
In addition to the proration described above, for the quarter
ended September 30, 2009, the Investment Advisor waived
approximately $172,000 of the base management fee on a portion
of the proceeds raised in connection with the equity offerings
the Company completed in 2009 and which were held in cash or
cash equivalents at September 30, 2009.
Prior to the merger of the Partnership with and into the
Company, which occurred on January 2, 2008, the Partnership
paid the Investment Adviser a management fee (the
Management Fee), subject to the adjustments as
described in the Partnership Agreement, for investment advice
equal to an annual rate of 2% of the aggregate capital
commitments of all limited partners (other than affiliated
limited partners) for each fiscal year (or portion thereof)
provided, however, that commencing on the earlier of
(1) the first day of the fiscal quarter immediately
following the expiration of the commitment period, or
(2) if a temporary suspension period became permanent in
accordance with the Partnership Agreement, on the first day of
the fiscal quarter immediately following the date of such
permanent suspension, the Management Fee for each subsequent
twelve month period was equal to 1.75% of the NAV of the
Partnership (exclusive of the portion thereof attributable to
the General Partner and the affiliated limited partners, based
upon respective capital percentages).
For the years ended September 30, 2009 and 2008 and the
period ended September 30, 2007, base management fees were
approximately $5.9 million, $4.3 million and
$1.6 million, respectively.
Incentive
Fee
The incentive fee portion of the investment advisory agreement
has two parts. The first part is calculated and payable
quarterly in arrears based on the Companys
Pre-Incentive Fee Net Investment Income for the
immediately preceding fiscal quarter. For this purpose,
Pre-Incentive Fee Net Investment Income means
interest income, dividend income and any other income (including
any other fees (other than fees for providing managerial
assistance), such as commitment, origination, structuring,
diligence and consulting fees or other fees that the Company
receives from portfolio companies) accrued during the fiscal
quarter, minus the Companys operating expenses for the
quarter (including the base management fee, expenses payable
under the Companys administration agreement with FSC,
Inc., and any interest expense and dividends paid on any issued
and outstanding indebtedness or preferred stock, but excluding
the incentive fee). Pre-Incentive Fee Net Investment Income
includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with
PIK interest and zero coupon securities), accrued income that
the Company has not yet received in cash. Pre-Incentive Fee Net
Investment Income does not include any realized capital gains,
realized capital losses or unrealized capital appreciation or
depreciation. Pre-Incentive Fee Net Investment Income, expressed
as a rate of return on the value of the Companys net
assets at the end of the immediately preceding fiscal quarter,
will be compared to a hurdle rate of 2% per quarter
(8% annualized), subject to a
catch-up
provision measured as of the end of each fiscal quarter. The
Companys net investment income used to calculate this part
of the incentive fee is also included in
95
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the amount of its gross assets used to calculate the 2% base
management fee. The operation of the incentive fee with respect
to the Companys Pre-Incentive Fee Net Investment Income
for each quarter is as follows:
|
|
|
|
|
no incentive fee is payable to the Investment Adviser in any
fiscal quarter in which the Companys Pre-Incentive Fee Net
Investment Income does not exceed the hurdle rate of 2% (the
preferred return or hurdle).
|
|
|
|
100% of the Companys Pre-Incentive Fee Net Investment
Income with respect to that portion of such Pre-Incentive Fee
Net Investment Income, if any, that exceeds the hurdle rate but
is less than or equal to 2.5% in any fiscal quarter (10%
annualized) is payable to the Investment Adviser. The Company
refers to this portion of its Pre-Incentive Fee Net Investment
Income (which exceeds the hurdle rate but is less than or equal
to 2.5%) as the
catch-up.
The
catch-up
provision is intended to provide the Investment Adviser with an
incentive fee of 20% on all of the Companys Pre-Incentive
Fee Net Investment Income as if a hurdle rate did not apply when
the Companys Pre-Incentive Fee Net Investment Income
exceeds 2.5% in any fiscal quarter.
|
|
|
|
20% of the amount of the Companys Pre-Incentive Fee Net
Investment Income, if any, that exceeds 2.5% in any fiscal
quarter (10% annualized) is payable to the Investment Adviser
once the hurdle is reached and the
catch-up is
achieved (20% of all Pre-Incentive Fee Net Investment Income
thereafter is allocated to the Investment Adviser).
|
The second part of the incentive fee will be determined and
payable in arrears as of the end of each fiscal year (or upon
termination of the investment advisory agreement, as of the
termination date), commencing on September 30, 2008, and
will equal 20% of the Companys realized capital gains, if
any, on a cumulative basis from inception through the end of
each fiscal year, computed net of all realized capital losses
and unrealized capital depreciation on a cumulative basis, less
the aggregate amount of any previously paid capital gain
incentive fees, provided that, the incentive fee determined as
of September 30, 2008 will be calculated for a period of
shorter than twelve calendar months to take into account any
realized capital gains computed net of all realized capital
losses and unrealized capital depreciation from inception.
For the years ended September 30, 2009 and 2008, incentive
fees were approximately $7.8 million and $4.1 million,
respectively. There were no incentive fees paid for the period
ended September 30, 2007.
Transaction
fees
Prior to the merger of the Partnership with and into the
Company, which occurred on January 2, 2008, the Investment
Adviser received 20% of transaction origination fees. For the
year ended September 30, 2008 and the period ended
September 30, 2007, payments for the transaction fees paid
to the Investment Adviser amounted to approximately
$0.2 million and $0.4 million, respectively, and were
expensed as incurred.
Indemnification
The investment advisory agreement provides that, absent willful
misfeasance, bad faith or gross negligence in the performance of
their respective duties or by reason of the reckless disregard
of their respective duties and obligations, the Companys
Investment Adviser and its officers, managers, agents,
employees, controlling persons, members (or their owners) and
any other person or entity affiliated with it, are entitled to
indemnification from the Company for any damages, liabilities,
costs and expenses (including reasonable attorneys fees
and amounts reasonably paid in settlement) arising from the
rendering of the Investment Advisers services under the
investment advisory agreement or otherwise as the Companys
Investment Adviser.
96
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Administration
Agreement
The Company has also entered into an administration agreement
with FSC, Inc. under which FSC, Inc. provides administrative
services for the Company, including office facilities and
equipment, and clerical, bookkeeping and recordkeeping services
at such facilities. Under the administration agreement, FSC,
Inc. also performs or oversees the performance of the
Companys required administrative services, which includes
being responsible for the financial records which the Company is
required to maintain and preparing reports to the Companys
stockholders and reports filed with the SEC. In addition, FSC,
Inc. assists the Company in determining and publishing the
Companys net asset value, overseeing the preparation and
filing of the Companys tax returns and the printing and
dissemination of reports to the Companys stockholders, and
generally overseeing the payment of the Companys expenses
and the performance of administrative and professional services
rendered to the Company by others. For providing these services,
facilities and personnel, the Company reimburses FSC, Inc. the
allocable portion of overhead and other expenses incurred by
FSC, Inc. in performing its obligations under the administration
agreement, including rent and the Companys allocable
portion of the costs of compensation and related expenses of the
Companys chief financial officer and his staff, and the
staff of our chief compliance officer. FSC, Inc. may also
provide, on the Companys behalf, managerial assistance to
the Companys portfolio companies. The administration
agreement may be terminated by either party without penalty upon
60 days written notice to the other party.
For the year ended September 30, 2009, the Company incurred
administrative expenses of approximately $1.3 million. At
September 30, 2009, approximately $704,000 was included in
Due to FSC, Inc. in the Consolidated Balance Sheets.
|
|
Note 12.
|
Financial
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
February 15, 2007
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
(Inception) through
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009(1)
|
|
|
2008(1)(2)
|
|
|
2007(1)(3)
|
|
|
Per Share Data(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at beginning of period
|
|
$
|
13.02
|
|
|
$
|
8.56
|
|
|
|
NA
|
|
Capital contributions from partners
|
|
|
|
|
|
|
2.94
|
|
|
|
NA
|
|
Capital withdrawals by partners
|
|
|
|
|
|
|
(0.12
|
)
|
|
|
NA
|
|
Dividends declared and paid
|
|
|
(1.20
|
)
|
|
|
(0.61
|
)
|
|
|
NA
|
|
Issuance of common stock
|
|
|
(1.21
|
)
|
|
|
2.11
|
|
|
|
NA
|
|
Repurchases of common stock
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
NA
|
|
Net investment income
|
|
|
1.27
|
|
|
|
0.89
|
|
|
|
NA
|
|
Unrealized depreciation on investments
|
|
|
(0.44
|
)
|
|
|
(0.75
|
)
|
|
|
NA
|
|
Realized loss on investments
|
|
|
(0.58
|
)
|
|
|
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value at end of period
|
|
$
|
10.84
|
|
|
$
|
13.02
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at beginning of period
|
|
$
|
294,335,839
|
|
|
$
|
106,815,695
|
|
|
|
|
|
Stockholders equity at end of period
|
|
$
|
410,556,071
|
|
|
$
|
294,335,839
|
|
|
$
|
106,815,695
|
|
Average stockholders equity(5)
|
|
$
|
291,401,218
|
|
|
$
|
205,932,850
|
|
|
$
|
30,065,414
|
|
Ratio of total expenses, excluding interest and line of credit
guarantee expenses, to average stockholders equity(6)
|
|
|
6.12
|
%
|
|
|
5.86
|
%
|
|
|
8.53
|
%
|
Ratio of total expenses to average stockholders equity(6)
|
|
|
6.34
|
%
|
|
|
6.35
|
%
|
|
|
11.10
|
%
|
Ratio of net increase in net assets resulting from operations to
ending stockholders equity(6)
|
|
|
1.51
|
%
|
|
|
1.11
|
%
|
|
|
1.01
|
%
|
Ratio of unrealized depreciation on investments to ending
stockholders equity(6)
|
|
|
(2.63
|
)%
|
|
|
(5.76
|
)%
|
|
|
0.12
|
%
|
Total return to stockholders based on average stockholders
equity(6)
|
|
|
2.13
|
%
|
|
|
1.58
|
%
|
|
|
3.60
|
%
|
Weighted average outstanding debt(7)
|
|
$
|
5,019,178
|
|
|
$
|
11,887,427
|
|
|
$
|
12,155,296
|
|
97
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(1) |
|
The amounts reflected in the financial highlights above
represent net assets, income and expense ratios for all
stockholders. |
|
(2) |
|
Per share data for the year ended September 30, 2008
presumes the issuance of the 12,480,972 common shares at
October 1, 2007 which were actually issued on
January 2, 2008 in connection with the merger described
above. |
|
(3) |
|
Per share data for the period February 15, 2007 (inception)
through September 30, 2007 reflects the fact that there was
no established public trading market for the Companys
common stock prior to October 1, 2007. |
|
(4) |
|
Based on actual shares outstanding at the end of the
corresponding period or weighted average shares outstanding for
the period, as appropriate. |
|
(5) |
|
Calculated based upon the daily weighted average
stockholders equity for the period. |
|
(6) |
|
Interim periods are not annualized. |
|
(7) |
|
Calculated based upon the daily weighted average of loans
payable for the period. |
The Companys restated certificate of incorporation had not
authorized any shares of preferred stock. However, on
April 4, 2008, the Companys Board of Directors
approved a certificate of amendment to its restated certificate
of incorporation reclassifying 200,000 shares of its common
stock as shares of non-convertible, non-participating preferred
stock, with a par value of $0.01 and a liquidation preference of
$500 per share (Series A Preferred Stock) and
authorizing the issuance of up to 200,000 shares of
Series A Preferred Stock. The Companys certificate of
amendment was also approved by the holders of a majority of the
shares of its outstanding common stock through a written consent
first solicited on April 7, 2008. On April 24, 2008,
the Company filed its certificate of amendment and on
April 25, 2008, it sold 30,000 shares of Series A
Preferred Stock to a company controlled by Bruce E. Toll, one of
the Companys directors at that time. For the three months
ended June 30, 2008, the Company paid dividends of
approximately $234,000 on the 30,000 shares of
Series A Preferred Stock. The dividend payment is
considered and included in interest expense for accounting
purposes since the preferred stock has a mandatory redemption
feature. On June 30, 2008, the Company redeemed
30,000 shares of Series A Preferred Stock at the
mandatory redemption price of 101% of the liquidation preference
or $15,150,000. The $150,000 is considered and included in
interest expense for accounting purposes due to the stocks
mandatory redemption feature. No preferred stock is currently
outstanding.
|
|
Note 14.
|
Subsequent
Events
|
On October 2, 2009, Storyteller Theaters Corporation drew
$250,000 on its line of credit. Prior to the draw, the
Companys unfunded commitment was $1.75 million.
On October 8, 2009, the Company funded $153,972 of its
previously unfunded limited partnership interest in Riverside
Fund IV, LP upon receipt of the first closing notice of the
fund.
On October 16, 2009, Elephant & Castle, Inc.
repaid $3.9 million of principal outstanding under its term
loan. The balance of the loan was assumed by Repechage
Investments Limited (RIL), the equity sponsors
98
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
holding company. The Company received a first lien on the assets
of RIL and a guaranty on the balance of its debt.
On October 21, 2009, the Company invested an additional
$6.0 million of second lien debt in Western Emulsions,
Inc., an existing portfolio company, to support its growth
initiatives.
On October 26, 2009, the Company executed a non-binding
term sheet for $41.25 million for its portion of an
investment in a post-secondary education company. The proposed
terms of this investment include a $10 million revolver at
Libor+950 with a Libor floor of 3% and a $31.25 million
first lien term loan at Libor+950 with a Libor floor of 3%. This
is a senior secured first lien facility with a scheduled
maturity of five years. This proposed investment is subject to
the completion of the Companys due diligence, approval
process and documentation, and may not result in a completed
investment. The Company may syndicate a portion of this
investment.
On November 6, 2009, the Company executed a non-binding
term sheet for $34.0 million for an investment in a
specialty chemical distributor. The proposed terms of this
investment include a $10 million revolver at 10%, a
$10 million Term Loan A at 10%, and a $14 million Term
Loan B at 12%. This is a first lien facility with a scheduled
maturity of five years. This proposed investment is subject to
the completion of the Companys due diligence, approval
process and documentation, and may not result in a completed
investment. The Company may syndicate a portion of this
investment.
On November 12, 2009, the Company declared a $0.27 per
share dividend to common stockholders of record as of
December 10, 2009. The dividend is payable
December 29, 2009.
On November 12, 2009, the Company executed a letter
agreement for the potential sale of its second lien term loan to
CPAC, Inc.
and/or its
2,297 shares of common stock of CPAC, Inc. The Company
received a non-refundable deposit of $150,000 in connection with
the letter agreement.
On November 16, 2009, the Company entered into a three-year
credit facility with Wachovia in the amount of $50 million
with an accordion feature, which will allow for potential future
expansion of the facility up to $100 million, and will bear
interest at a rate of LIBOR plus 4% per annum. See Note 6.
Line of Credit for a more detailed discussion of the
credit facility.
On November 23, 2009, the Company received a cash payment
in the amount of $0.1 million, representing payment in full
of all amounts due in connection with the cancellation of the
Companys loan agreement with American Hardwoods Industries
Holdings, LLC on August 3, 2009.
On December 1, 2009, the Company executed a non-binding
term sheet for $28.75 million for an investment in a
specialty food company. The proposed terms of this investment
include a $2.0 million revolver at 10%, a $10 million
Term Loan A at 10%, and a $16.75 million Term Loan B at 12%
cash and 3% PIK. This is a first lien facility with a scheduled
maturity of five years. This proposed investment is subject to
the completion of the Companys due diligence, approval
process and documentation, and may not result in a completed
investment. The Company may syndicate a portion of this
investment.
On December 3, 2009, the Company executed a non-binding
term sheet for $57.3 million for an investment in a
contract manufacturer for medical device original equipment
manufacturers. The proposed terms of this investment include a
$4.0 million revolver at Libor+700 with a 3% Libor floor, a
$33 million Term Loan A at Libor+700 with a 3% Libor floor,
and a $20.3 million Term Loan B at 12% cash interest and 2%
PIK. This is a first lien loan facility with a scheduled
maturity of five years. This proposed investment is
99
FIFTH
STREET FINANCE CORP.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subject to the completion of the Companys due diligence,
approval process and documentation, and may not result in a
completed investment. The Company may syndicate a portion of
this investment.
On December 4, 2009, the Company executed a non-binding
term sheet for $34.0 million for an investment in a
franchisor of consumer services. The proposed terms of this
investment include a $2.0 million revolver at Libor+650
with a 3% Libor floor, a $10 million first lien Term Loan A
at Libor+675 with a 3% Libor floor, and a $22.0 million
Term Loan B at 12% cash and 2% PIK. This is a first lien loan
facility with a scheduled maturity of five years. This proposed
investment is subject to the completion of the Companys
due diligence, approval process and documentation, and may not
result in a completed investment. The Company may syndicate a
portion of this investment.
100
Schedule 12-14
Fifth
Street Finance Corp.
Schedule
of Investments in and Advances to Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees or
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Dividends
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
at
|
|
|
|
Credited in
|
|
|
at October 1,
|
|
|
Gross
|
|
|
Gross
|
|
|
September 30,
|
|
Portfolio Company/Type of Investment(1)
|
|
Income(2)
|
|
|
2008
|
|
|
Additions(3)
|
|
|
Reductions(4)
|
|
|
2009
|
|
|
Control Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lighting by Gregory, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 9.75% due 2/28/2013
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,044,732
|
|
|
$
|
(625,105
|
)
|
|
$
|
2,419,627
|
|
First Lien Term Loan B, 14.5% due 2/28/2013
|
|
|
|
|
|
|
|
|
|
|
4,138,390
|
|
|
|
(866,910
|
)
|
|
|
3,271,480
|
|
97.38% membership interest
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control Investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,483,122
|
|
|
$
|
(1,792,015
|
)
|
|
$
|
5,691,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCurrance, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 16.875% due 3/21/2012
|
|
|
1,856,153
|
|
|
|
9,888,488
|
|
|
|
511,758
|
|
|
|
(213,745
|
)
|
|
|
10,186,501
|
|
First Lien Term Loan B, 16.875% due 3/21/2012
|
|
|
573,147
|
|
|
|
3,581,245
|
|
|
|
367,826
|
|
|
|
(1,030,000
|
)
|
|
|
2,919,071
|
|
1.75% Preferred Membership Interest in OCurrance Holding
Co., LLC
|
|
|
|
|
|
|
130,413
|
|
|
|
|
|
|
|
|
|
|
|
130,413
|
|
3.3% Membership Interest in OCurrance Holding Co., LLC
|
|
|
|
|
|
|
97,156
|
|
|
|
|
|
|
|
(43,325
|
)
|
|
|
53,831
|
|
CPAC, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 17.5% due 4/13/2012
|
|
|
1,318,008
|
|
|
|
3,626,497
|
|
|
|
4,932,164
|
|
|
|
(4,110,000
|
)
|
|
|
4,448,661
|
|
2,297 shares of Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elephant & Castle, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan, 15.5% due 4/20/2012
|
|
|
1,472,389
|
|
|
|
7,145,198
|
|
|
|
449,845
|
|
|
|
(283,439
|
)
|
|
|
7,311,604
|
|
7,500 shares of Series A Preferred Stock
|
|
|
|
|
|
|
196,386
|
|
|
|
296,083
|
|
|
|
|
|
|
|
492,469
|
|
MK Network, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan A, 13.5% due 6/1/2012
|
|
|
1,462,272
|
|
|
|
9,115,152
|
|
|
|
161,959
|
|
|
|
(243,285
|
)
|
|
|
9,033,826
|
|
First Lien Term Loan B, 17.5% due 6/1/2012
|
|
|
872,070
|
|
|
|
|
|
|
|
5,581,544
|
|
|
|
(418,000
|
)
|
|
|
5,163,544
|
|
First Lien Revolver, Prime + 1.5% (10% floor), due 6/1/2010
|
|
|
17,111
|
|
|
|
(11,113
|
)
|
|
|
17,113
|
|
|
|
(6,000
|
)
|
|
|
|
|
11,030 Membership Units
|
|
|
|
|
|
|
760,441
|
|
|
|
186,780
|
|
|
|
(947,221
|
)
|
|
|
|
|
Rose Tarlow, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 12% due 1/25/2014
|
|
|
1,128,302
|
|
|
|
9,796,648
|
|
|
|
177,084
|
|
|
|
(9,973,732
|
)
|
|
|
|
|
First Lien Revolver, LIBOR+4% (9% floor) due 1/25/2014
|
|
|
123,460
|
|
|
|
323,333
|
|
|
|
1,214,827
|
|
|
|
(1,538,160
|
)
|
|
|
|
|
6.9% membership interest in RTMH Acquisition Company
|
|
|
|
|
|
|
591,939
|
|
|
|
|
|
|
|
(591,939
|
)
|
|
|
|
|
0.1% membership interest in RTMH Acquisition Company
|
|
|
|
|
|
|
11,607
|
|
|
|
|
|
|
|
(11,607
|
)
|
|
|
|
|
Martini Park, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loan, 14% due 2/20/2013
|
|
|
475,732
|
|
|
|
2,719,236
|
|
|
|
220,000
|
|
|
|
(870,933
|
)
|
|
|
2,068,303
|
|
5% membership interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caregiver Services, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Lien Term Loan A, LIBOR+6.85% (12% floor) due 2/25/2013
|
|
|
1,263,662
|
|
|
|
9,381,973
|
|
|
|
288,785
|
|
|
|
(1,445,358
|
)
|
|
|
8,225,400
|
|
Second Lien Term Loan B, 16.5% due 2/25/2013
|
|
|
2,806,310
|
|
|
|
12,811,951
|
|
|
|
1,101,389
|
|
|
|
(405,002
|
)
|
|
|
13,508,338
|
|
1,080,399 shares of Series A Preferred Stock
|
|
|
|
|
|
|
1,183,867
|
|
|
|
22,732
|
|
|
|
|
|
|
|
1,206,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Affiliate Investments
|
|
$
|
13,368,616
|
|
|
$
|
71,350,417
|
|
|
$
|
15,529,889
|
|
|
$
|
(22,131,746
|
)
|
|
$
|
64,748,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Control & Affiliate Investments
|
|
$
|
13,368,616
|
|
|
$
|
71,350,417
|
|
|
$
|
23,013,011
|
|
|
$
|
(23,923,761
|
)
|
|
$
|
70,439,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
This schedule should be read in connection with the
Companys Consolidated Financial Statements, including the
Schedules of Investments and Notes to the Consolidated Financial
Statements.
|
|
|
(1) |
|
The principal amount and ownership detail as shown in the
Consolidated Schedules of Investments. |
|
(2) |
|
Represents the total amount of interest, fees and dividends
credited to income for the portion of the year an investment was
included in the Control or Non-Control/Non-Affiliate categories,
respectively. |
|
(3) |
|
Gross additions include increases in the cost basis of
investments resulting from new portfolio investments, follow-on
Investments and accrued PIK interest, and the exchange of one or
more existing securities for one or more new securities. Gross
additions also include net increases in unrealized appreciation
or net decreases in unrealized depreciation as well as the
movement of an existing portfolio company into this category or
out of a different category. |
|
(4) |
|
Gross reductions include decreases in the cost basis of
investment resulting from principal payments or sales and
exchanges of one or more existing securities for one or more new
securities. Gross reductions also include net increases in
unrealized depreciation or net decreases in unrealized
appreciation as well as the movement of an existing portfolio
company out of this category and into a different category. |
102
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
As of September 30, 2009 (the end of the period covered by
this report), management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
and
15d-15(e) of
the Securities and Exchange Act of 1934). Based on that
evaluation, our management, including the Chief Executive
Officer and Chief Financial Officer, concluded that, at the end
of such period, our disclosure controls and procedures were
effective and provided reasonable assurance that information
required to be disclosed in our periodic SEC filings is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. However, in evaluating the
disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of such possible controls and procedures.
|
|
(b)
|
Managements
Report on Internal Control Over Financial Reporting
|
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, and for
performing an assessment of the effectiveness of internal
control over financial reporting as of September 30, 2009.
Internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive and
principal financial officers, or persons performing similar
functions, and effected by our Board of Directors, management
and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions
and dispositions of assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures are being made only in accordance with
authorizations; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management performed an assessment of the effectiveness of our
internal control over financial reporting as of
September 30, 2009 based upon the criteria set forth in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment, management
determined that our internal control over financial reporting
was effective as of September 30, 2009.
103
|
|
(c)
|
Attestation
Report of the Independent Registered Public Accounting
Firm
|
Refer to the Report of the Independent Registered Public
Accounting Firm contained in Item 8 Consolidated Financial
Statements and Supplementary Data of this annual report on
Form 10-K.
|
|
(d)
|
Changes
in Internal Controls Over Financial Reporting
|
Management has not identified any change in our internal control
over financing reporting that occurred during the fourth fiscal
quarter of 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
|
|
Item 9B.
|
Other
Information
|
None
104
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Directors
Information regarding our Board of Directors is set forth below.
We have divided the directors into two groups
independent directors and interested directors. Interested
directors are interested persons of Fifth Street
Finance Corp. as defined in Section 2(a)(19) of the 1940
Act.
The address for each director is
c/o Fifth
Street Finance Corp., 10 Bank Street,
12th
Floor, White Plains, NY 10606.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Expiration of
|
Name
|
|
Age
|
|
Since
|
|
Term
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
Adam C. Berkman
|
|
42
|
|
|
2007
|
|
|
|
2012
|
|
Brian S. Dunn
|
|
38
|
|
|
2007
|
|
|
|
2011
|
|
Byron J. Haney
|
|
48
|
|
|
2007
|
|
|
|
2011
|
|
Frank C. Meyer
|
|
66
|
|
|
2007
|
|
|
|
2010
|
|
Douglas F. Ray
|
|
41
|
|
|
2007
|
|
|
|
2010
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
Leonard M. Tannenbaum
|
|
38
|
|
|
2007
|
|
|
|
2012
|
|
Bernard D. Berman
|
|
38
|
|
|
2009
|
|
|
|
2012
|
|
Executive
Officers
The following persons serve as our executive officers in the
following capacities:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s) Held
|
|
Leonard M. Tannenbaum
|
|
|
38
|
|
|
Chief Executive Officer and President
|
Bernard D. Berman
|
|
|
38
|
|
|
Chief Compliance Officer, Executive Vice President and Secretary
|
William H. Craig
|
|
|
53
|
|
|
Chief Financial Officer
|
Marc A. Goodman
|
|
|
52
|
|
|
Chief Investment Officer
|
The address for each executive officer is
c/o Fifth
Street Finance Corp., 10 Bank Street,
12th
Floor, White Plains, NY 10606.
Biographical
Information
Independent
Directors
|
|
|
|
|
Adam C. Berkman. Mr. Berkman has been a
member of our Board of Directors since December 2007.
Mr. Berkman has over 20 years of experience in
strategy, operations, finance and business development in the
consumer products, importing and manufacturing, wholesale
distribution, business services and information technology
industries. Since September 2007, he has served as chief
operating officer of Adrianna Papell LLC, an apparel company.
From February 2006 to May 2007, Mr. Berkman served as the
chief financial officer of Accessory Network LLC, and from May
2003 to January 2006, he served as the chief financial officer
of Amerex Group, Inc, each of which is an apparel/accessory
firm. Prior to this, from August 2001 to February 2003, he was
the vice president of business development at Accruent, Inc., a
leading real estate performance management software solutions
company. Mr. Berkman also co-founded MyContracts, a
predecessor of Accruent, Inc., and was a member of its Board of
Directors from June 1999 to August 2001. Mr. Berkman is a
Certified Public Accountant who began his career at Price
Waterhouse, a predecessor to PricewaterhouseCoopers LLP, and
earned his B.A. from Duke University and M.B.A. in finance and
accounting from the NYU Stern School of Business.
|
105
|
|
|
|
|
Brian S. Dunn. Mr. Dunn has been a member
of our Board of Directors since December 2007. Mr. Dunn has
over 15 years of marketing, logistical and entrepreneurial
experience. He founded and turned around direct marketing
divisions for several consumer-oriented companies. Since June
2006, Mr. Dunn has been the marketing director for
Lipenwald, Inc., a direct marketing company that markets
collectibles and mass merchandise. Prior to that, from February
2001 to June 2006, he was sole proprietor of BSD
Trading/Consulting. Mr. Dunn graduated from the Wharton
School of the University of Pennsylvania in 1993 with a B.S. in
Economics.
|
|
|
|
Byron J. Haney. Mr. Haney has been a
member of our Board of Directors since December 2007. From 1994
until 2009, Mr. Haney worked for Resurgence Asset
Management LLC, during which time he most recently served as
managing director and chief investment officer. Mr. Haney
previously served on the Board of Directors of Sterling
Chemicals, Inc. and Furniture.com. Mr. Haney has more than
20 years of business experience, including having served as
chief financial officer of a private retail store chain and as
an auditor with Touche Ross & Co., a predecessor of
Deloitte & Touche LLP. Mr. Haney earned his B.S.
in Business Administration from the University of California at
Berkeley and his M.B.A. from the Wharton School of the
University of Pennsylvania.
|
|
|
|
Frank C. Meyer. Mr. Meyer has been a
member of our Board of Directors since December 2007.
Mr. Meyer is a private investor who was chairman of
Glenwood Capital Investments, LLC, an investment adviser
specializing in hedge funds, which he founded in January of 1988
and from which he resigned in January of 2004. As of October of
2000, Glenwood has been a wholly-owned subsidiary of the Man
Group, PLC, an investment adviser based in England specializing
in alternative investment strategies. Since leaving Glenwood in
2004, Mr. Meyer has focused on serving as a director for
various companies. During his career, Mr. Meyer has served
as an outside director on a several companies, including Quality
Systems, Inc. (a public company specializing in software for
medical and dental professionals), Bernard Technologies, Inc. (a
firm specializing in development of industrial processes using
chlorine dioxide), and Centurion Trust Company of Arizona (where
he served as a non-executive Chairman until its purchase by GE
Financial). Currently, he is on the Board of Directors of
Einstein-Noah Restaurant Group, Inc., a firm operating in the
quick casual segment of the restaurant industry, and United
Capital Financial Partners, Inc., a firm that converts
transaction-oriented brokers into fee-based financial planners.
He is also on the Board of Directors of three investment funds
run by Ferox Capital Management, Limited, an investment manager
based in the United Kingdom that specializes in convertible
bonds. Mr. Meyer received his B.A. and M.B.A. from the
University of Chicago.
|
|
|
|
Douglas F. Ray. Mr. Ray has been a member
of our Board of Directors since December 2007. Since August
1995, Mr. Ray has worked for Seavest Inc., a private
investment and wealth management firm based in White Plains, New
York. He currently serves as the president of Seavest Inc.
Mr. Ray has more than 14 years experience acquiring,
developing, financing and managing a diverse portfolio of real
estate investments, including three healthcare properties funds.
Mr. Ray previously served on the Board of Directors of Nat
Nast, Inc., a luxury mens apparel company. Prior to
joining Seavest, Mr. Ray worked in Washington, D.C. on
the staff of U.S. Senator Arlen Specter and as a research
analyst with the Republican National Committee. Mr. Ray
holds a B.A. from the University of Pittsburgh.
|
Interested
Directors
|
|
|
|
|
Leonard M. Tannenbaum,
CFA. Mr. Tannenbaum has been our president
and chief executive officer since October 2007 and the chairman
of our Board of Directors since December 2007. He is also the
managing partner of our investment adviser. Since founding his
first private investment firm in 1998, Mr. Tannenbaum has
founded a number of private investment firms, including Fifth
Street Capital LLC, and he has served as managing member of each
firm. Prior to launching his first firm, Mr. Tannenbaum
gained extensive small-company experience as an equity analyst
for Merrill Lynch and a partner in a $50 million small
company hedge fund. In addition to serving on our Board of
Directors, Mr. Tannenbaum currently serves on the Board of
Directors of several Greenlight Capital affiliated entities
(Greenlight Capital Offshore, Ltd., Greenlight Capital Offshore
Qualified, Ltd., Greenlight Masters Offshore, Ltd., and
Greenlight Masters Offshore I, Ltd.) and has previously served
on the
|
106
|
|
|
|
|
Boards of Directors of five other public companies, including
Einstein Noah Restaurant Group, Inc., Assisted Living Concepts,
Inc., WesTower Communications, Inc., Cortech, Inc. and General
Devices, Inc. Mr. Tannenbaum has also served on four audit
committees and five compensation committees, of which he has
acted as chairperson for one of such audit committees and four
of such compensation committees. Mr. Tannenbaum graduated
from the Wharton School of the University of Pennsylvania, where
he received a B.S. in Economics. Subsequent to his undergraduate
degree from the University of Pennsylvania, Mr. Tannenbaum
received an M.B.A. in Finance from the Wharton School as part of
the Submatriculation Program. He is a holder of the Chartered
Financial Analyst designation and he is also a member of the
Young Presidents Organization.
|
|
|
|
|
|
Bernard D. Berman. Mr. Berman has been
our chief compliance officer since April 2009, and our executive
vice president and secretary since October 2007. Mr. Berman
is also a partner of Fifth Street Management and a partner of
Fifth Street Capital LLC. Mr. Berman joined Fifth Street
Capital LLC in 2004. He is responsible for the structuring of
all investments, overseeing legal issues, and firm-wide risk
management. Mr. Berman has 13 years of legal
experience, including structuring and negotiating a variety of
investment transactions. Prior to joining Fifth Street Capital
LLC, he was a corporate attorney with the law firm
Riemer & Braunstein LLP from 2000 2004.
Mr. Berman graduated from Boston College Law School (cum
laude). He received a B.S. in Finance from Lehigh University
(with high honors).
|
Non-Director
Executive Officers
|
|
|
|
|
William H. Craig. Mr. Craig has been our
chief financial officer since October 2007 and was our chief
compliance officer from December 2007 through April 2009. Prior
to joining Fifth Street, from March 2005 to October 2007,
Mr. Craig was an executive vice president and chief
financial officer of Vital-Signs, Inc., a medical device
manufacturer that was later acquired by General Electric
Companys GE Healthcare unit in October 2008. Prior to
that, from January 2004 to March 2005, he worked as an interim
chief financial officer and Sarbanes-Oxley consultant. From 1999
to 2004, Mr. Craig served as an executive vice president
for finance and administration and chief financial officer for
Matheson Trigas, Inc., a manufacturer and marketer of industrial
gases and related equipment. Mr. Craigs prior
experience includes stints at GE Capital, Deloitte &
Touche LLP, and GMAC, as well as merchant banking.
Mr. Craig has an M.B.A. from Texas A&M University and
a B.A. from Wake Forest University. Mr. Craig is a
Certified Public Accountant.
|
|
|
|
Marc A. Goodman. Mr. Goodman has served
as our chief investment officer since April 2009 and is a senior
partner of Fifth Street Management and is co-head of the
Investment Committee of Fifth Street Management.
Mr. Goodman has over 18 years of experience advising
on, restructuring, and negotiating investments. Mr. Goodman
is responsible for all portfolio management. Prior to joining
Fifth Street Capital LLC in 2004, from 2003 to 2004,
Mr. Goodman was a partner of Triax Capital Advisors, a
consulting firm that provides management and financial advisory
services to distressed companies. Mr. Goodman also served
as the president of Cross River Consulting, Inc. from June 1998
to January 2005. Previously, he was with the law firm of Kramer,
Levin, Naftalis & Frankel LLP and the law firm of
Otterbourg, Steindler, Houston & Rosen, P.C.
Mr. Goodman graduated from Cardozo Law School, and has a
B.A. in Economics from New York University.
|
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934
requires our directors and executive officers, and persons who
own 10% or more of our voting stock, to file reports of
ownership and changes in ownership of our equity securities with
the SEC. Directors, executive officers and 10% or more holders
are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. Based solely on a review of
the copies of those forms furnished to us, or written
representations that no such forms were required, we believe
that our directors, executive officers and 10% or more
beneficial owners complied with all Section 16(a) filing
requirements during the year ended September 30, 2009.
107
Code of
Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that
applies to which applies to, among others, our senior officers,
including our Chief Executive Officer and its Chief Financial
Officer, as well as every officer, director and employee of the
Company. In addition, our investment adviser has adopted a Code
of Ethics applicable to all of its employees. Requests for
copies of either document without charge should be sent in
writing to Fifth Street Finance Corp., 10 Bank Street,
12th
Floor, White Plains, NY 10606. Our Code of Business Conduct and
Ethics is also available on our website at
http://ir.fifthstreetfinance.com/governance.cfm.
If we make any substantive amendment to, or grant a waiver from,
a provision of our Code of Business Conduct and Ethics, we will
promptly disclose the nature of the amendment or waiver on our
website at
http://ir.fifthstreetfinance.com/governance.cfm
as well as file a
Form 8-K.
Audit
Committee
Our Board of Directors has an Audit Committee that is
responsible for selecting, engaging and discharging our
independent accountants, reviewing the plans, scope and results
of the audit engagement with our independent accountants,
approving professional services provided by our independent
accountants (including compensation therefore), reviewing the
independence of our independent accountants and reviewing the
adequacy of our internal control over financial reporting. The
members of the Audit Committee are Messrs. Berkman, Dunn,
and Haney, each of whom is not an interested person of us for
purposes of the 1940 Act and is independent for purposes of the
New York Stock Exchange corporate governance listing standards.
Mr. Haney serves as the chairman of the Audit Committee.
Our Board of Directors has determined that Mr. Haney is
independent as defined in New York Stock Exchange Rule 303A.00
and an audit committee financial expert as defined
under SEC rules.
|
|
Item 11.
|
Executive
Compensation
|
Compensation
of Directors
The following table sets forth compensation of our directors for
the year ended September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
All Other
|
|
|
Name
|
|
Paid in Cash(1)
|
|
Compensation(2)
|
|
Total
|
|
Interested Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Bernard D. Berman
|
|
|
|
|
|
|
|
|
|
|
|
|
Leonard M. Tannenbaum
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Adam C. Berkman
|
|
$
|
50,500
|
|
|
|
|
|
|
$
|
50,500
|
|
Brian S. Dunn
|
|
$
|
56,500
|
|
|
|
|
|
|
$
|
56,500
|
|
Byron J. Haney
|
|
$
|
70,500
|
|
|
|
|
|
|
$
|
70,500
|
|
Frank C. Meyer
|
|
$
|
77,000
|
|
|
|
|
|
|
$
|
77,000
|
|
Douglas F. Ray
|
|
$
|
53,750
|
|
|
|
|
|
|
$
|
53,750
|
|
Bruce E. Toll(3)
|
|
$
|
2,000
|
|
|
|
|
|
|
$
|
2,000
|
|
|
|
|
(1) |
|
For a discussion of the independent directors
compensation, see below. |
|
(2) |
|
We do not maintain a stock or option plan, non-equity incentive
plan or pension plan for our directors. |
|
(3) |
|
Mr. Toll did not stand for re-election at the 2009 annual
meeting and his term expired at such meeting. |
For the year ended September 30, 2009, the independent
directors received an annual retainer fee of $25,000, payable
once per year if the director attended at least 75% of the
meetings held during the previous year, plus $2,000 for each
board meeting in which the director attended in person and
$1,000 for each board meeting in which the director participated
other than in person, and reimbursement of reasonable
out-of-pocket expenses incurred in connection with attending
each board meeting. The independent directors also received
$1,000 for each committee meeting in which they attended in
person and $500 for each committee meeting in which they
participated other than in person, in connection with each
committee meeting of the Board of
108
Directors that they attended, plus reimbursement of reasonable
out-of-pocket expenses incurred in connection with attending
each committee meeting not held concurrently with a board
meeting.
In addition, the Chairman of the Audit Committee received an
annual retainer of $20,000, while the Chairman of the Valuation
Committee and the Chairman of the Nominating and Corporate
Governance Committee each received an annual retainer of $30,000
and $5,000, respectively. No compensation was paid to directors
who are interested persons of the Company as defined in the 1940
Act, except that we paid Mr. Toll all applicable board fees
through the end of his term as director.
Effective as of October 1, 2009, the annual retainer fee
received by the independent directors was increased to $30,000,
payable once per year if the director attends at least 75% of
the meetings held during the previous year, and the annual
retainer fee paid to the chairman of the Valuation Committee of
our Board of Directors was reduced to $20,000 from $30,000.
Compensation
of Executive Officers
None of our executive officers receive direct compensation from
us. The compensation of the principals and other investment
professionals of our investment adviser is paid by our
investment adviser. Compensation paid to Mr. Craig, our
chief financial officer, is set by our administrator, FSC, Inc.,
and is subject to reimbursement by us of an allocable portion of
such compensation for services rendered to us. For fiscal year
2009, we reimbursed FSC, Inc. approximately $704,000 for the
allocable portion of compensation expenses incurred by FSC, Inc.
Pursuant to the administration agreement with FSC, Inc., this
reimbursement includes compensation to Mr. Craig for his
services as chief financial officer, as well as other staff and
support personnel.
Compensation
Committee Interlocks and Insider Participation
The current members of the Compensation Committee are
Messrs. Dunn, Meyer and Ray, each of whom is not an
interested person of us for purposes of the 1940 Act and is
independent for purposes of the NYSE corporate governance
listing standards. Mr. Ray serves as the chairman of the
Compensation Committee. None of the members of the compensation
committee are current or former officers or employees of the
Company. None of the members of the compensation committee has
any relationship required to be disclosed under this caption
under the rules of the SEC.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following table sets forth information with respect to the
beneficial ownership of our common stock by:
|
|
|
|
|
each person known to us to beneficially own 5% or more of the
outstanding shares of our common stock;
|
|
|
|
each of our directors and each executive officers; and
|
|
|
|
all of our directors and executive officers as a group.
|
Beneficial ownership is determined in accordance with the rules
of the SEC and includes voting or investment power with respect
to the securities. Percentage of beneficial ownership is based
on 37,878,987 shares of common stock outstanding as of
November 30, 2009, unless otherwise noted.
109
Unless otherwise indicated, to our knowledge, each stockholder
listed below has sole voting and investment power with respect
to the shares beneficially owned by the stockholder, and
maintains an address
c/o Fifth
Street Finance Corp., 10 Bank Street,
12th
Floor, White Plains, NY 10606.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Shares Owned
|
|
|
Name
|
|
Beneficially
|
|
Percentage
|
|
Stockholders Owning 5% or greater of the Companys
Outstanding Shares
|
|
|
|
|
|
|
|
|
Greenlight Entities(1)
|
|
|
2,259,492
|
|
|
|
5.97
|
%
|
Interested Directors:
|
|
|
|
|
|
|
|
|
Leonard M. Tannenbaum(2)
|
|
|
1,326,557
|
|
|
|
3.50
|
%
|
Bernard D. Berman(3)
|
|
|
10,468
|
|
|
|
*
|
|
Independent Directors:
|
|
|
|
|
|
|
|
|
Adam C. Berkman
|
|
|
1,000
|
|
|
|
*
|
|
Brian S. Dunn(4)
|
|
|
6,000
|
|
|
|
*
|
|
Byron J. Haney(4)
|
|
|
10,000
|
|
|
|
*
|
|
Frank C. Meyer
|
|
|
90,672
|
|
|
|
*
|
|
Douglas F. Ray
|
|
|
2,500
|
|
|
|
*
|
|
Executive Officers:
|
|
|
|
|
|
|
|
|
William H. Craig(5)
|
|
|
7,505
|
|
|
|
*
|
|
Marc A. Goodman
|
|
|
53,207
|
|
|
|
*
|
|
All officers and directors as a group (nine persons)
|
|
|
1,507,909
|
|
|
|
3.98
|
%
|
|
|
|
* |
|
Represents less than 1%. |
|
(1) |
|
Based upon information contained in the Schedule 13G/A
filed by (i) Greenlight Capital, L.L.C.;
(ii) Greenlight Capital, Inc.; (iii) DME Advisors,
L.P.; (iv) DME Advisors GP, L.L.C. and (v) David
Einhorn on February 13, 2009 (collectively, the
Greenlight Entities). Greenlight Capital, L.L.C.
(Greenlight LLC) may be deemed the beneficial owner
of 1,014,322 shares of common stock held for the account of
Greenlight Capital, L.P. (Greenlight Fund), and
Greenlight Capital Qualified, L.P. (Greenlight
Qualified); Greenlight Capital, Inc. (Greenlight
Inc) may be deemed the beneficial owner of
1,678,857 shares of common stock held for the accounts of
Greenlight Fund, Greenlight Qualified and Greenlight Capital
Offshore, Ltd. (Greenlight Offshore). DME Advisors,
L.P. (Advisors) may be deemed the beneficial owner
of 580,635 shares of common stock held for the account of
the managed account for which Advisors acts as investment
manager; DME Advisors GP, L.L.C. (DME GP) may be
deemed the beneficial owner of 580,635 shares of common
stock held for the account of the managed account for which
Advisors acts as investment manager; Mr. Einhorn may be
deemed the beneficial owner of 2,259,492 shares of common
stock. This number consists of: (A) an aggregate of
1,014,322 shares of common stock held for the accounts of
Greenlight Fund and Greenlight Qualified,
(B) 664,535 shares of common stock held for the
account of Greenlight Offshore, and (C) 580,635 shares
of common stock held for the managed account for which Advisors
acts as investment manager. Greenlight LLC is the general
partner of Greenlight Fund and Greenlight Qualified;
Greenlight Inc serves as investment adviser to Greenlight
Offshore. Greenlight, Inc, Greenlight L.L.C., DME Advisors and
DME GP are located at 2 Grand Central Tower, 140 East 45th
Street, 24th Floor, New York, New York 10017. Pursuant to Rule
13d-4, each of the Greenlight Entities disclaims all such
beneficial ownership except to the extent of their pecuniary
interest in any shares of common stock, if applicable. |
|
(2) |
|
The total number of shares reported includes:
1,316,557 shares of which Mr. Tannenbaum is the direct
beneficial owner; 79,867 shares Mr. Tannenbaum holds
in a margin account; 500,000 shares Mr. Tannenbaum has
pledged as security to Wachovia Bank, National Association; and
10,000 shares owned by the Leonard M. & Elizabeth T.
Tannenbaum Foundation, a 501(c)(3) corporation for which
Mr. Tannenbaum serves as the President. With respect to the
10,000 shares held by the Leonard |
110
|
|
|
|
|
M. & Elizabeth T. Tannenbaum Foundation,
Mr. Tannenbaum has sole voting and investment power over
all 10,000 shares, but has no pecuniary interest in, and
expressly disclaims beneficial ownership of, the shares. |
|
(3) |
|
Includes 10,100 shares held in margin accounts. |
|
(4) |
|
Shares are held in a brokerage account and may be used as
security on a margin basis. |
|
(5) |
|
Pursuant to
Rule 16a-1,
Mr. Craig disclaims beneficial ownership of
4,005 shares of common stock owned by his spouse. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
We have entered into an investment advisory agreement with Fifth
Street Management LLC, our investment adviser. Fifth Street
Management is controlled by Leonard M. Tannenbaum, its managing
member and our president and chief executive officer. Pursuant
to the investment advisory agreement, payments will be equal to
(a) a base management fee of 2.0% of the value of our gross
assets, which includes any borrowings for investment purposes,
and (b) an incentive fee based on our performance. The
investment advisory agreement may be terminated by either party
without penalty upon no fewer than 60 days written
notice to the other.
We have also entered into an administration agreement with FSC,
Inc., which is also controlled by Mr. Tannenbaum. Pursuant
to the administration agreement with FSC, Inc., FSC, Inc. will
furnish us with the facilities and administrative services
necessary to conduct our day-to-day operations, including
equipment, clerical, bookkeeping and recordkeeping services at
such facilities. In addition, FSC, Inc. will assist us in
connection with the determination and publishing of our net
asset value, the preparation and filing of tax returns and the
printing and dissemination of reports to our stockholders. We
will pay FSC, Inc. our allocable portion of overhead and other
expenses incurred by it in performing its obligations under the
administration agreement, including a portion of the rent and
the compensation of our chief financial officer and his staff,
and the staff of our chief compliance officer. The
administration agreement may be terminated by either party
without penalty upon no fewer than 60 days written
notice to the other.
We have also entered into a license agreement with Fifth Street
Capital LLC pursuant to which Fifth Street Capital LLC has
agreed to grant us a non-exclusive, royalty-free license to use
the name Fifth Street. Fifth Street Capital LLC is
controlled by Mr. Tannenbaum. Under this agreement, we will
have a right to use the Fifth Street name, for so
long as Fifth Street Management LLC or one of its affiliates
remains our investment adviser. Other than with respect to this
limited license, we will have no legal right to the Fifth
Street name.
Review,
Approval or Ratification of Transactions with Related
Parties
In the ordinary course of business, we enter into transactions
with portfolio companies that may be considered related party
transactions. In order to ensure that we do not engage in any
prohibited transactions with any persons affiliated with us, we
have implemented certain policies and procedures whereby our
executive officers screen each of our transactions for any
possible affiliations, close or remote, between the proposed
portfolio investment, us, companies controlled by us and our
employees and directors. We will not enter into any agreements
unless and until we are satisfied that no affiliations
prohibited by the 1940 Act exist or, if such affiliations exist,
we have taken appropriate actions to seek board review and
receive approval or exemptive relief for such transaction. Our
Board reviews these procedures on an annual basis.
The Audit Committee of our Board of Directors is required to
review and approve any transactions with related parties (as
such term is defined in Item 404 of
Regulation S-K).
In addition, our code of business conduct and ethics, which is
applicable to all our all employees, officers and directors,
requires that all employees, officers and directors avoid any
conflict, or the appearance of a conflict, between an
individuals personal interests and our interests. Our code
of business conduct and ethics is available on our website.
111
Director
Independence
In accordance with rules of the NYSE, the Board annually
determines the independence of each director. No director is
considered independent unless the Board has determined that he
or she has no material relationship with us. We monitor the
status of its directors and officers through the activities of
our Nominating and Corporate Governance Committee and through a
questionnaire to be completed by each director no less
frequently than annually, with updates periodically if
information provided in the most recent questionnaire has
changed.
In order to evaluate the materiality of any such relationship,
the Board uses the definition of director independence set forth
in the NYSE Listed Company Manual. Section 303A.00 of the
NYSE Listed Company Manual provides that business development
companies, or BDCs, are required to comply with all of the
provisions of Section 303A applicable to domestic issuers
other than Sections 303A.02, the section that defines
director independence. Section 303A.00 provides that a
director of a BDC shall be considered to be independent if he or
she is not an interested person, as defined in
Section 2(a)(19) of the 1940 Act. Section 2(a)(19) of
the 1940 Act defines an interested person to
include, among other things, any person who has, or within the
last two years had, a material business or professional
relationship with us.
The Board has determined that each of the directors is
independent and has no relationship with the us, except as a
director and stockholder of ours, with the exception of Bernard
D. Berman and Leonard M. Tannenbaum. Messrs. Berman and
Tannenbaum are interested persons due to their positions as
officers.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The following table presents fees for professional services
rendered by Grant Thornton LLP for fiscal years 2008 and 2009.
|
|
|
|
|
|
|
|
|
|
|
2008(1)
|
|
|
2009
|
|
|
Audit Fees
|
|
$
|
351,020
|
|
|
$
|
587,239
|
|
Aggregate Non-Audit Fees:
|
|
|
|
|
|
|
|
|
Audit-Related Fees
|
|
|
313,200
|
|
|
|
188,142
|
|
Tax Fees
|
|
|
35,070
|
|
|
|
55,560
|
|
All Other Fees
|
|
|
3,675
|
|
|
|
|
|
Total Aggregate Non-Audit Fees
|
|
|
351,945
|
|
|
|
243,702
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
702,965
|
|
|
$
|
830,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Certain prior year amounts have been reclassified to conform to
current year presentation. |
Audit Fees. Audit fees consist of fees billed
for professional services rendered for the audit of our year-end
financial statements and services that are normally provided by
Grant Thornton LLP in connection with statutory and regulatory
filings.
Audit-Related Fees. Audit-related services
consist of fees billed for assurance and related services that
are reasonably related to the performance of the audit or review
of our financial statements and are not reported under
Audit Fees. These services include attest services
that are not required by statute or regulation and consultations
concerning financial accounting and reporting standards.
Tax Fees. Tax fees consist of fees billed for
professional services for tax compliance, tax advice and tax
planning. These services include assistance regarding federal,
state, and local tax compliance.
All Other Fees. All other fees would include
fees for products and services other than the services reported
above.
The Audit Committee of the Board has established a pre-approval
policy that describes the permitted audit, audit-related, tax,
and other services to be provided by Grant Thornton LLP, the
Companys independent registered public accounting firm.
Pursuant to the policy, the Audit Committee pre-approves the
audit and non-
112
audit services performed by the independent registered public
accounting firm in order to assure that the provision of such
service does not impair the firms independence.
Any requests for audit, audit-related, tax, and other services
that have not received general pre-approval must be submitted to
the Audit Committee for specific pre-approval, irrespective of
the amount, and cannot commence until such approval has been
granted. Normally, pre-approval is provided at regularly
scheduled meetings of the Audit Committee. However, the Audit
Committee may delegate pre-approval authority to one or more of
its members. The member or members to whom such authority is
delegated shall report any pre-approval decisions to the Audit
Committee at its next scheduled meeting. The Audit Committee
does not delegate its responsibilities to pre-approve services
performed by the independent registered public accounting firm
to management.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following documents are filed or incorporated by reference
as part of this Annual Report:
|
|
1.
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
|
Page
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
64
|
|
Consolidated Balance Sheets as of September 30, 2009 and
2008
|
|
|
66
|
|
Statements of Operations for the Years Ended September 30,
2009 and 2008 and the Period February 15 through
September 30, 2007
|
|
|
67
|
|
Consolidated Statements of Changes in Net Assets for the Years
Ended September 30, 2009 and 2008 and the Period February
15 through September 30, 2007
|
|
|
68
|
|
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2009 and 2008 and the Period February 15
through September 30, 2007
|
|
|
69
|
|
Consolidated Schedules of Investments as of September 30,
2009 and 2008
|
|
|
70
|
|
Notes to Consolidated Financial Statements
|
|
|
78
|
|
|
|
2.
|
Financial
Statement Schedule
|
The following financial statement schedule is filed herewith:
Schedule 12-14 Investments in and advances to
affiliates 101
113
|
|
3.
|
Exhibits
required to be filed by Item 601 of Regulation
S-K
|
The following exhibits are filed as part of this report or
hereby incorporated by reference to exhibits previously filed
with the SEC:
|
|
|
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of the Registrant
(Incorporated by reference to Exhibit 3.1 filed with Fifth
Street Finance Corp.s Form 8-A (File No. 001-33901) filed
on January 2, 2008).
|
|
3
|
.2
|
|
Certificate of Amendment to the Registrants Restated
Certificate of Incorporation (Incorporated by reference to
Exhibit (a)(2) filed with Fifth Street Finance Corp.s
Registration Statement on Form N-2 (File No. 333-146743) filed
on June 6, 2008).
|
|
3
|
.3
|
|
Certificate of Correction to the Certificate of Amendment to the
Registrants Restated Certificate of Incorporation
(Incorporated by reference to Exhibit (a)(3) filed with Fifth
Street Finance Corp.s Registration Statement on Form N-2
(File No. 333-146743) filed on June 6, 2008).
|
|
3
|
.4
|
|
Amended and Restated By-laws of the Registrant (Incorporated by
reference to Exhibit 3.2 filed with Fifth Street Finance
Corp.s Form 8-A (File No. 001-33901) filed on January 2,
2008).
|
|
4
|
.1
|
|
Form of Common Stock Certificate (Incorporated by reference to
Exhibit 4.1 filed with Fifth Street Finance Corp.s Form
8-A (File No. 001-33901) filed on January 2, 2008).
|
|
10
|
.1
|
|
Amended and Restated Dividend Reinvestment Plan (Incorporated by
reference to Exhibit (e) filed with Fifth Street Finance
Corp.s Registration Statement on Form N-2 (File No.
333-146743) filed on June 6, 2008).
|
|
10
|
.2
|
|
Form of Amended and Restated Investment Advisory Agreement by
and between Registrant and Fifth Street Management LLC
(Incorporated by reference to Exhibit (g) filed with Fifth
Street Finance Corp.s Registration Statement on Form N-2
(File No. 333-146743) filed on May 8, 2008).
|
|
10
|
.3
|
|
Custodial Agreement (Incorporated by reference to Exhibit (j)
filed with Fifth Street Finance Corp.s Registration
Statement on Form N-2 (File No. 333-146743) filed on June 6,
2008).
|
|
10
|
.4
|
|
Form of Administration Agreement by and between Registrant and
FSC, Inc. (Incorporated by reference to Exhibit (k)(1) filed
with Fifth Street Finance Corp.s Registration Statement on
Form N-2
(File No. 333-146743) filed on May 8, 2008).
|
|
10
|
.5
|
|
Form of License Agreement by and between Registrant and Fifth
Street Capital LLC (Incorporated by reference to Exhibit (k)(2)
filed with Fifth Street Finance Corp.s Registration
Statement on Form N-2 (File No. 333-146743) filed on May 8,
2008).
|
|
10
|
.6*
|
|
Loan and Servicing Agreement among Fifth Street Funding, LLC,
Registrant, Wells Fargo Securities, LLC, Wachovia Bank, National
Association, and Wells Fargo Bank, National Association, dated
as of November 16, 2009.
|
|
10
|
.7*
|
|
Purchase and Sale Agreement by and between Registrant and Fifth
Street Funding, LLC, dated as of November 16, 2009.
|
|
10
|
.8*
|
|
Pledge Agreement by and between Registrant and Wells Fargo Bank,
National Association, dated as of November 16, 2009.
|
|
21
|
|
|
Subsidiaries of Registrant and jurisdiction of
incorporation/organizations:
Fifth Street Funding, LLC Delaware
Fifth Street Mezzanine Partners IV, L.P.
Delaware
FSMP IV GP, LLC Delaware
FSFC Holdings, Inc. Delaware
FSF/MP Holdings, Inc. Delaware
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934.
|
|
32
|
.1*
|
|
Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
|
|
32
|
.2*
|
|
Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U. S. C. 1350).
|
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIFTH STREET FINANCE CORP.
|
|
|
|
By:
|
/s/ Leonard
M. Tannenbaum
|
Leonard M. Tannenbaum
Chairman, President and Chief Executive Officer
William H. Craig
Chief Financial Officer
Date: December 9, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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|
|
|
|
|
|
Signature
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|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ LEONARD
M. TANNENBAUM
Leonard
M. Tannenbaum
|
|
Chairman, President and Chief Executive Officer (principal
executive officer)
|
|
December 9, 2009
|
|
|
|
|
|
/s/ WILLIAM
H. CRAIG
William
H. Craig
|
|
Chief Financial Officer (principal financial officer)
|
|
December 9, 2009
|
|
|
|
|
|
/s/ BERNARD
D. BERMAN
Bernard
D. Berman
|
|
Secretary, Executive Vice President and Chief Compliance Officer
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|
December 9, 2009
|
|
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|
/s/ ADAM
C. BERKMAN
Adam
C. Berkman
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|
Director
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|
December 9, 2009
|
|
|
|
|
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/s/ BRIAN
S. DUNN
Brian
S. Dunn
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|
Director
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|
December 9, 2009
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|
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|
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/s/ BYRON
J. HANEY
Byron
J. Haney
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Director
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|
December 9, 2009
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|
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|
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/s/ FRANK
C. MEYER
Frank
C. Meyer
|
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Director
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|
December 9, 2009
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|
|
|
|
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/s/ DOUGLAS
F. RAY
Douglas
F. Ray
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|
Director
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|
December 9, 2009
|
115
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
Description
|
|
|
10
|
.6
|
|
Loan and Servicing Agreement among Registrant, Fifth Street
Funding, LLC, Wells Fargo Securities, LLC, Wachovia Bank,
National Association, and Wells Fargo Bank, National
Association, dated as of November 16, 2009.
|
|
10
|
.7
|
|
Purchase and Sale Agreement by and between Registrant and Fifth
Street Funding, LLC, dated as of November 16, 2009.
|
|
10
|
.8
|
|
Pledge Agreement by and between Registrant and Wells Fargo Bank,
National Association, dated as of November 16, 2009.
|
|
31
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the
Sarbanes-Oxley
Act of 2002 (18 U. S. C. 1350).
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U. S. C. 1350).
|
116
exv10w6
Exhibit 10.6
EXECUTION COPY
U.S. Up to $100,000,000
LOAN AND SERVICING AGREEMENT
Dated as of November 16, 2009
Among
FIFTH STREET FUNDING, LLC,
as the Borrower
FIFTH STREET FINANCE CORP.,
as the Servicer and the Transferor
WELLS FARGO SECURITIES, LLC,
as the Administrative Agent
EACH OF THE CONDUIT LENDERS AND INSTITUTIONAL LENDERS FROM TIME TO
TIME PARTY HERETO,
as the Lenders
EACH OF THE LENDER AGENTS FROM TIME TO TIME PARTY HERETO,
as the Lender Agents
and
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as the Collateral Agent, Account Bank and Collateral Custodian
TABLE OF CONTENTS
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Page |
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ARTICLE I. DEFINITIONS |
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1 |
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|
|
Section 1.01 Certain Defined Terms |
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1 |
|
Section 1.02 Other Terms |
|
|
36 |
|
Section 1.03 Computation of Time Periods |
|
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36 |
|
Section 1.04 Interpretation |
|
|
36 |
|
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|
|
|
|
ARTICLE II. THE FACILITY |
|
|
36 |
|
|
|
|
|
|
Section 2.01 Variable Funding Note and Advances |
|
|
36 |
|
Section 2.02 Procedure for Advances |
|
|
37 |
|
Section 2.03 Determination of Yield |
|
|
39 |
|
Section 2.04 Remittance Procedures |
|
|
39 |
|
Section 2.05 Instructions to the Collateral Agent and the Account Bank |
|
|
44 |
|
Section 2.06 Borrowing Base Deficiency Payments |
|
|
45 |
|
Section 2.07 Substitution and Sale of Loan Assets; Affiliate Transactions |
|
|
45 |
|
Section 2.08 Payments and Computations, Etc |
|
|
50 |
|
Section 2.09 Non-Usage Fee |
|
|
50 |
|
Section 2.10 Increased Costs; Capital Adequacy |
|
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51 |
|
Section 2.11 Taxes |
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52 |
|
Section 2.12 Collateral Assignment of Agreements |
|
|
54 |
|
Section 2.13 Grant of a Security Interest |
|
|
54 |
|
Section 2.14 Evidence of Debt |
|
|
55 |
|
Section 2.15 Survival of Representations and Warranties |
|
|
55 |
|
Section 2.16 Release of Loan Assets |
|
|
55 |
|
Section 2.17 Treatment of Amounts Received by the Borrower |
|
|
56 |
|
Section 2.18 Prepayment; Termination |
|
|
56 |
|
Section 2.19 Extension of Stated Maturity Date and Reinvestment Period |
|
|
57 |
|
Section 2.20 Collections and Allocations |
|
|
57 |
|
Section 2.21 Reinvestment of Principal Collections |
|
|
58 |
|
Section 2.22 Increase of Commitment; Maximum Facility Amount |
|
|
59 |
|
|
|
|
|
|
ARTICLE III. CONDITIONS PRECEDENT |
|
|
60 |
|
|
|
|
|
|
Section 3.01 Conditions Precedent to Effectiveness |
|
|
60 |
|
i
TABLE OF CONTENTS
(continued)
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|
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Page |
|
|
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Section 3.02 Conditions Precedent to All Advances |
|
|
61 |
|
Section 3.03 Advances Do Not Constitute a Waiver |
|
|
63 |
|
Section 3.04 Conditions to Pledges of Loan Assets |
|
|
63 |
|
|
|
|
|
|
ARTICLE IV. REPRESENTATIONS AND WARRANTIES |
|
|
65 |
|
|
|
|
|
|
Section 4.01 Representations and Warranties of the Borrower |
|
|
65 |
|
Section 4.02 Representations and Warranties of the Borrower Relating to the Agreement and the Collateral Portfolio |
|
|
73 |
|
Section 4.03 Representations and Warranties of the Servicer |
|
|
73 |
|
Section 4.04 Representations and Warranties of the Collateral Agent |
|
|
77 |
|
Section 4.05 Representations and Warranties of each Lender |
|
|
78 |
|
Section 4.06 Representations and Warranties of the Collateral Custodian |
|
|
78 |
|
|
|
|
|
|
ARTICLE V. GENERAL COVENANTS |
|
|
79 |
|
|
|
|
|
|
Section 5.01 Affirmative Covenants of the Borrower |
|
|
79 |
|
Section 5.02 Negative Covenants of the Borrower |
|
|
85 |
|
Section 5.03 Affirmative Covenants of the Servicer |
|
|
88 |
|
Section 5.04 Negative Covenants of the Servicer |
|
|
92 |
|
Section 5.05 Affirmative Covenants of the Collateral Agent |
|
|
94 |
|
Section 5.06 Negative Covenants of the Collateral Agent |
|
|
94 |
|
Section 5.07 Affirmative Covenants of the Collateral Custodian |
|
|
94 |
|
Section 5.08 Negative Covenants of the Collateral Custodian |
|
|
95 |
|
Section 5.09 Covenants of the Borrower Relating to Hedging of Loan Assets |
|
|
95 |
|
|
|
|
|
|
ARTICLE VI. ADMINISTRATION AND SERVICING OF CONTRACTS |
|
|
96 |
|
|
|
|
|
|
Section 6.01 Appointment and Designation of the Servicer |
|
|
96 |
|
Section 6.02 Duties of the Servicer |
|
|
98 |
|
Section 6.03 Authorization of the Servicer |
|
|
100 |
|
Section 6.04 Collection of Payments; Accounts |
|
|
101 |
|
Section 6.05 Realization Upon Loan Assets |
|
|
103 |
|
Section 6.06 Servicing Compensation |
|
|
103 |
|
Section 6.07 Payment of Certain Expenses by Servicer |
|
|
103 |
|
Section 6.08 Reports to the Administrative Agent; Account Statements;
Servicing Information |
|
|
103 |
|
ii
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
Section 6.09 Annual Statement as to Compliance |
|
|
105 |
|
Section 6.10 Annual Independent Public Accountants
Servicing Reports |
|
|
105 |
|
Section 6.11 The Servicer Not to Resign |
|
|
106 |
|
|
|
|
|
|
ARTICLE VII. EVENTS OF DEFAULT |
|
|
106 |
|
|
|
|
|
|
Section 7.01 Events of Default |
|
|
106 |
|
Section 7.02 Additional Remedies of the Administrative Agent |
|
|
109 |
|
|
|
|
|
|
ARTICLE VIII. INDEMNIFICATION |
|
|
111 |
|
|
|
|
|
|
Section 8.01 Indemnities by the Borrower |
|
|
111 |
|
Section 8.02 Indemnities by Servicer |
|
|
115 |
|
Section 8.03 Legal Proceedings |
|
|
117 |
|
Section 8.04 After-Tax Basis |
|
|
117 |
|
|
|
|
|
|
ARTICLE IX. THE ADMINISTRATIVE AGENT AND LENDER AGENTS |
|
|
117 |
|
|
|
|
|
|
Section 9.01 The Administrative Agent |
|
|
117 |
|
Section 9.02 The Lender Agents |
|
|
121 |
|
|
|
|
|
|
ARTICLE X. COLLATERAL AGENT |
|
|
123 |
|
|
|
|
|
|
Section 10.01 Designation of Collateral Agent |
|
|
123 |
|
Section 10.02 Duties of Collateral Agent |
|
|
123 |
|
Section 10.03 Merger or Consolidation |
|
|
126 |
|
Section 10.04 Collateral Agent Compensation |
|
|
126 |
|
Section 10.05 Collateral Agent Removal |
|
|
126 |
|
Section 10.06 Limitation on Liability |
|
|
126 |
|
Section 10.07 Collateral Agent Resignation |
|
|
128 |
|
|
|
|
|
|
ARTICLE XI. MISCELLANEOUS |
|
|
128 |
|
|
|
|
|
|
Section 11.01 Amendments and Waivers |
|
|
128 |
|
Section 11.02 Notices, Etc |
|
|
129 |
|
Section 11.03 No Waiver; Remedies |
|
|
129 |
|
Section 11.04 Binding Effect; Assignability; Multiple Lenders |
|
|
129 |
|
Section 11.05 Term of This Agreement |
|
|
130 |
|
Section 11.06 GOVERNING LAW; JURY WAIVER |
|
|
130 |
|
Section 11.07 Costs, Expenses and Taxes |
|
|
130 |
|
iii
TABLE OF CONTENTS
(continued)
|
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
Section 11.08 No Proceedings |
|
|
131 |
|
Section 11.09 Recourse Against Certain Parties |
|
|
131 |
|
Section 11.10 Execution in Counterparts; Severability; Integration |
|
|
133 |
|
Section 11.11 Consent to Jurisdiction; Service of Process |
|
|
133 |
|
Section 11.12 Characterization of Conveyances Pursuant to the Purchase and
Sale Agreement |
|
|
133 |
|
Section 11.13 Confidentiality |
|
|
134 |
|
Section 11.14 Non-Confidentiality of Tax Treatment |
|
|
136 |
|
Section 11.15 Waiver of Set Off |
|
|
136 |
|
Section 11.16 Headings and Exhibits |
|
|
136 |
|
Section 11.17 Ratable Payments |
|
|
136 |
|
Section 11.18 Failure of Borrower or Servicer to Perform Certain Obligations |
|
|
137 |
|
Section 11.19 Power of Attorney |
|
|
137 |
|
Section 11.20 Delivery of Termination Statements, Releases, etc |
|
|
137 |
|
|
|
|
|
|
ARTICLE XII. COLLATERAL CUSTODIAN |
|
|
137 |
|
|
|
|
|
|
Section 12.01 Designation of Collateral Custodian |
|
|
137 |
|
Section 12.02 Duties of Collateral Custodian |
|
|
138 |
|
Section 12.03 Merger or Consolidation |
|
|
141 |
|
Section 12.04 Collateral Custodian Compensation |
|
|
141 |
|
Section 12.05 Collateral Custodian Removal |
|
|
141 |
|
Section 12.06 Limitation on Liability |
|
|
141 |
|
Section 12.07 Collateral Custodian Resignation |
|
|
142 |
|
Section 12.08 Release of Documents |
|
|
143 |
|
Section 12.09 Return of Required Loan Documents |
|
|
143 |
|
Section 12.10 Access to Certain Documentation and Information Regarding the
Collateral Portfolio; Audits of Servicer |
|
|
144 |
|
Section 12.11 Bailment |
|
|
144 |
|
iv
LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
|
|
|
SCHEDULE I
|
|
Conditions Precedent Documents |
SCHEDULE II
|
|
Prior Names, Tradenames, Fictitious Names and Doing Business
As Names |
SCHEDULE III
|
|
Eligibility Criteria |
SCHEDULE IV
|
|
Agreed-Upon Procedures For Independent Public Accountants |
SCHEDULE V
|
|
Loan Asset Schedule |
EXHIBITS
|
|
|
EXHIBIT A
|
|
Form of Approval Notice |
EXHIBIT B
|
|
Form of Assignment of Mortgage |
EXHIBIT C
|
|
Form of Borrowing Base Certificate |
EXHIBIT D
|
|
Form of Disbursement Request |
EXHIBIT E
|
|
Form of Joinder Supplement |
EXHIBIT F
|
|
Form of Notice of Borrowing |
EXHIBIT G
|
|
Form of Notice of Reduction (Reduction of Advances Outstanding) |
EXHIBIT H
|
|
[Reserved] |
EXHIBIT I
|
|
Form of Variable Funding Note |
EXHIBIT J
|
|
Form of Notice and Request for Consent |
EXHIBIT K
|
|
Form of Certificate of Closing Attorneys |
EXHIBIT L
|
|
Form of Servicing Report |
EXHIBIT M
|
|
Form of Servicers Certificate (Servicing Report) |
EXHIBIT N
|
|
Form of Release of Required Loan Documents |
EXHIBIT O
|
|
Form of Transferee Letter |
EXHIBIT P
|
|
Form of Power of Attorney for Servicer |
EXHIBIT Q
|
|
Form of Power of Attorney for Borrower |
EXHIBIT R
|
|
Form of Servicers Certificate (Loan Asset Register) |
ANNEXES
-v-
This LOAN AND SERVICING AGREEMENT is made as of November 16, 2009, among:
(1) FIFTH STREET FUNDING, LLC, a Delaware limited liability company (together with its
successors and assigns in such capacity, the Borrower);
(2) FIFTH STREET FINANCE CORP., a Delaware corporation, as the Servicer (as defined
herein) and the Transferor (as defined herein);
(3) EACH OF THE CONDUIT LENDERS FROM TIME TO TIME PARTY HERETO, as a Conduit Lender;
(4) EACH OF THE INSTITUTIONAL LENDERS FROM TIME TO TIME PARTY HERETO, as an
Institutional Lender;
(5) EACH OF THE LENDER AGENTS FROM TIME TO TIME PARTY HERETO, as a Lender Agent;
(6) WELLS FARGO SECURITIES, LLC, as Administrative Agent (Administrative
Agent); and
(7) WELLS FARGO BANK, NATIONAL ASSOCIATION (Wells Fargo), as the Collateral
Agent (together with its successors and assigns in such capacity, the Collateral
Agent), the Account Bank (as defined herein) and the Collateral Custodian (together
with its successors and assigns in such capacity, the Collateral Custodian).
PRELIMINARY STATEMENT
The Lenders have agreed, on the terms and conditions set forth herein, to provide a secured
revolving credit facility which shall provide for Advances under the Variable Funding Note(s) from
time to time in an aggregate principal amount not to exceed the Borrowing Base. The proceeds of the
Advances will be used to finance the Borrowers purchase, on a true sale basis, of Eligible Loan
Assets from the Transferor, approved by the Administrative Agent, pursuant to the Purchase and Sale
Agreement between the Borrower and the Transferor. Accordingly, the parties agree as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01 Certain Defined Terms.
(a) Certain capitalized terms used throughout this Agreement are defined above or in this
Section 1.01.
(b) As used in this Agreement and the exhibits and schedules thereto (each of which is hereby
incorporated herein and made a part hereof), the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
1940 Act means the Investment Company Act of 1940, as amended, and the rules and
regulations promulgated thereunder.
Account Bank means Wells Fargo, in its capacity as the Account Bank pursuant to
each of the Collection Account Agreement and the Unfunded Exposure Account Agreement.
Action has the meaning assigned to that term in Section 8.03.
Additional Amount has the meaning assigned to that term in Section 2.11(a).
Adjusted Borrowing Value means for any Loan Asset, for any date of determination, an
amount equal to the lowest of: (i) the Outstanding Balance of such Loan Asset at such time, and
(ii) the Assigned Value of such Loan Asset at such time multiplied by the Outstanding Balance of
such Loan Asset; provided that the parties hereby agree that the Adjusted Borrowing Value of any
Loan Asset that is no longer an Eligible Loan Asset shall be zero; provided further that the
aggregate Adjusted Borrowing Value for all Loan Assets with respect to a single Obligor and its
Affiliates shall not exceed $15,000,000 (for the avoidance of doubt, companies owned by the same
private equity sponsor shall not be considered Affiliates for purposes of this definition).
Administrative Agent means Wells Fargo Securities, LLC, in its capacity as
administrative agent for the Lender Agents, together with its successors and assigns, including any
successor appointed pursuant to Article IX.
Advance means each loan advanced by the Lenders to the Borrower on an Advance Date
pursuant to Article II.
Advance Date means, with respect to any Advance, the date on which such Advance is
made.
Advance Date Assigned Value means, with respect to any Loan Asset, the value
(expressed as a percentage of the Outstanding Balance of such Loan Asset) equal to the lower of (i)
the purchase price paid by the Borrower to acquire such Loan Asset from the Transferor (expressed
exclusive of accrued interest) or (ii) the value determined by the Administrative Agent, in its
sole reasonable discretion.
Advances Outstanding means, at any time, the sum of the principal amounts of
Advances loaned to the Borrower for the initial and any subsequent borrowings pursuant to
Sections 2.01 and 2.02 as of such time, reduced by the aggregate Available Collections
received and distributed as repayment of principal amounts of Advances outstanding pursuant to
Section 2.04 at or prior to such time and any other amounts received by the Lenders to
repay the principal amounts of Advances outstanding pursuant to Section 2.18 or otherwise
at or prior to such time; provided that the principal amounts of Advances outstanding shall not be
reduced by
-2-
any Available Collections or other amounts if at any time such Available Collections or other
amounts are rescinded or must be returned for any reason.
Affected Party has the meaning assigned to that term in Section 2.10.
Affiliate when used with respect to a Person, means any other Person controlling,
controlled by or under common control with such Person. For the purposes of this definition,
control, when used with respect to any specified Person, means the power to vote 20% or more of
the voting securities of such Person or to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms controlling and controlled have meanings correlative to the foregoing;
provided that for purposes of determining whether any Loan Asset is an Eligible Loan Asset or for
purposes of Section 5.01(b)(xix), the term Affiliate shall not include any Affiliate
relationship which may exist solely as a result of direct or indirect ownership of, or control by,
a common Financial Sponsor.
Agented Note means any Loan Asset (i) originated as a part of a syndicated loan
transaction that has been closed (without regard to any contemporaneous or subsequent syndication
of such Loan Asset) prior to such Loan Asset becoming part of the Collateral Portfolio and (ii)
with respect to which, upon an assignment of the note under the Purchase and Sale Agreement to the
Borrower, the Borrower, as assignee of the note, will have all of the rights but none of the
obligations of the Transferor with respect to such note and the Underlying Collateral.
Agreement means this Loan and Servicing Agreement, as the same may be amended,
restated, supplemented and/or otherwise modified from time to time hereafter.
Applicable Law means for any Person all existing and future laws, rules, regulations
(including proposed, temporary and final income tax regulations), statutes, treaties, codes,
ordinances, permits, certificates, orders, licenses of and interpretations by any Governmental
Authority applicable to such Person (including, without limitation, predatory lending laws, usury
laws, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing
Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade
Commission Act, the Magnuson-Moss Warranty Act, the Federal Reserve Boards Regulations B and
Z, the Servicemembers Civil Relief Act of 2003 and state adaptations of the National Consumer Act
and of the Uniform Consumer Credit Code and all other consumer credit laws and equal credit
opportunity and disclosure laws) and applicable judgments, decrees, injunctions, writs, awards or
orders of any court, arbitrator or other administrative, judicial, or quasi-judicial tribunal or
agency of competent jurisdiction.
Applicable Percentage means, for each Eligible Loan Asset, the percentage assigned
by the Administrative Agent in its sole discretion on the Cut-Off Date and set forth on the
Approval Notice pertaining to such Loan Asset; provided that such percentage shall not be less than
50% or greater than 65%.
Applicable Spread means 4.00% per annum; provided that, at any time after the
occurrence of an Event of Default, the Applicable Spread shall be 5.50%.
-3-
Approval Notice means, with respect to any Eligible Loan Asset, the written notice,
in substantially the form attached hereto as Exhibit A, evidencing the approval by the
Administrative Agent, in its sole discretion, of the conveyance of such Eligible Loan Asset by the
Transferor to the Borrower pursuant to the terms of the Purchase and Sale Agreement and the Loan
Assignment by which the Transferor effects such conveyance.
Asset Coverage Ratio means the ratio, determined on a consolidated basis, without
duplication, in accordance with GAAP, of (a) the fair value of the total assets of Fifth Street and
its Subsidiaries as required by, and in accordance with, the 1940 Act and any orders of the
Securities and Exchange Commission issued to Fifth Street, to be determined by the Board of
Directors of Fifth Street and reviewed by its auditors, less all liabilities (other than
Indebtedness, including Indebtedness hereunder) of Fifth Street and its Subsidiaries, to (b) the
aggregate amount of Indebtedness of Fifth Street and its Subsidiaries; provided that the
calculation of the Asset Coverage Ratio shall not include Subsidiaries that are not required to be
included by the 1940 Act as affected by such orders of the Securities and Exchange Commission
issued to Fifth Street, including, if set forth in any such order, any Subsidiary which is a small
business investment company which is licensed by the Small Business Administration to operate under
the Small Business Investment Act of 1958.
Assigned Documents has the meaning assigned to that term in Section 2.12.
Assigned Value means, with respect to each Loan Asset, as of any date of
determination and expressed as a percentage of the Outstanding Balance of such Loan Asset, the
Advance Date Assigned Value of such Loan Asset, subject to the following terms:
(a) If a Value Adjustment Event of the type described in clauses (ii), (iv) or
(vi) of the definition thereof with respect to such Loan Asset occurs, the Assigned Value
of such Loan Asset will be zero.
(b) If a Value Adjustment Event of the type described in clauses (i), (iii) or
(v) of the definition thereof with respect to such Loan Asset occurs, Assigned Value may
be amended by the Administrative Agent, in its sole discretion; provided that the Assigned Value of
any Priced Loan Asset shall not be less than the price quoted therefor (if any) by such nationally
recognized pricing service as selected by the Administrative Agent. In the event the Borrower
disagrees with the Administrative Agents determination of the Assigned Value of a Loan Asset, the
Borrower may (at its expense) retain any nationally recognized valuation firm reasonably acceptable
to the Administrative Agent to value such Loan Asset and if the value determined by such firm is
greater than the Administrative Agents determination of the Assigned Value, such firms valuation
shall become the Assigned Value of such Loan Asset; provided that the Assigned Value of such Loan
Asset shall be the value assigned by the Administrative Agent until such firm has determined its
value. The Assigned Value of any Loan Asset may be increased at the sole discretion of the
Administrative Agent upon improvement in the Net Leverage Ratio or the Interest Coverage Ratio of
such Loan Asset, as the case may be, as part of a Value Adjustment Event; provided that such
Assigned Value may not increase above the purchase price paid by the Borrower to acquire the Loan
Asset from the Transferor. The Administrative Agent shall promptly notify the Servicer of any
change effected by the Administrative Agent of the Assigned Value of any Loan Asset.
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Assignment of Mortgage means an assignment of the Mortgage, notice of transfer or
equivalent instrument in recordable form sufficient under the laws of the jurisdiction wherein the
related mortgaged property is located to effect the assignment of the Mortgage to the Collateral
Agent, which assignment, notice of transfer or equivalent instrument may be in the form of one or
more blanket assignments covering the Loan Assets secured by mortgaged properties located in the
same jurisdiction, if permitted by Applicable Law, substantially in the form of Exhibit B.
Available Collections means, (a) all cash collections and other cash proceeds with
respect to any Loan Asset, including, without limitation, all Principal Collections, all Interest
Collections, all proceeds of any sale or disposition with respect to such Loan Asset, cash proceeds
or other funds received by the Borrower or the Servicer with respect to any Underlying Collateral
(including from any guarantors), all other amounts on deposit in the Collection Account from time
to time, and all proceeds of Permitted Investments with respect to the Controlled Accounts and (b)
all payments received pursuant to any Hedging Agreement or Hedge Transaction; provided that, for
the avoidance of doubt, Available Collections shall not include amounts on deposit in the
Unfunded Exposure Account which do not represent proceeds of Permitted Investments.
Average Life means, as of any date of determination, the number obtained for each
Loan Asset by (i) summing the products of (A) the number of actual days divided by 360 from such
date of determination to the respective dates of each successive Scheduled Payment of principal of
a Loan Asset and (B) the related amounts of the principal of such Scheduled Payment of principal
and (ii) dividing such sum by the sum of all successive Scheduled Payment of principal of such Loan
Asset.
Bankruptcy Code means Title 11, United States Code, 11 U.S.C. §§ 101 et seq., as
amended from time to time.
Bankruptcy Event shall be deemed to have occurred with respect to a Person if
either:
(i) a case or other proceeding shall be commenced, without the application or consent of such
Person, in any court, seeking the liquidation, reorganization, debt arrangement, dissolution,
winding up, or composition or readjustment of debts of such Person, the appointment of a trustee,
receiver, custodian, liquidator, assignee, sequestrator or the like for such Person or all or
substantially all of its assets, or any similar action with respect to such Person under any law
relating to bankruptcy, insolvency, reorganization, winding up or composition or adjustment of
debts, and such case or proceeding shall continue undismissed, or unstayed and in effect, for a
period of 60 consecutive days; or an order for relief in respect of such Person shall be entered in
an involuntary case under the federal bankruptcy laws or other similar laws now or hereafter in
effect; or
(ii) such Person shall commence a voluntary case or other proceeding under any Bankruptcy Laws
now or hereafter in effect, or shall consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) for
such Person or all or substantially all of its assets, or shall make any general
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assignment for the benefit of creditors, or shall fail to, or admit in writing its inability
to, pay its debts generally as they become due, or, if a corporation or similar entity, its board
of directors or members shall vote to implement any of the foregoing.
Bankruptcy Laws means the Bankruptcy Code and all other applicable liquidation,
conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization,
suspension of payments, or similar debtor relief laws from time to time in effect affecting the
rights of creditors generally.
Bankruptcy Proceeding means any case, action or proceeding before any court or other
Governmental Authority relating to any Bankruptcy Event.
Base Rate means, on any date, a fluctuating per annum interest rate equal to the
higher of (a) the Prime Rate or (b) the Federal Funds Rate plus 1.5%.
Borrower has the meaning assigned to that term in the preamble hereto.
Borrowing Base means, as of any date of determination, an amount equal to the lesser
of:
(a) (i) the aggregate sum of the products of (A) the Applicable Percentage for each Eligible
Loan Asset as of such date and (B) the Adjusted Borrowing Value of such Eligible Loan Asset as of
such date, plus (ii) the amount on deposit in the Principal Collection Account as of such date
plus (iii) the amount on deposit in the Unfunded Exposure Account minus the
Unfunded Exposure Equity Amount; or
(b) (i) the aggregate Adjusted Borrowing Value of all Eligible Loan Assets as of such date
minus (ii) the Minimum Equity Amount, plus (iii) the amount on deposit in the Principal
Collection Account as of such date plus (iv) the amount on deposit in the Unfunded Exposure
Account minus the Unfunded Exposure Equity Amount; or
(c) the Maximum Facility Amount minus the Unfunded Exposure Amount plus
amounts on deposit in the Unfunded Exposure Account;
provided that, for the avoidance of doubt, any Loan Asset which at any time is no longer an
Eligible Loan Asset shall not be included in the calculation of Borrowing Base.
Borrowing Base Certificate means a certificate setting forth the calculation of the
Borrowing Base as of the applicable date of determination substantially in the form of Exhibit
C hereto, prepared by the Servicer.
Borrowing Base Deficiency means, as of any date of determination, the extent to
which the aggregate Advances Outstanding on such date exceeds the Borrowing Base.
Breakage Fee means, for Advances which are repaid (in whole or in part) on any date
other than a Payment Date, the breakage costs, if any, related to such repayment, based upon the
assumption that the Lender funded its loan commitment in the London Interbank Eurodollar market and
using any reasonable attribution or averaging methods which the Lender
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deems appropriate and practical, it hereby being understood that the amount of any loss, costs
or expense payable by the Borrower to any Lender as Breakage Fee shall be determined in the
respective Lender Agents reasonable discretion and shall be conclusive absent manifest error.
Business Day means a day of the year other than (i) Saturday or a Sunday or (ii) any
other day on which commercial banks in New York, New York or the city in which the offices of the
Collateral Agent are authorized or required by applicable law, regulation or executive order to
close; provided, that, if any determination of a Business Day shall relate to an Advance bearing
interest at LIBOR, the term Business Day shall also exclude any day on which banks are not open
for dealings in dollar deposits in the London interbank market. For avoidance of doubt, if the
offices of the Collateral Agent are authorized by applicable law, regulation or executive order to
close but remain open, such day shall not be a Business Day.
Capital Lease Obligations means, with respect to any entity, the obligations of such
entity to pay rent or other amounts under any lease of (or other arrangement conveying the right to
use) real or personal property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of such entity under GAAP, and
the amount of such obligations shall be the capitalized amount thereof determined in accordance
with GAAP.
Change of Control shall be deemed to have occurred if any of the following occur:
(a) the Management Agreement shall fail to be in full force and effect; provided that if,
pursuant to a Fifth Street Affiliate Merger Transaction, the services provided to Fifth Street
under the Management Agreement have been assumed by a Fifth Street Merger Party or by Fifth Street
for its own account, then the foregoing shall not be deemed a Change of Control;
(b) the creation or imposition of any Lien on any limited liability company membership
interest in the Borrower (other than pursuant to the Pledge Agreement);
(c) the failure by Fifth Street to own 100% of the limited liability company membership
interests in the Borrower; or
(d) the dissolution, termination or liquidation in whole or in part, transfer or other
disposition, in each case, of all or substantially all of the assets of, Fifth Street.
Change of Tax Law means any change in application or public announcement of an
official position under or any change in or amendment to the laws (or any regulations or rulings
promulgated thereunder) of any jurisdiction in which an Obligor is organized, or any political
subdivision or taxing authority of any of the foregoing, affecting taxation, or any proposed change
in such laws or change in the official application, enforcement or interpretation of such laws,
regulations or rulings (including a holding by a court of competent jurisdiction), or any other
action taken by a taxing authority or court of competent jurisdiction in the relevant jurisdiction,
or the official proposal of any such action.
Closing Date means November 16, 2009
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Code means the Internal Revenue Code of 1986, as amended.
Collateral Agent has the meaning assigned to that term in the preamble hereto.
Collateral Agent Expenses means the expenses set forth in the Wells Fargo Fee Letter
and any other accrued and unpaid expenses (including attorneys fees, costs and expenses) and
indemnity amounts payable by the Borrower to the Collateral Agent under the Transaction Documents.
Collateral Agent Fees means the fees set forth in the Wells Fargo Fee Letter, as
such fee letter may be amended, restated, supplemented and/or otherwise modified from time to time.
Collateral Agent Termination Notice has the meaning assigned to that term in
Section 10.05.
Collateral Custodian means Wells Fargo, not in its individual capacity, but solely
as collateral custodian pursuant to the terms of this Agreement.
Collateral Custodian Expenses means the expenses set forth in the Wells Fargo Fee
Letter and any other accrued and unpaid expenses (including attorneys fees, costs and expenses)
and indemnity amounts payable by the Borrower to the Collateral Custodian under the Transaction
Documents.
Collateral Custodian Fees means the fees set forth in the Wells Fargo Fee Letter, as
such fee letter may be amended, restated, supplemented and/or otherwise modified from time to time.
Collateral Custodian Termination Notice has the meaning assigned to that term in
Section 12.05.
Collateral Portfolio means all right, title, and interest (whether now owned or
hereafter acquired or arising, and wherever located) of the Borrower in the property identified
below in clauses (i) through (iv) and all accounts, cash and currency, chattel
paper, tangible chattel paper, electronic chattel paper, copyrights, copyright licenses, equipment,
fixtures, contract rights, general intangibles, instruments, certificates of deposit, certificated
securities, uncertificated securities, financial assets, securities entitlements, commercial tort
claims, deposit accounts, inventory, investment property, letter-of-credit rights, software,
supporting obligations, accessions, or other property consisting of, arising out of, or related to
any of the following (in each case excluding the Retained Interest and the Excluded Amounts):
(i) the Loan Assets, and all monies due or to become due in payment under such Loan Assets on
and after the related Cut-Off Date, including, but not limited to, all Available Collections;
(ii) the Portfolio Assets with respect to the Loan Assets referred to in clause (i);
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(iii) the Controlled Accounts and all Permitted Investments purchased with funds on deposit in
the Controlled Accounts; and
(iv) all income and Proceeds of the foregoing.
Collection Account means a trust account (account number 53237100 at the Account
Bank) in the name of the Borrower for the benefit of and under the sole dominion and control of the
Collateral Agent for the benefit of the Secured Parties; provided, that the funds deposited therein
(including any interest and earnings thereon) from time to time shall constitute the property and
assets of the Borrower, and the Borrower shall be solely liable for any Taxes payable with respect
to the Collection Account.
Collection Account Agreement means that certain Collection Account Agreement, dated
the date of this Agreement, among the Borrower, the Servicer, the Account Bank, the Administrative
Agent and the Collateral Agent, which agreement relates to the Collection Account, as such
agreement may from time to time be amended, supplemented or otherwise modified in accordance with
the terms thereof.
Collection Date means the date on which the aggregate outstanding principal amount
of the Advances have been repaid in full and all Yield and Fees and all other Obligations have been
paid in full, and the Borrower shall have no further right to request any additional Advances.
Commercial Paper Notes means, any short-term promissory notes of any Conduit Lender
issued by such Conduit Lender in the commercial paper market.
Commitment means, with respect to each Lender, (i) prior to the end of the
Reinvestment Period or for purposes of Advances made pursuant to Section 2.02(f), the
dollar amount set forth opposite such Lenders name on Annex A hereto (as such amount may
be revised from time to time) or the amount set forth as such Lenders Commitment on Schedule I
to the Joinder Supplement relating to such Lender, as applicable and (ii) on or after the
Reinvestment Period (other than for purposes of Advances made pursuant to Section 2.02(f)),
such Lenders Pro Rata Share of the aggregate Advances Outstanding.
Commitment Increase Amount means, in the event the aggregate Commitments are
increased after the Closing Date pursuant to Section 2.22, the amount by which such
increased aggregate Commitments exceed the aggregate Commitments in effect immediately prior to
giving effect to such increase.
Commitment Increase Closing Date means, in the event the aggregate Commitments are
increased after the Closing Date pursuant to Section 2.22, the date such increase shall
become effective.
Conduit Lender means each commercial paper conduit as may from time to time become
a Lender hereunder by executing and delivering a Joinder Supplement to the Administrative Agent and
the Borrower as contemplated by Section 2.22(b).
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Control means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a Person, whether through the ability to
exercise voting power, by contract or otherwise.
Controlled Accounts means the Collection Account and the Unfunded Exposure Account.
Cut-Off Date means, with respect to each Loan Asset, the date such Loan Asset is
Pledged hereunder.
Delayed Draw Loan Asset means a Loan Asset that is fully committed on the initial
funding date of such Loan Asset and is required to be fully funded in one or more installments on
draw dates to occur within one year of the initial funding of such Loan Asset but which, once all
such installments have been made, has the characteristics of a Term Loan Asset.
Determination Date means the fifth Business Day after the end of each calendar
month.
Disbursement Request means a disbursement request from the Borrower to the
Administrative Agent and the Collateral Agent in the form attached hereto as Exhibit D in
connection with a disbursement request from the Unfunded Exposure Account in accordance with
Section 2.04(e) or a disbursement request from the Principal Collection Account in
accordance with Section 2.21, as applicable.
EBITDA means, with respect to any period and any Loan Asset, the meaning of
EBITDA, Adjusted EBITDA or any comparable definition in the Loan Agreement for each such Loan
Asset (together with all add-backs and exclusions as designated in such Loan Agreement), and in any
case that EBITDA, Adjusted EBITDA or such comparable definition is not defined in such Loan
Agreement, an amount, for the principal obligor on such Loan Asset and any of its parents or
Subsidiaries that are obligated pursuant to the Loan Agreement for such Loan Asset (determined on a
consolidated basis without duplication in accordance with GAAP) equal to earnings from continuing
operations for such period plus interest expense, income taxes and unallocated depreciation and
amortization for such period (to the extent deducted in determining earnings from continuing
operations for such period), and any other item the Borrower and the Administrative Agent mutually
deem to be appropriate.
Eligible Loan Asset means, at any time, a Loan Asset in respect of which each of the
representations and warranties contained in Section 4.02 and Schedule III hereto is
true and correct.
Environmental Laws means any and all foreign, federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals, interpretations and orders
of courts or Governmental Authorities, relating to the protection of human health or the
environment, including, but not limited to, requirements pertaining to the manufacture, processing,
distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials. Environmental Laws include,
without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42
U.S.C. § 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. §
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331 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Clean
Air Act (42 U.S.C. § 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. § 2601
et seq.), the Safe Drinking Water Act (42 U.S.C. § 300, et seq.), the Environmental
Protection Agencys regulations relating to underground storage tanks (40 C.F.R. Parts 280 and
281), and the Occupational Safety and Health Act (29 U.S.C. § 651 et seq.), and the rules
and regulations thereunder, each as amended or supplemented from time to time.
Equity Security means (i) any equity security or any other security that is not
eligible for purchase by the Borrower as a Loan Asset, (ii) any security purchased as part of a
unit with a Loan Asset and that itself is not eligible for purchase by the Borrower as a Loan
Asset, and (iii) any obligation that, at the time of commitment to acquire such obligation, was
eligible for purchase by the Borrower as a Loan Asset but that, as of any subsequent date of
determination, no longer is eligible for purchase by the Borrower as a Loan Asset, for so long as
such obligation fails to satisfy such requirements.
ERISA means the United States Employee Retirement Income Security Act of 1974, as
amended from time to time.
ERISA Affiliate means (a) any corporation that is a member of the same controlled
group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower, (b) a
trade or business (whether or not incorporated) under common control (within the meaning of Section
414(c) of the Code) with the Borrower, or (c) a member of the same affiliated service group (within
the meaning of Section 414(m) of the Code) as the Borrower, any corporation described in clause
(a) above or any trade or business described in clause (b) above.
Eurodollar Disruption Event means the occurrence of any of the following: (a)
Wachovia shall have notified the Administrative Agent of a determination by Wachovia or any of its
assignees or participants that it would be contrary to law or to the directive of any central bank
or other Governmental Authority (whether or not having the force of law) to obtain United States
dollars in the London interbank market to fund any Advance, (b) Wachovia shall have notified the
Administrative Agent of the inability, for any reason, of Wachovia or any of its respective
assignees or participants to determine LIBOR, (c) Wachovia shall have notified the Administrative
Agent of a determination by Wachovia or any of its respective assignees or participants that the
rate at which deposits of United States dollars are being offered to Wachovia or any of its
respective assignees or participants in the London interbank market does not accurately reflect the
cost to Wachovia or its assignee or participant of making, funding or maintaining any Advance or
(d) Wachovia shall have notified the Administrative Agent of the inability of Wachovia or any of
its respective assignees or participants to obtain United States dollars in the London interbank
market to make, fund or maintain any Advance.
Event of Default has the meaning assigned to that term in Section 7.01.
Excepted Persons has the meaning assigned to that term in Section 11.13(a).
Exchange Act means the United States Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
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Excluded Amounts means (a) any amount received in the Collection Account with
respect to any Loan Asset included as part of the Collateral Portfolio, which amount is
attributable to the payment of any Tax, fee or other charge imposed by any Governmental Authority
on such Loan Asset or on any Underlying Collateral and (b) any amount received in the Collection
Account or other Controlled Account representing (i) any amount representing a reimbursement of
insurance premiums, (ii) any escrows relating to Taxes, insurance and other amounts in connection
with Loan Assets which are held in an escrow account for the benefit of the Obligor and the secured
party pursuant to escrow arrangements under a Loan Agreement and (iii) any amount received in the
Collection Account with respect to any Loan Asset retransferred or substituted for upon the
occurrence of a Warranty Event or that is otherwise replaced by a Substitute Eligible Loan Asset,
or that is otherwise sold or transferred by the Borrower pursuant to Section 2.07, to the
extent such amount is attributable to a time after the effective date of such replacement or sale.
Excluded Taxes has the meaning assigned to that term in Section 2.11(a).
Facility Maturity Date means the earliest to occur of (i) the Stated Maturity Date,
(ii) the date of the declaration, or automatic occurrence, of the Facility Maturity Date pursuant
to Section 7.01, (iii) the Collection Date and (iv) the occurrence of the termination of
this Agreement pursuant to Section 2.18(b) hereof.
FDIC means the Federal Deposit Insurance Corporation, and any successor thereto.
Federal Funds Rate means, for any period, a fluctuating interest per annum rate
equal, for each day during such period, to the weighted average of the overnight federal funds
rates as in Federal Reserve Board Statistical Release H.15(519) or any successor or substitute
publication selected by the Administrative Agent (or, if such day is not a Business Day, for the
next preceding Business Day), or, if for any reason such rate is not available on any day, the rate
determined, in the sole discretion of the Administrative Agent, to be the rate at which overnight
federal funds are being offered in the national federal funds market at 9:00 a.m. on such day.
Fees means (i) the Non-Usage Fee and (ii) the fees payable to each Lender or Lender
Agent pursuant to the terms of any Lender Fee Letter.
Fifth Street means Fifth Street Finance Corp.
Fifth Street Affiliate Merger Transaction has the meaning specified in Section
5.04(a) hereof.
Fifth Street Competitor means any specialty finance company which derives
substantially all of its revenue from lending to and providing investment in middle market
companies.
Fifth Street LIBOR Rate means, with respect to any Loan Asset, the definition of
LIBOR Rate or any comparable definition in the Loan Agreement for each such Loan Asset, and in
any case that LIBOR Rate or such comparable definition is not defined in such Loan Agreement, the
rate per annum appearing on Reuters Screen LIBOR01 Page (or on any
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successor or substitute page of such service, or any successor to or substitute for such
service, providing rate quotations comparable to those currently provided on such page of such
service, as determined by the Administrative Agent from time to time for purposes of providing
quotations of interest rates applicable to dollar deposits in the London interbank market) at
approximately 11:00 a.m., London time for such day, provided, if such day is not a Business Day,
the immediately preceding Business Day, as the rate for dollar deposits with a one-month, a
two-month or a three-month maturity, as applicable, as and when determined in accordance with the
applicable Loan Agreement.
Fifth Street Merger Party shall mean any Person that (a) is an Affiliate of Fifth
Street (other than the Borrower) on the Closing Date or (b) becomes an Affiliate of Fifth Street
after the Closing Date and was either (i) a newly formed Person which (x) has not entered into any
merger, consolidation or acquisition prior to the applicable Fifth Street Affiliate Merger
Transaction and (y) since its inception has been an Affiliate of Fifth Street or (ii) an existing
Person when it became an Affiliate of Fifth Street but, immediately prior to such Fifth Street
Affiliate Merger Transaction, had been an Affiliate of Fifth Street for at least two years.
Fifth Street Prime Rate means, with respect to any Loan Asset, the definition of
Prime Rate or any comparable definition in the Loan Agreement for each such Loan Asset, and in
any case that Prime Rate or such comparable definition is not defined in such Loan Agreement, the
rate designated by certain reference lenders in the applicable Loan Agreement from time to time as
its prime rate in the United States, such rate to change as and when the designated rate changes;
provided that the Fifth Street Prime Rate is not intended to be lowest rate of interest charged by
Fifth Street in connection with extensions of credit to debtors.
Financial Asset has the meaning specified in Section 8-102(a)(9) of the UCC.
Financial Sponsor means any Person, including any Subsidiary of such Person, whose
principal business activity is acquiring, holding, and selling investments (including controlling
interests) in otherwise unrelated companies that each are distinct legal entities with separate
management, books and records and bank accounts, whose operations are not integrated with one
another and whose financial condition and creditworthiness are independent of the other companies
so owned by such Person.
Fitch means Fitch, Inc. or any successor thereto.
Fixed Rate Loan Asset means a Loan Asset other than a Floating Rate Loan Asset.
Floating Rate Loan Asset means a Loan Asset under which the interest rate payable by
the Obligor thereof is based on the Fifth Street Prime Rate or Fifth Street LIBOR Rate,
plus some specified interest percentage in addition thereto, and which provides that such
interest rate will reset immediately upon any change in the related Fifth Street Prime Rate or
Fifth Street LIBOR Rate.
GAAP means generally accepted accounting principles as in effect from time to time
in the United States.
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Governmental Authority means, with respect to any Person, any nation or government,
any state or other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any body or entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and any court or arbitrator
having jurisdiction over such Person.
Hazardous Materials means all materials subject to any Environmental Law, including,
without limitation, materials listed in 49 C.F.R. § 172.010, materials defined as hazardous
pursuant to § 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, flammable, explosive or radioactive materials, hazardous or toxic wastes or
substances, lead-based materials, petroleum or petroleum distillates or asbestos or material
containing asbestos, polychlorinated biphenyls, radon gas, urea formaldehyde and any substances
classified as being in inventory, usable work in process or similar classification that would,
if classified as unusable, be included in the foregoing definition.
Hedge Breakage Costs means, for any Hedge Transaction, any amount payable by the
Borrower for the early termination of that Hedge Transaction or any portion thereof.
Hedge Collateral has the meaning assigned to that term in Section 5.09(b).
Hedge Counterparty means any entity, approved in writing by the Administrative Agent
(in its sole discretion), which has entered into a Hedging Agreement in connection with this
Agreement.
Hedge Transaction means each interest rate swap transaction, interest rate cap
transaction, interest rate floor transaction or other derivative transaction approved in writing by
the Administrative Agent, between the Borrower and a Hedge Counterparty that is entered into
pursuant to Section 5.09(a) and is governed by a Hedging Agreement.
Hedging Agreement means each agreement between the Borrower and a Hedge Counterparty
that governs one or more Hedge Transactions entered into by the Borrower and such Hedge
Counterparty pursuant to Section 5.09(a), which agreement shall consist of a Master
Agreement in a form published by the International Swaps and Derivatives Association, Inc.,
together with a Schedule and each Confirmation thereunder confirming the specific terms of each
such Hedge Transaction; provided that the Schedule and the form of each Confirmation to any
Hedging Agreement shall be subject to the written approval of the Administrative Agent, in its sole
discretion.
Improvement Date means, with respect to any Loan Asset, any date upon which the
Assigned Value of such Loan Asset is revised pursuant to clause (b) of the definition of
Assigned Value due to an improvement in the Interest Coverage Ratio or Net Leverage Ratio.
Indebtedness means:
(i) with respect to any Obligor under any Loan Asset, for the purposes of the definition of
the Interest Coverage Ratio and the Net Leverage Ratio, the meaning of Indebtedness or any
comparable definition in the Loan Agreement for each such Loan Asset, and in any case that
Indebtedness or such comparable definition is not defined in such Loan
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Agreement, without duplication, (a) all obligations of such entity for borrowed money or with
respect to deposits or advances of any kind, (b) all obligations of such entity evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such entity under conditional sale
or other title retention agreements relating to property acquired by such entity, (d) all
obligations of such entity in respect of the deferred purchase price of property or services
(excluding current accounts payable incurred in the ordinary course of business), (e) all
indebtedness of others secured by (or for which the holder of such indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such
entity, whether or not the indebtedness secured thereby has been assumed, (f) all guarantees by
such entity of indebtedness of others, (g) all Capital Lease Obligations of such entity, (h) all
obligations, contingent or otherwise, of such entity as an account party in respect of letters of
credit and letters of guaranty and (i) all obligations, contingent or otherwise, of such entity in
respect of bankers acceptances; and
(ii) for all other purposes, with respect to any Person at any date, (a) all indebtedness of
such Person for borrowed money or for the deferred purchase price of property or services (other
than current liabilities incurred in the ordinary course of business and payable in accordance with
customary trade practices) or that is evidenced by a note, bond, debenture or similar instrument or
other evidence of indebtedness customary for indebtedness of that type, (b) all obligations of such
Person under leases that have been or should be, in accordance with GAAP, recorded as capital
leases, (c) all obligations of such Person in respect of acceptances issued or created for the
account of such Person, (d) all liabilities secured by any Lien on any property owned by such
Person even though such Person has not assumed or otherwise become liable for the payment thereof,
(e) all indebtedness, obligations or liabilities of that Person in respect of derivatives, and (f)
all obligations under direct or indirect guaranties in respect of obligations (contingent or
otherwise) to purchase or otherwise acquire, or to otherwise assure a creditor against loss in
respect of, indebtedness or obligations of others of the kind referred to in clauses (a)
through (e) of this clause (ii).
Indemnified Amounts has the meaning assigned to that term in Section 8.01.
Indemnified Party has the meaning assigned to that term in Section 8.01.
Indemnifying Party has the meaning assigned to that term in Section 8.03.
Independent Director means a natural person who, (A) for the five-year period prior
to his or her appointment as Independent Director, has not been, and during the continuation of his
or her service as Independent Director is not: (i) an employee, director, stockholder, member,
manager, partner or officer of the Borrower or any of their respective Affiliates (other than his
or her service as an Independent Director of the Borrower or other Affiliates that are structured
to be bankruptcy remote); (ii) a customer or supplier of the Borrower or any of their Affiliates
(other than his or her service as an Independent Director of the Borrower); or (iii) any member of
the immediate family of a person described in (i) or (ii), and (B) has, (i) prior experience as an
Independent Director for a corporation or limited liability company whose charter documents
required the unanimous consent of all Independent Directors thereof before such corporation or
limited liability company could consent to the institution of bankruptcy or insolvency proceedings
against it or could file a petition seeking relief under any
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applicable federal or state law relating to bankruptcy and (ii) at least three years of
employment experience with one or more entities that provide, in the ordinary course of their
respective businesses, advisory, management or placement services to issuers of securitization or
structured finance instruments, agreements or securities. The initial Independent Director of the
Borrower set forth in the Borrowers operating agreement as of the Closing Date is hereby approved
by the Administrative Agent.
Indorsement has the meaning specified in Section 8-102(a)(11) of the UCC, and
Indorsed has a corresponding meaning.
Initial Advance means the first Advance made pursuant to Article II.
Initial Payment Date means the 15th day of January (or if such day is not
a Business Day, the next succeeding Business Day).
Initial Reinvestment Period Extension has the meaning assigned to that term in
Section 2.19(b).
Initial Stated Maturity Extension has the meaning assigned to that term in
Section 2.19(a).
Institutional Lender means (i) Wachovia and (ii) each financial institution other
than a Conduit Lender which may from time to time become a Lender hereunder by executing and
delivering a Joinder Supplement to the Administrative Agent and the Borrower as contemplated by
Section 2.22(b).
Instrument has the meaning specified in Section 9-102(a)(47) of the UCC.
Insurance Policy means, with respect to any Loan Asset, an insurance policy covering
liability and physical damage to, or loss of, the Underlying Collateral.
Insurance Proceeds means any amounts received on or with respect to a Loan Asset
under any Insurance Policy or with respect to any condemnation proceeding or award in lieu of
condemnation, other than (i) any such amount received which is required to be used to restore,
improve or repair the related real estate or required to be paid to the Obligor under the Loan
Agreement or (ii) prior to an Event of Default hereunder and with prior notice to the
Administrative Agent, any such amount for which the Borrower has elected, in its reasonable
business discretion, to be used to restore, improve or repair the related real estate or otherwise
to be paid to the Obligor under the Loan Agreement.
Interest means, with respect to any period and any Loan Asset, for the Obligor on
such Loan Asset and any of its parents or Subsidiaries that are obligated under the Loan Agreement
for such Loan Asset (determined on a consolidated basis without duplication in accordance with
GAAP), the meaning of Interest or any comparable definition in the Loan Agreement for each such
Loan Asset and in any case that Interest or such comparable definition is not defined in such
Loan Agreement, all interest in respect of Indebtedness (including the interest component of any
payments in respect of Capital Lease Obligations) accrued or capitalized during such period
(whether or not actually paid during such period).
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Interest Collection Account means a sub-account (account number 53237102 at the
Account Bank) of the Collection Account into which Interest Collections shall be segregated.
Interest Collections means, (i) with respect to any Loan Asset, all payments and
collections attributable to interest on such Loan Asset, including, without limitation, all
scheduled payments of interest and payments of interest relating to principal prepayments, all
guaranty payments attributable to interest and proceeds of any liquidations, sales, dispositions or
securitizations attributable to interest on such Loan Asset and (ii) amendment fees, late fees,
waiver fees, prepayment fees or other amounts received in respect of Loan Assets.
Interest Coverage Ratio means, with respect to any Loan Asset for any Relevant Test
Period, the meaning of Interest Coverage Ratio or any comparable definition in the Loan Agreement
for each such Loan Asset, and in any case that Interest Coverage Ratio or such comparable
definition is not defined in such Loan Agreement, the ratio of (a) EBITDA to (b) Interest.
Joinder Supplement means an agreement among the Borrower, a Lender, its Lender Agent
and the Administrative Agent in the form of Exhibit E to this Agreement (appropriately
completed) delivered in connection with a Person becoming a Lender hereunder after the Closing
Date.
Lender means any Institutional Lender or Conduit Lender, and/or any other Person to
whom an Institutional Lender or Conduit Lender assigns any part of its rights and obligations under
this Agreement and the other Transaction Documents in accordance with the terms of Section
11.04.
Lender Agent means, with respect to (i) Wachovia, Wachovia; (ii) each Conduit Lender
which may from time to time become party hereto, the Person designated as the Lender Agent with
respect to such Conduit Lender in the applicable Joinder Supplement and (iii) each Institutional
Lender which may from time to time become a party hereto, each shall be deemed to be its own Lender
Agent, and, in each case, each of their respective successors and assigns.
Lender Fee Letter means each fee letter agreement that shall be entered into by and
among the Borrower, the Servicer, the applicable Lender and its related Lender Agent in connection
with the transactions contemplated by this Agreement, as amended, modified, waived, supplemented,
restated or replaced from time to time.
LIBOR means, for any day during the Remittance Period, with respect to any Advance
(or portion thereof) (a) the rate per annum appearing on Reuters Screen LIBOR01 Page (or any
successor or substitute page) as the London interbank offered rate for deposits in dollars at
approximately 11:00 a.m., London time, for such day, provided, if such day is not a Business Day,
the immediately preceding Business Day, for a one-month maturity; and (b) if no rate specified in
clause (a) of this definition so appears on Reuters Screen LIBOR01 Page (or any successor
or substitute page), the interest rate per annum at which dollar deposits of $5,000,000 and for a
one-month maturity are offered by the principal London office of Wachovia in immediately available
funds in the London interbank market at approximately 11:00 a.m., London time, for such day.
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Lien means any mortgage or deed of trust, pledge, hypothecation, collateral
assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, claim, preference,
priority or other security interest or preferential arrangement in the nature of a security
interest of any kind or nature whatsoever (including any conditional sale, lease or other title
retention agreement, sale subject to a repurchase obligation, any easement, right of way or other
encumbrance on title to real property, and any financing lease having substantially the same
economic effect as any of the foregoing) or the filing of or agreement to give any financing
statement perfecting a security interest under the UCC or comparable law of any jurisdiction.
Lien Release Dividend has the meaning assigned to that term in Section
2.07(g).
Lien Release Dividend Date means the date specified by the Borrower, which date may
be any Business Day, provided written notice is given in accordance with Section 2.07(g).
Liquidity Agreement means any agreement entered into in connection with this
Agreement pursuant to which a Liquidity Bank agrees to make purchases from or advances to, or
purchase assets from, any Conduit Lender in order to provide liquidity support for such Conduit
Lenders Advances hereunder.
Liquidity Bank means the Person or Persons who provide liquidity support to any
Conduit Lender pursuant to a Liquidity Agreement in connection with the issuance by such Conduit
Lender of Commercial Paper Notes.
Loan Agreement means the loan agreement, credit agreement or other agreement
pursuant to which a Loan Asset has been issued or created and each other agreement that governs the
terms of or secures the obligations represented by such Loan Asset or of which the holders of such
Loan Asset are the beneficiaries.
Loan Asset means any loan originated or acquired by the Transferor in the ordinary
course of its business, which loan includes, without limitation, (i) the Required Loan Documents
and Loan Asset File, and (ii) all right, title and interest of the Transferor in and to the loan
and any Underlying Collateral, but excluding, in each case, the Retained Interest and Excluded
Amounts and which loan was acquired by the Borrower from the Transferor under the Purchase and Sale
Agreement and owned by the Borrower on the initial Advance Date (as set forth on the Loan Asset
Schedule delivered on the initial Advance Date) or acquired by the Borrower from the Transferor
under the Purchase and Sale Agreement after the initial Advance Date pursuant to the delivery of a
Loan Assignment and listed on Schedule I to the Loan Assignment.
Loan Asset Checklist means an electronic or hard copy, as applicable, of a checklist
delivered by or on behalf of the Borrower to the Collateral Custodian, for each Loan Asset, of all
Required Loan Documents to be included within the respective Loan Asset File, which shall specify
whether such document is an original or a copy.
Loan Asset File means, with respect to each Loan Asset, a file containing (a) each
of the documents and items as set forth on the Loan Asset Checklist with respect to such
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Loan Asset and (b) duly executed originals (to the extent required by the Servicing Standard)
and copies of any other Records relating to such Loan Assets and Portfolio Assets pertaining
thereto.
Loan Asset Register has the meaning assigned to that term in Section
5.03(l).
Loan Asset Schedule means the schedule of Loan Agreements evidencing Loan Assets
delivered by the Borrower to the Collateral Custodian and the Administrative Agent. Each such
schedule shall set forth, as to any Eligible Loan Asset to be Pledged hereunder, the applicable
information specified on Schedule V, which shall also be provided to the Collateral
Custodian in electronic format acceptable to the Collateral Custodian.
Loan Assignment has the meaning set forth in the Purchase and Sale Agreement.
Make-Whole Premium means an amount, payable pro rata to each Lender Agent (for the
account of the applicable Lender), equal to (i) to the extent the Agreement is terminated and the
Make-Whole Premium is required to be paid pursuant to Section 2.18(b) on or prior to the
date which is one year following the Closing Date, 3.00% of the Maximum Facility Amount and (ii)
to the extent the Agreement is terminated and the Make-Whole Premium is required to be paid
pursuant to Section 2.18(b) on or prior to the date which is 90 days prior to the date
which is two years following the Closing Date but after the first anniversary of the Closing Date,
1.00% of the Maximum Facility Amount; provided that, in the foregoing clauses (i) and
(ii), the Make-Whole Premium shall be calculated without giving effect to the proviso in
the definition of Maximum Facility Amount.
Management Agreement means the Amended and Restated Investment Advisory Agreement,
dated as of April 30, 2008, between Fifth Street and Fifth Street Management LLC.
Margin Stock means margin stock as such term is defined in Regulation T, U or X of
the Federal Reserve Board.
Material Adverse Effect means, with respect to any event or circumstance, a material
adverse effect on (a) the business, condition (financial or otherwise), operations, performance or
properties of the Transferor, the Servicer or the Borrower, (b) the validity, enforceability or
collectability of this Agreement or any other Transaction Document or the validity, enforceability
or collectability of the Loan Assets generally or any material portion of the Loan Assets, (c) the
rights and remedies of the Collateral Agent, the Collateral Custodian, the Account Bank, the
Administrative Agent, any Lender, any Lender Agent and the Secured Parties with respect to matters
arising under this Agreement or any other Transaction Document, (d) the ability of each of the
Borrower and the Servicer, to perform their respective obligations under this Agreement or any
other Transaction Document, or (e) the status, existence, perfection, priority or enforceability of
the Collateral Agents, the Administrative Agents or the other Secured Parties lien on the
Collateral Portfolio.
Material Modification means any amendment or waiver of, or modification or
supplement to, a Loan Agreement governing a Loan Asset executed or effected on or after the
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Cut-Off Date for such Loan Asset (or, solely in the case of clause (d)(ii)(y), a
change to any loan senior to a Loan Asset) which:
(a) reduces or forgives any or all of the principal amount due under such Loan Asset;
(b) (i) delays or extends the maturity date for such Loan Asset or (ii) delays or extends the
required or scheduled amortization in any way that increases the Average Life of such Loan Asset by
0.50 years or more; provided that the Average Life of such Loan Asset may be increased by not more
than 20% from its Average Life on the related Cut-Off Date if the Net Leverage Ratio of such Loan
Asset is not more than 85% of the maximum established in the Net Leverage Ratio covenant of such
Loan Asset;
(c) waives one or more interest payments, permits any interest due in cash to be deferred or
capitalized and added to the principal amount of such Loan Asset (other than any deferral or
capitalization already allowed by the terms of the Loan Agreement of any PIK Loan Asset), or
reduces the spread or coupon with respect to such Loan Asset;
(d) (i) in the case of a first lien loan, contractually or structurally subordinates such Loan
Asset by operation of a priority of payments, turnover provisions, the transfer of assets in order
to limit recourse to the related Obligor or the granting of Liens (other than Permitted Liens) on
any of the Underlying Collateral securing such Loan Asset or (ii) in the case of a second lien
loan, (x) contractually or structurally subordinates such Loan Asset to any obligation (other than
the first lien loan which existed at the Cut-Off Date for such Loan Asset) by operation of a
priority of payments, turnover provisions, the transfer of assets in order to limit recourse to the
related Obligor or the granting of Liens (other than Permitted Liens) on any of the Underlying
Collateral securing such Loan Asset or (y) the commitment amount of any loan senior to such second
lien loan is increased;
(e) substitutes, alters or releases the Underlying Collateral securing such Loan Asset and
each such substitution, alteration or release, as determined in the sole discretion of the
Administrative Agent, materially and adversely affects the value of such Loan Asset; or
(f) amends, waives, forbears, supplements or otherwise modifies (i) the meaning of Net
Leverage Ratio, Interest Coverage Ratio or Permitted Liens or any respective comparable
definitions in the Loan Agreement for such Loan Asset or (ii) any term or provision of such Loan
Agreement referenced in or utilized in the calculation of the Net Leverage Ratio, Interest
Coverage Ratio or Permitted Liens or any respective comparable definitions for such Loan Asset,
in either case in a manner that, in the reasonable judgment of the Administrative Agent, is
materially adverse to the Secured Parties.
Maximum Facility Amount means the aggregate Commitments as then in effect, which
amount shall not exceed $100,000,000; provided that at all times after the Reinvestment Period, the
Maximum Facility Amount shall mean the aggregate Advances Outstanding at such time.
Minimum Equity Amount means $100,000,000.
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Moodys means Moodys Investors Service, Inc. (or its successors in interest).
Mortgage means the mortgage, deed of trust or other instrument creating a Lien on an
interest in real property securing a Loan Asset, including the assignment of leases and rents
related thereto.
Multiemployer Plan means a multiemployer plan as defined in Section 4001(a)(3) of
ERISA to which the Borrower or any ERISA Affiliate contributed or had any obligation to contribute
on behalf of its employees at any time during the current year or the preceding five years
Net Leverage Ratio means, with respect to any Loan Asset for any Relevant Test
Period, the meaning of Net Leverage Ratio or any comparable definition in the Loan Agreement for
each such Loan Asset, and in any case that Net Leverage Ratio or such comparable definition is
not defined in such Loan Agreement, the ratio of (a) Indebtedness minus Unrestricted Cash
to (b) EBITDA.
Non-Usage Fee has the meaning assigned to that term in Section 2.09(a).
Non-Usage Fee Rate has the meaning assigned to that term in Section 2.09(a).
Noteless Loan Asset means a Loan Asset with respect to which the Loan Agreements (i)
do not require the Obligor to execute and deliver a promissory note to evidence the indebtedness
created under such Loan Asset or (ii) require any holder of the indebtedness created under such
Loan Asset to affirmatively request a promissory note from the related Obligor.
Notice and Request for Consent has the meaning assigned to that term in Section
2.07(g)(i).
Notice of Borrowing means an irrevocable written notice of borrowing from the
Borrower to the Administrative Agent and each Lender Agent in the form attached hereto as
Exhibit F.
Notice of Reduction means a notice of a reduction of the Advances Outstanding
pursuant to Section 2.18, in the form attached hereto as Exhibit G.
Obligations means all present and future indebtedness and other liabilities and
obligations (howsoever created, arising or evidenced, whether direct or indirect, absolute or
contingent, or due or to become due) of the Borrower to the Lenders, the Lender Agents, the
Administrative Agent, the Account Bank, any Hedge Counterparty, the Collateral Agent or the
Collateral Custodian arising under this Agreement and/or any other Transaction Document and shall
include, without limitation, all liability for principal of and interest on the Advances, Hedge
Breakage Costs, Breakage Fees, indemnifications and other amounts due or to become due by the
Borrower to the Lenders, the Lender Agents, the Administrative Agent, the Collateral Agent, the
Hedge Counterparty, the Collateral Custodian and the Account Bank under this Agreement and/or any
other Transaction Document, including, without limitation, any amounts payable under any Hedging
Agreement (including, without limitation, payments in respect of the
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termination of any such Hedging Agreement), any Lender Fee Letter, any Make-Whole Premium and
costs and expenses payable by the Borrower to the Lenders, the Lender Agents, the Administrative
Agent, the Account Bank, the Collateral Agent or the Collateral Custodian, including attorneys
fees, costs and expenses, including without limitation, interest, fees and other obligations that
accrue after the commencement of an insolvency proceeding (in each case whether or not allowed as a
claim in such insolvency proceeding).
Obligor means, collectively, each Person obligated to make payments under a Loan
Agreement, including any guarantor thereof.
Officers Certificate means a certificate signed by the president, the secretary, an
assistant secretary, the chief financial officer or any vice president, as an authorized officer,
of any Person.
Opinion of Counsel means a written opinion of counsel, which opinion and counsel are
acceptable to the Administrative Agent in its sole discretion.
Outstanding Balance means the principal balance of a Loan Asset, expressed exclusive
of PIK Interest and accrued interest; provided that amortization payments on a Loan Asset shall
first be applied to PIK Interest when determining the Outstanding Balance of such Loan Asset. For
the avoidance of doubt, the Outstanding Balance with respect to a Revolving Loan Asset or a Delayed
Draw Loan Asset shall be equal to the funded amount of such Revolving Loan Asset or Delayed Draw
Loan Asset.
Payment Date means the 15th day of each calendar month or, if such day is
not a Business Day, the next succeeding Business Day, commencing on the 15th day of
January; provided, that the final Payment Date shall occur on the Collection Date.
Payment Duties has the meaning assigned to that term in Section
10.02(b)(ii).
Pension Plan has the meaning assigned to that term in Section 4.01(x).
Permitted Assignee means any lender which (i) is not a Fifth Street Competitor and
(ii) has a long-term unsecured debt rating of not less than A3 from Moodys and not less than A
from S&P.
Permitted Investments means any of (i) Wells Fargo Advantage Money Market Funds
Government Money Market Fund, or (ii) Wells Fargo Money Market Deposit Account.
Permitted Liens means any of the following as to which no enforcement, collection,
execution, levy or foreclosure proceeding shall have been commenced (a) Liens for state, municipal
or other local Taxes if such Taxes shall not at the time be due and payable or if a Person shall
currently be contesting the validity thereof in good faith by appropriate proceedings and with
respect to which reserves in accordance with GAAP have been provided on the books of such Person,
(b) Liens imposed by law, such as materialmens, warehousemens, mechanics, carriers, workmens
and repairmens Liens and other similar Liens, arising by operation of law in the ordinary course
of business for sums that are not overdue or are being contested in good faith and (c) Liens
granted pursuant to or by the Transaction Documents.
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Person means an individual, partnership, corporation (including a statutory or
business trust), limited liability company, joint stock company, trust, unincorporated association,
sole proprietorship, joint venture, government (or any agency or political subdivision thereof) or
other entity.
PIK Interest means interest accrued on a Loan Asset that is added to the principal
amount of such Loan Asset instead of being paid as interest as it accrues.
PIK Loan Asset means a Loan Asset which provides for a portion of the interest that
accrues thereon to be added to the principal amount of such Loan Asset for some period of the time
prior to such Loan Asset requiring the current cash payment of such previously capitalized
interest, which cash payment shall be treated as an Interest Collection at the time it is received.
Pledge means the pledge of any Eligible Loan Asset or other Portfolio Asset pursuant
to Article II.
Pledge Agreement means that certain Pledge Agreement, dated as of the Closing Date,
between the Transferor, as pledgor, and the Collateral Agent, as pledgee, as such Pledge Agreement
may from time to time be amended, restated, supplemented or otherwise modified from time to time in
accordance with the terms thereof.
Portfolio Assets means all Loan Assets owned by the Borrower, together with all
proceeds thereof and other assets or property related thereto, including all right, title and
interest of the Borrower in and to:
(a) any amounts on deposit in any cash reserve, collection, custody or lockbox accounts
securing the Loan Assets;
(b) all rights with respect to the Loan Assets to which the Transferor is entitled as lender
under the applicable Loan Agreement;
(c) the Controlled Accounts, together with all cash and investments in each of the foregoing
other than amounts earned on investments therein;
(d) any Underlying Collateral securing a Loan Asset and all Recoveries related thereto, all
payments paid in respect thereof and all monies due, to become due and paid in respect thereof
accruing after the applicable Cut-Off Date and all liquidation proceeds;
(e) all Required Loan Documents, the Loan Asset Files related to any Loan Asset, any Records,
and the documents, agreements, and instruments included in the Loan Asset Files or Records;
(f) all Insurance Policies with respect to any Loan Asset;
(g) all Liens, guaranties, indemnities, warranties, letters of credit, accounts, bank accounts
and property subject thereto from time to time purporting to secure or support
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payment of any Loan Asset, together with all UCC financing statements, mortgages or similar
filings signed or authorized by an Obligor relating thereto;
(h) the Purchase and Sale Agreement (including, without limitation, rights of recovery of the
Borrower against the Transferor) and the assignment to the Collateral Agent, for the benefit of the
Secured Parties, of all UCC financing statements filed by the Borrower against the Transferor under
or in connection with the Purchase and Sale Agreement;
(i) any Hedging Agreement and all payments from time to time due thereunder;
(j) all records (including computer records) with respect to the foregoing; and
(k) all collections, income, payments, proceeds and other benefits of each of the foregoing.
Priced Loan Asset means any Loan Asset that has an observable quote from LoanX
Mark-It Partners or Loan Pricing Corporation, or from another pricing service selected by the
Administrative Agent in its sole discretion.
Prime Rate means the rate announced by Wachovia from time to time as its prime rate
in the United States, such rate to change as and when such designated rate changes. The Prime Rate
is not intended to be the lowest rate of interest charged by Wachovia or any other specified
financial institution in connection with extensions of credit to debtors.
Principal Collection Account means a sub-account (account number 53237103 at the
Account Bank) of the Collection Account into which Principal Collections shall be segregated.
Principal Collections means (i) any amounts deposited by the Borrower in accordance
with Section 2.06(a)(i) or Section 2.07(c)(i), (ii) with respect to any Loan Asset,
all amounts received which are not Interest Collections, including, without limitation, all
Recoveries, all Insurance Proceeds, all scheduled payments of principal and principal prepayments
and all guaranty payments and proceeds of any liquidations, sales, dispositions or securitizations,
in each case, attributable to the principal of such Loan Asset and (iii) all payments received
pursuant to any Hedging Agreement or Hedge Transaction. For the avoidance of doubt, Principal
Collections shall not include amounts on deposit in the Unfunded Exposure Account.
Pro Rata Share means, with respect to each Lender, the percentage obtained by
dividing the Commitment of such Lender (as determined under clause (i) of the definition of
Commitment), by the aggregate Commitments of all the Lenders (as determined under clause
(i) of the definition of Commitment).
Proceeds means, with respect to any Collateral Portfolio, all property that is
receivable or received when such Collateral Portfolio is collected, sold, liquidated, foreclosed,
exchanged, or otherwise disposed of, whether such disposition is voluntary or involuntary, and
includes all rights to payment with respect to any insurance relating to such Collateral Portfolio.
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Prohibited Transferee means any hedge fund, any so-called vulture fund or
loan-to-own fund, any distressed debt fund or any other fund that is similar to any of the
foregoing.
Purchase and Sale Agreement means that certain Purchase and Sale Agreement, dated as
of the date hereof, between the Transferor, as the seller, and the Borrower, as the purchaser, as
amended, modified, waived, supplemented, restated or replaced from time to time.
Records means all documents relating to the Loan Assets, including books, records
and other information executed in connection with the origination or acquisition of the Collateral
Portfolio or maintained with respect to the Collateral Portfolio and the related Obligors that the
Borrower, the Transferor or the Servicer have generated, in which the Borrower or the Transferor
have acquired an interest pursuant to the Purchase and Sale Agreement or in which the Borrower or
the Transferor have otherwise obtained an interest.
Recoveries means, as of the time any Underlying Collateral with respect to any Loan
Asset subject to clauses (ii) or (iv) of the definition of Value Adjustment
Event, as applicable, is sold, discarded or abandoned (after a determination by the Servicer that
such Underlying Collateral has little or no remaining value) or otherwise determined to be fully
liquidated by the Servicer in accordance with the Servicing Standard, the proceeds from the sale of
the Underlying Collateral, the proceeds of any related Insurance Policy, any other recoveries with
respect to such Loan Asset, as applicable, the Underlying Collateral, and amounts representing late
fees and penalties, net of any amounts received that are required under such Loan Asset, as
applicable, to be refunded to the related Obligor.
Register has the meaning assigned to that term in Section 2.14.
Reinvestment Period shall mean the date commencing on the Closing Date and ending on
the day preceding the earlier of (i) November 16, 2011 (or such later date as is agreed to in
writing by the Borrower, the Servicer, the Administrative Agent and the Lenders pursuant to
Section 2.19(b)), (ii) the occurrence of an Event of Default (past any applicable notice or
cure period provided in the definition thereof) and (iii) the date of any voluntary termination by
the Borrower pursuant to Section 2.18(b).
Release Date has the meaning set forth in Section 2.07(c).
Relevant Test Period means, with respect to any Loan Asset, the relevant test period
for the calculation of Net Leverage Ratio or Interest Coverage Ratio, as applicable, for such Loan
Asset in the Loan Agreements or, if no such period is provided for therein, for Obligors delivering
monthly financing statements, each period of the last 12 consecutive reported calendar months, and
for Obligors delivering quarterly financing statements, each period of the last four consecutive
reported fiscal quarters of the principal Obligor on such Loan Asset; provided that with respect to
any Loan Asset for which the relevant test period is not provided for in the Loan Agreement, if an
Obligor is a newly-formed entity as to which 12 consecutive calendar months have not yet elapsed,
Relevant Test Period shall initially include the period from the date of formation of such
Obligor to the end of the twelfth calendar month or fourth fiscal quarter (as the case may be) from
the date of formation, and shall subsequently
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include each period of the last 12 consecutive reported calendar months or four consecutive
reported fiscal quarters (as the case may be) of such Obligor.
Remittance Period means, (i) as to the Initial Payment Date, the period beginning on
the Closing Date and ending on, and including, the Determination Date immediately preceding such
Payment Date and (ii) as to any subsequent Payment Date, the period beginning on the first day
after the most recently ended Remittance Period and ending on, and including, the Determination
Date immediately preceding such Payment Date, or, with respect to the final Remittance Period, the
Collection Date.
Replacement Servicer has the meaning assigned to that term in Section
6.01(c).
Reporting Date means the date that is two Business Days prior to the Payment Date of
each calendar month, commencing December, 2009.
Required Lenders means (i) Wachovia (as a Lender hereunder) and its successors and
assigns and (ii) the Lenders representing an aggregate of at least 51% of the aggregate Commitments
of the Lenders then in effect.
Required Loan Documents means, for each Loan Asset, originals (except as otherwise
indicated) of the following documents or instruments, all as specified on the related Loan Asset
Checklist:
(a) (i) other than in the case of a Noteless Loan Asset, the original or, if accompanied by an
original lost note affidavit and indemnity, a copy of, the underlying promissory note, endorsed
by the Borrower or the prior holder of record either in blank or to the Collateral Agent (and
evidencing an unbroken chain of endorsements from each prior holder thereof evidenced in the chain
of endorsements either in blank or to the Collateral Agent), with any endorsement to the Collateral
Agent to be in the following form: Wells Fargo Bank, National Association, as Collateral Agent for
the Secured Parties, and (ii) in the case of a Noteless Loan Asset (x) a copy of each transfer
document or instrument relating to such Noteless Loan Asset evidencing the assignment of such
Noteless Loan Asset to the Transferor and from the Transferor to the Borrower and from the Borrower
either to the Collateral Agent or in blank, and (y) a copy of the Loan Asset Register with respect
to such Noteless Loan Asset, as described in Section 5.03(l)(ii);
(b) originals or copies of each of the following, to the extent applicable to the related Loan
Asset; any related loan agreement, credit agreement, note purchase agreement, security agreement
(if separate from any Mortgage), sale and servicing agreement, acquisition agreement, subordination
agreement, intercreditor agreement or similar instruments, guarantee, Insurance Policy, assumption
or substitution agreement or similar material operative document, in each case together with any
amendment or modification thereto, as set forth on the Loan Asset Checklist;
(c) if any Loan Asset is secured by a Mortgage, in each case as set forth in the Loan Asset
Checklist:
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(i) either (i) the original Mortgage, the original assignment of leases and rents, if
any, and the originals of all intervening assignments, if any, of the Mortgage and
assignments of leases and rents with evidence of recording thereon, (ii) copies thereof
certified by the Servicer, by closing counsel or by a title company or escrow company to be
true and complete copies thereof where the originals have been transmitted for recording
until such time as the originals are returned by the public recording office; provided that,
solely for purposes of the Review Criteria, the Collateral Custodian shall have no duty to
ascertain whether any certification set forth in this subsection (c)(ii) has been received,
other than a certification which has been clearly delineated as being provided by the
Servicer or (iii) copies certified by the public recording offices where such documents were
recorded to be true and complete copies thereof in those instances where the public
recording offices retain the original or where the original recorded documents are lost; and
(ii) other than with respect to any Agented Note, to the extent the Borrower is the
sole lender under the Loan Agreement, an Assignment of Mortgage and of any other material
recorded security documents (including any assignment of leases and rents) in recordable
form, executed by the Borrower or the prior holder of record, in blank or to the Collateral
Agent (and evidencing an unbroken chain of assignments from the prior holder of record to
the Collateral Agent), with any assignment to the Collateral Agent to be in the following
form: Wells Fargo Bank, National Association, as Collateral Agent for the Secured Parties;
(d) with respect to any Loan Asset originated by the Transferor and with respect to which the
Transferor acts as administrative agent (or in a comparable capacity), either (i) copies of the
UCC-1 Financing Statements, if any, and any related continuation statements, each showing the
Obligor as debtor and the Collateral Agent as total assignee or showing the Obligor, as debtor and
the Transferor as secured party and each with evidence of filing thereon, or (ii) copies of any
such financing statements certified by the Servicer to be true and complete copies thereof in
instances where the original financing statements have been sent to the appropriate public filing
office for filing, in each case as set forth in the Loan Asset Checklist.
Required Reports means, collectively, the Servicing Report required pursuant to
Section 6.08(b), the Servicers Certificate required pursuant to Section 6.08(c),
the financial statements of the Servicer required pursuant to Section 6.08(d), the tax
returns of the Borrower and the Servicer required pursuant to Section 6.08(e), the
financial statements and valuation reports of each Obligor required pursuant to Section
6.08(f), the annual statements as to compliance required pursuant to Section 6.09, and
the annual independent public accountants report required pursuant to Section 6.10.
Responsible Officer means, with respect to any Person, any duly authorized officer
of such Person with direct responsibility for the administration of this Agreement and also, with
respect to a particular matter, any other duly authorized officer of such Person to whom such
matter is referred because of such officers knowledge of and familiarity with the particular
subject.
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Restricted Junior Payment means (i) any dividend or other distribution, direct or
indirect, on account of any class of membership interests of the Borrower now or hereafter
outstanding, except a dividend paid solely in interests of that class of membership interests or in
any junior class of membership interests of the Borrower; (ii) any redemption, retirement, sinking
fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class
of membership interests of the Borrower now or hereafter outstanding, (iii) any payment made to
redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants,
options or other rights to acquire membership interests of the Borrower now or hereafter
outstanding, and (iv) any payment of management fees by the Borrower. For the avoidance of doubt,
(x) payments and reimbursements due to the Servicer in accordance with this Agreement or any other
Transaction Document do not constitute Restricted Junior Payments, and (y) distributions by the
Borrower to holders of its membership interests of Loan Assets or of cash or other proceeds
relating thereto which have been substituted by the Borrower in accordance with this Agreement
shall not constitute Restricted Junior Payments.
Retained Interest means, with respect to any Agented Note that is transferred to the
Borrower, (i) all of the obligations, if any, of the agent(s) under the documentation evidencing
such Agented Note and (ii) the applicable portion of the interests, rights and obligations under
the documentation evidencing such Agented Note that relate to such portion(s) of the indebtedness
that is owned by another lender.
Review Criteria has the meaning assigned to that term in Section
12.02(b)(i).
Revolving Loan Asset means a Loan Asset that is a line of credit or contains an
unfunded commitment arising from an extension of credit by the Transferor to an Obligor, pursuant
to the terms of which amounts borrowed may be repaid and subsequently reborrowed.
S&P means Standard & Poors Ratings Group, a division of The McGraw-Hill Companies,
Inc. (or its successors in interest).
Same-Day Advance means any Advance made on the same day such Advance is requested,
in accordance with the second sentence of Section 2.02(b).
Scheduled Payment means each scheduled payment of principal and/or interest required
to be made by an Obligor on the related Loan Asset, as adjusted pursuant to the terms of the
related Loan Agreement.
Second Reinvestment Period Extension has the meaning assigned to that term in
Section 2.19(b).
Second Stated Maturity Extension has the meaning assigned to that term in
Section 2.19(a).
Secured Party means each of the Administrative Agent, each Lender (together with its
successors and assigns), each Lender Agent, each Affected Party, each Indemnified Party, the
Collateral Custodian, the Collateral Agent, the Account Bank and each Hedge Counterparty.
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Securities Act means the U.S. Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Servicer means at any time the Person then authorized, pursuant to Section
6.01 to service, administer, and collect on the Loan Assets and exercise rights and remedies in
respect of the same.
Servicer Pension Plan has the meaning set forth in Section 4.03(p).
Servicer Termination Event means the occurrence of any one or more of the following
events:
(a) any failure by the Servicer to make any payment, transfer or deposit into the Collection
Account (including, without limitation, with respect to bifurcation and remittance of Interest
Collections and Principal Collections) or the Unfunded Exposure Account, as required by this
Agreement or any Transaction Document which continues unremedied for a period of two Business Days;
(b) any failure on the part of the Servicer duly to (i) observe or perform in any material
respect any other covenants or agreements of the Servicer set forth in this Agreement or the other
Transaction Documents to which the Servicer is a party (including, without limitation, any
delegation of the Servicers duties that is not permitted by Section 6.01 of this
Agreement) or (ii) comply in any material respect with the Servicing Standard regarding the
servicing of the Collateral Portfolio and in each case the same continues unremedied for a period
of 30 days (if such failure can be remedied) after the earlier to occur of (x) the date on which
written notice of such failure requiring the same to be remedied shall have been given to the
Servicer by the Administrative Agent or the Collateral Agent (at the direction of the
Administrative Agent) and (y) the date on which a Responsible Officer of the Servicer acquires
knowledge thereof;
(c) the failure of the Servicer to make any payment when due (after giving effect to any
related grace period) under one or more agreements for borrowed money to which it is a party in an
aggregate amount in excess of United States $1,000,000, individually or in the aggregate, or the
occurrence of any event or condition that has resulted in the acceleration of such amount of
recourse debt whether or not waived;
(d) a Bankruptcy Event shall occur with respect to the Servicer;
(e) Fifth Street shall assign its rights or obligations as Servicer hereunder to any Person
without the consent of each Lender Agent and the Administrative Agent (as required in the last
sentence of Section 11.04(a));
(f) at the end of any fiscal quarter, Fifth Street fails to maintain the Asset Coverage Ratio
at greater than or equal to 2:1;
(g) Fifth Street permits Shareholders Equity (as reflected in its 10Q or 10K without any
deductions) at the last day of any of its fiscal quarter to be less than $200,000,000 plus 75% of
the net proceeds of the sale of equity interests by Fifth Street after the Closing Date;
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(h) any change in the management of the Servicer (whether by resignation, termination,
disability, death or lack of day-to-day management) relating to (x) Leonard Tannenbaum or (y) any
two of Marc Goodman, Bernard Berman and Ivelin Dimitrov failing to provide active and material
participation in the Servicers or Transferors daily activities including, but not limited to,
general management, underwriting, and the credit approval process and credit monitoring activities,
and such persons are not replaced with other individuals reasonably acceptable to the
Administrative Agent within 30 days of such event;
(i) any failure by the Servicer to deliver (i) any required Servicing Report on or before the
date occurring two Business Days after the date such report is required to be made or given, as the
case may be or (ii) any other Required Reports hereunder on or before the date occurring five
Business Days after the date such report is required to be made or given, as the case may be, in
each case under the terms of this Agreement;
(j) any representation, warranty or certification made by the Servicer in any Transaction
Document or in any certificate delivered pursuant to any Transaction Document shall prove to have
been incorrect in any material respect when made and continues to be unremedied for a period of 30
days after the earlier to occur of (i) the date on which written notice of such incorrectness
requiring the same to be remedied shall have been given to the Servicer by the Administrative Agent
or the Collateral Agent (at the direction of the Administrative Agent) and (ii) the date on which a
Responsible Officer of the Servicer acquires knowledge thereof;
(k) any financial or other information reasonably requested by the Administrative Agent, a
Lender Agent or the Collateral Agent is not provided as requested within a reasonable amount of
time following such request;
(l) the rendering against the Servicer of one or more final judgments, decrees or orders for
the payment of money in excess of United States $1,000,000, individually or in the aggregate, and
the continuance of such judgment, decree or order unsatisfied and in effect for any period of more
than 30 consecutive days without a stay of execution;
(m) any change in the control of the Servicer that takes the form of either a merger or
consolidation that does not comply with the provisions of Section 5.04(a) of this
Agreement;
(n) the occurrence of an Event of Default (past any applicable notice or cure period provided
in the definition thereof);
(o) Fifth Street makes a capital contribution to an Affiliate other than the Borrower and
after accounting for such capital contribution, Fifth Streets Shareholders Equity (provided that
equity in Affiliates other than the Borrower will not be included in this calculation) is not
greater than $250,000,000; or
(p) any other event which has caused, or which may cause, a Material Adverse Effect on the
assets, liabilities, financial condition, business or operations of the Servicer or the ability of
the Servicer to meet its obligations under the Transaction Documents to which it is a party.
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Servicer Termination Notice has the meaning assigned to that term in Section
6.01(b).
Servicers Certificate has the meaning assigned to that term in Section
6.08(c).
Servicing Fees means the fee payable to the Servicer on each Payment Date in arrears
in respect of each Remittance Period, which fee shall be equal to the product of (i) 0.50%, (ii)
the arithmetic mean of the aggregate Outstanding Balance of all Eligible Loan Assets on the first
day and on the last day of the related Remittance Period and (iii) the actual number of days in
such Remittance Period divided by 360; provided that the rate set forth in clause (i)
hereof may be increased up to 0.75% at the discretion of the Administrative Agent in the event that
a successor Servicer is appointed pursuant to Section 6.01(c).
Servicing File means, for each Loan Asset, (a) copies of each of the Required Loan
Documents and (b) any other portion of the Loan Asset File which is not part of the Required Loan
Documents.
Servicing Report has the meaning assigned to that term in Section 6.08(b).
Servicing Standard means, with respect to any Loan Assets included in the Collateral
Portfolio, to service and administer such Loan Assets on behalf of the Secured Parties in
accordance with Applicable Law, the terms of this Agreement, the Loan Agreements, all customary and
usual servicing practices for loans like the Loan Assets and, to the extent consistent with the
foregoing, (a)(i) if the Servicer is the originator or an Affiliate thereof, the higher of: (A) the
customary and usual servicing practices that a prudent loan investor or lender would use in
servicing loans like the Loan Assets for its own account, and (B) the same care, skill, prudence
and diligence with which the Servicer services and administers loans for its own account or for the
account of others, and (ii) if the Servicer is not the originator or an Affiliate thereof, the same
care, skill, prudence and diligence with which the Servicer services and administers loans for its
own account or for the account of others; (b) with a view to maximize the value of the Loan Assets;
and (c) without regard to: (i) the Servicers obligations to incur servicing and administrative
expenses with respect to a Loan Asset, (ii) the Servicers right to receive compensation for its
services hereunder or with respect to any particular transaction, (iii) the ownership by the
Servicer or any Affiliate thereof of any Loan Assets, or (iv) the ownership, servicing or
management for others by the Servicer of any other loans or property by the Servicer.
Shareholders Equity means, at any date, the amount determined on a consolidated
basis, without duplication, in accordance with GAAP, of shareholders equity for the Servicer at
such date.
Solvent means, as to any Person at any time, having a state of affairs such that all
of the following conditions are met: (a) the fair value of the property of such Person is greater
than the amount of such Persons liabilities (including disputed, contingent and unliquidated
liabilities) as such value is established and liabilities evaluated for purposes of Section 101(32)
of the Bankruptcy Code; (b) the present fair saleable value of the property of such Person in an
orderly liquidation of such Person is not less than the amount that will be
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required to pay the probable liability of such Person on its debts and other liabilities as
they become absolute and matured; (c) such Person is able to realize upon its property and pay its
debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they
mature in the normal course of business; (d) such Person does not intend to, and does not believe
that it will, incur debts or liabilities beyond such Persons ability to pay as such debts and
liabilities mature; and (e) such Person is not engaged in a business or a transaction, and does not
propose to engage in a business or a transaction, for which such Persons property assets would
constitute unreasonably small capital.
Spread Differential means, for any date of determination, the (a) weighted average
fixed rate cash coupon of the Fixed Rate Loan Assets included in the Collateral Portfolio on such
date minus (b) the Yield Rate for such date.
State means one of the fifty states of the United States or the District of
Columbia.
Stated Maturity Date means November 16, 2012 or such later date as is agreed to in
writing by the Borrower, the Servicer, the Administrative Agent and the Lenders pursuant to
Section 2.19(a).
Subsidiary means with respect to a person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having ordinary voting power (other
than stock or such other ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of such corporation,
partnership or other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both, by such person.
Substitute Eligible Loan Asset means each Eligible Loan Asset Pledged by the
Borrower to the Collateral Agent, on behalf of the Secured Parties, pursuant to Section
2.07(a) or Section 2.07(c)(ii).
Taxes means any present or future taxes, levies, imposts, duties, charges,
assessments or fees of any nature (including interest, penalties, and additions thereto) that are
imposed by any Governmental Authority.
Term Loan Asset means a Loan Asset that is a term loan that has been fully funded
and does not contain any unfunded commitment on the part of the Transferor arising from an
extension of credit by the Transferor to an Obligor.
Transaction Documents means this Agreement, the Variable Funding Note(s), any
Hedging Agreement, any Joinder Supplement, the Purchase and Sale Agreement, the Collection Account
Agreement, the Unfunded Exposure Account Agreement, the Wells Fargo Fee Letter, each Lender Fee
Letter, the Pledge Agreement and each document, instrument or agreement related to any of the
foregoing.
Transferee Letter has the meaning assigned to that term in Section 11.04(a).
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Transferor means Fifth Street, in its capacity as the transferor hereunder and as
the seller under the Purchase and Sale Agreement, together with its successors and assigns in such
capacity.
UCC means the Uniform Commercial Code as from time to time in effect in the
specified jurisdiction.
Underlying Collateral means, with respect to a Loan Asset, any property or other
assets designated and pledged or mortgaged as collateral to secure repayment of such Loan Asset, as
applicable, including, without limitation, mortgaged property and/or a pledge of the stock,
membership or other ownership interests in the related Obligor and all proceeds from any sale or
other disposition of such property or other assets.
Unfunded Exposure Account means a trust account (account number 53237101 at the
Account Bank) in the name of the Borrower and under the sole dominion and control of the Collateral
Agent for the benefit of the Secured Parties; provided, that the funds deposited therein (including
any interest and earnings thereon) from time to time shall constitute the property and assets of
the Borrower and the Borrower shall be solely liable for any Taxes payable with respect to the
Unfunded Exposure Account.
Unfunded Exposure Account Agreement means that certain Unfunded Exposure Account
Agreement, dated the date of this Agreement, among the Borrower, the Servicer, the Account Bank,
the Administrative Agent, and the Collateral Agent, which agreement relates to the Unfunded
Exposure Account, as such agreement may from time to time be amended, supplemented or otherwise
modified in accordance with the terms thereof.
Unfunded Exposure Amount means, as of any date of determination, an amount equal to
the aggregate amount of all unfunded commitments associated with Loan Assets owned by the Borrower.
Unfunded Exposure Amount Shortfall has the meaning assigned to that term in
Section 2.02(f).
Unfunded Exposure Equity Amount means, on any date of determination, an amount equal
to:
(i) for each Loan Asset which has any unfunded commitments, the aggregate sum of the products
of (a) the Unfunded Exposure Amount for each such Loan Asset multiplied by (b) the
difference of (x) 100% minus (y) the Applicable Percentage for each such Loan Asset;
plus
(ii) for each Loan Asset which has any unfunded commitments, the aggregate sum of the products
of (a) (x) 100% minus the Assigned Value for each such Loan Asset multiplied by (y)
the Unfunded Exposure Amount of each such Loan Asset; multiplied by (b) the Applicable
Percentage for each such Loan Asset.
United States means the United States of America.
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Unmatured Event of Default means any event that, if it continues uncured, will, with
lapse of time, notice or lapse of time and notice, constitute an Event of Default.
Unrestricted Cash the meaning of Unrestricted Cash or any comparable definition in
the Loan Agreements for each Loan Asset, and in any case that Unrestricted Cash or such
comparable definition is not defined in such Loan Agreement, all cash available for use for general
corporate purposes and not held in any reserve account or legally or contractually restricted for
any particular purposes or subject to any lien (other than blanket liens permitted under or granted
in accordance with such Loan Agreement).
Unused Portion has the meaning assigned to that term in Section 2.09(a).
Value Adjustment Event means, with respect to any Loan Asset, the occurrence of any
one or more of the following events after the related Cut-Off Date:
(i) (x) The Interest Coverage Ratio for any Relevant Test Period with respect to such Loan
Asset is less than 90% of the Interest Coverage Ratio with respect to such Loan Asset as calculated
on (A) the applicable Cut-Off Date (if no Improvement Date has occurred) or (B) the most recent
Improvement Date (if an Improvement Date has occurred) or (y) the Net Leverage Ratio for any
Relevant Test Period of the related Obligor with respect to such Loan Asset is more than 0.50x
higher than such Net Leverage Ratio as calculated on (A) the applicable Cut-Off Date (if no
Improvement Date has occurred) or (B) the most recent Improvement Date (if an Improvement Date has
occurred);
(ii) an Obligor payment default under any Loan Asset (after giving effect to any grace and/or
cure period set forth in the Loan Agreement, but not to exceed five days);
(iii) any other Obligor default under any Loan Asset for which the Borrower (or agent or
required lenders pursuant to the Loan Agreement, as applicable) has elected to exercise any of its
rights and remedies under the applicable Loan Agreement in case of the default thereunder
(including, but not limited to, acceleration of the debt);
(iv) a Bankruptcy Event with respect to the related Obligor;
(v) the occurrence of a Material Modification (in accordance with clauses
(b)-(f) of the definition thereof) with respect to such Loan Asset; or
(vi) the occurrence of a Material Modification (in accordance with clause (a) of the
definition thereof) with respect to such Loan Asset.
Variable Funding Note has the meaning assigned to such term in Section
2.01(a).
Wachovia means Wachovia Bank, National Association, a national banking association,
in its individual capacity, and its successors and assigns.
Warranty Event means, as to any Loan Asset, the discovery that as of the related
Cut-Off Date for such Loan Asset there existed a breach of any representation or
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warranty relating to such Loan Asset (other than any representation or warranty that the Loan
Asset satisfies the criteria of the definition of Eligible Loan Asset) and the failure of the
Borrower to cure such breach, or cause the same to be cured, within 10 days after the earlier to
occur of the Borrowers receipt of notice thereof from the Administrative Agent or the Borrower
becoming aware thereof; provided that, any Loan Asset approved by the Administrative Agent in
accordance with Section 11 of Schedule III on the applicable Cut-Off Date shall not be a
Warranty Loan Asset due to the failure of such Loan Asset to satisfy the requirements of Section 11
of Schedule III on any date thereafter.
Warranty Loan Asset means any Loan Asset that fails to satisfy any criteria of the
definition of Eligible Loan Asset as of the Cut-Off Date for such Loan Asset or a Loan Asset with
respect to which a Warranty Event has occurred.
Wells Fargo has the meaning assigned to that term in the preamble hereto.
Wells Fargo Fee Letter means the Wells Fargo Fee Letter, dated as of the date
hereof, between the Collateral Agent, the Collateral Custodian, the Account Bank, the Borrower and
the Administrative Agent, as such letter may be amended, modified, supplemented, restated or
replaced from time to time.
Yield means with respect to any Remittance Period, the sum for each day in such
Remittance Period determined in accordance with the following formula:
YR x L
D
|
|
|
|
|
|
|
where:
|
|
YR
|
|
=
|
|
the Yield Rate applicable on such day; |
|
|
|
|
|
|
|
|
|
L
|
|
=
|
|
the Advances Outstanding on such day; and |
|
|
|
|
|
|
|
|
|
D
|
|
=
|
|
360 or, to the extent
the Yield Rate is the Base Rate, 365 or 366 days, as
applicable; |
provided that (i) no provision of this Agreement shall require the payment or permit the collection
of Yield in excess of the maximum permitted by Applicable Law and (ii) Yield shall not be
considered paid by any distribution if at any time such distribution is later required to be
rescinded by any Lender to the Borrower or any other Person for any reason including, without
limitation, such distribution becoming void or otherwise avoidable under any statutory provision or
common law or equitable action, including, without limitation, any provision of the Bankruptcy
Code.
Yield Rate means, as of any date of determination, an interest rate per annum equal
to LIBOR for such date plus the Applicable Spread; provided that if Wachovia shall have
notified the Administrative Agent that a Eurodollar Disruption Event has occurred, the Yield Rate
shall be equal to the Base Rate plus the Applicable Spread until such Lender Agent shall
have notified the Administrative Agent that such Eurodollar Disruption Event has ceased, at which
time the Yield Rate shall again be equal to LIBOR for such date plus the Applicable Spread.
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SECTION 1.02 Other Terms. All accounting terms used but not specifically defined
herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the
State of New York, and used but not specifically defined herein, are used herein as defined in such
Article 9.
SECTION 1.03 Computation of Time Periods. Unless otherwise stated in this Agreement,
in the computation of a period of time from a specified date to a later specified date, the word
from means from and including and the words to and until each mean to but excluding.
SECTION 1.04 Interpretation.
In each Transaction Document, unless a contrary intention appears:
(a) the singular number includes the plural number and vice versa;
(b) reference to any Person includes such Persons successors and assigns but, if applicable,
only if such successors and assigns are permitted by the Transaction Documents;
(c) reference to any gender includes each other gender;
(d) reference to day or days without further qualification means calendar days;
(e) reference to any time means New York, New York time;
(f) reference to the words include, includes and including shall be deemed to be
followed by the phrase without limitation;
(g) reference to any agreement (including any Transaction Document), document or instrument
means such agreement, document or instrument as amended, modified, waived, supplemented, restated
or replaced and in effect from time to time in accordance with the terms thereof and, if
applicable, the terms of the other Transaction Documents, and reference to any promissory note
includes any promissory note that is an extension or renewal thereof or a substitute or replacement
therefor; and
(h) reference to any Applicable Law means such Applicable Law as amended, modified, codified,
replaced or reenacted, in whole or in part, and in effect from time to time, including rules and
regulations promulgated thereunder and reference to any Section or other provision of any
Applicable Law means that provision of such Applicable Law from time to time in effect and
constituting the substantive amendment, modification, codification, replacement or reenactment of
such Section or other provision.
ARTICLE II.
THE FACILITY
SECTION 2.01 Variable Funding Note and Advances.
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(a) Variable Funding Note. The Borrower has heretofore delivered or shall, on the date
hereof (and on the terms and subject to the conditions hereinafter set forth), deliver, to each
Lender Agent, at the address set forth on the signature pages of this Agreement, and on the
effective date of any Joinder Supplement, to each additional Lender Agent, at the address set forth
in the applicable Joinder Supplement, a duly executed variable funding note (the Variable
Funding Note), in substantially the form of Exhibit I, in an aggregate face amount
equal to the applicable Lenders Commitment as of the Closing Date or the effective date of any
Joinder Supplement, as applicable, and otherwise duly completed. Interest shall accrue on the
Variable Funding Note, and the Variable Funding Note shall be payable, as described herein.
(b) Advances. On the terms and conditions hereinafter set forth, from time to time
from the Closing Date until the end of the Reinvestment Period, the Lenders shall make Advances
under the Variable Funding Notes, secured by the Collateral Portfolio, (x) to the Borrower for the
purpose of purchasing Eligible Loan Assets or (y) to the Unfunded Exposure Account in an amount up
to the Unfunded Exposure Amount. Other than pursuant to Section 2.02(f), under no
circumstances shall any Lender be required to make any Advance if after giving effect to such
Advance and the addition to the Collateral Portfolio of the Eligible Loan Assets being acquired by
the Borrower using the proceeds of such Advance, (i) an Event of Default has occurred or would
result therefrom or an Unmatured Event of Default exists or would result therefrom or (ii) the
aggregate Advances Outstanding would exceed the Borrowing Base. Notwithstanding anything to the
contrary herein (other than pursuant to Section 2.02(f)), no Lender shall be obligated to
provide the Borrower (or to the Unfunded Exposure Account, if applicable) with aggregate funds in
connection with an Advance that would exceed the least of (x) such Lenders unused Commitment then
in effect and (y) the aggregate unused Commitments then in effect.
(c) Notations on Variable Funding Note. Each Lender Agent is hereby authorized to
enter on a schedule attached to the Variable Funding Note with respect to each Conduit Lender and
each Institutional Lender a notation (which may be computer generated) with respect to each Advance
under the Variable Funding Note made by the applicable Lender of: (i) the date and principal
amount thereof, and (ii) each repayment of principal thereof, and any such recordation shall
constitute prima facie evidence of the accuracy of the information so recorded. The failure of any
Lender Agent to make any such notation on the schedule attached to any Variable Funding Note shall
not limit or otherwise affect the obligation of the Borrower to repay the Advances in accordance
with their respective terms as set forth herein.
SECTION 2.02 Procedure for Advances.
(a) During the Reinvestment Period, the Lenders will make Advances on any Business Day at the
request of the Borrower, subject to and in accordance with the terms and conditions of Sections
2.01 and 2.02 and subject to the provisions of Article III hereof.
(b) Each Advance shall be made on at least one Business Days irrevocable written notice
(other than in the case of a Same-Day Advance) from the Borrower to the Administrative Agent and
each Lender Agent, with a copy to the Collateral Agent and the Collateral Custodian, in the form of
a Notice of Borrowing; provided that such Notice of Borrowing shall be deemed to have been received
by the Administrative Agent and each Lender
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Agent on a Business Day if delivered no later than 5:00 p.m. on such Business Day and if not
delivered by such time, shall be deemed to have been received on the following Business Day. For
each Same-Day Advance, the Borrower shall deliver an irrevocable written notice in the form of a
Notice of Borrowing to the Administrative Agent and each Lender Agent, with a copy to the
Collateral Agent and the Collateral Custodian no later than 2:00 p.m. on the proposed date of such
Same-Day Advance; provided that, the amount of any such Same-Day Advance shall not exceed
$20,000,000. The Borrower or the Servicer shall post all Loan Agreements and other loan documents
and information with respect to each proposed Eligible Loan Asset, if any, to an IntraLinks (or
other replacement) website to which the Administrative Agent and each Lender Agent has access. Each
Notice of Borrowing shall include a duly completed Borrowing Base Certificate (updated to the date
such Advance is requested and giving pro forma effect to the Advance requested and the use of the
proceeds thereof), and shall specify:
(i) the aggregate amount of such Advance, which amount shall not cause the Advances
Outstanding to exceed the Borrowing Base; provided that, except with respect to an Advance
pursuant to Section 2.02(f), the amount of such Advance must be at least equal to
$500,000;
(ii) the proposed date of such Advance;
(iii) a representation that all conditions precedent for an Advance described in
Article III hereof have been satisfied;
(iv) the amount of cash that will be funded by the Transferor into the Unfunded
Exposure Account in connection with any Revolving Loan Asset or Delayed Draw Loan Asset
funded by such Advance, if applicable; and
(v) whether such Advance should be remitted to the Borrower or the Unfunded Exposure
Account.
On the date of each Advance, upon satisfaction of the applicable conditions set forth in
Article III, each Lender shall, in accordance with instructions received by the Borrower,
either (i) make available to the Borrower, in same day funds, an amount equal to such Lenders Pro
Rata Share of such Advance, by payment into the account which the Borrower has designated in
writing or (ii) remit in same day funds an amount equal to such Lenders Pro Rata Share of such
Advance into the Unfunded Exposure Account, as applicable; provided that, with respect to an
Advance funded pursuant to Section 2.02(f), each Lender shall remit the Advance equal to
such Lenders Pro Rata Share of the Unfunded Exposure Amount Shortfall in same day funds to the
Unfunded Exposure Account.
(c) The Advances shall bear interest at the Yield Rate.
(d) Subject to Section 2.18 and the other terms, conditions, provisions and
limitations set forth herein (including, without limitation, the payment of the Make-Whole Premium,
as applicable), the Borrower may borrow, repay or prepay and reborrow Advances without any penalty,
fee or premium on and after the Closing Date and prior to the end of the Reinvestment Period.
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(e) A determination by Wachovia of the existence of any Eurodollar Disruption Event (any such
determination to be communicated to the Borrower by written notice from the Administrative Agent
promptly after the Administrative Agent learns of such event), or of the effect of any Eurodollar
Disruption Event on its making or maintaining Advances at LIBOR, shall be conclusive absent
manifest error.
(f) Notwithstanding anything to the contrary herein (including, without limitation, the
occurrence of an Event of Default or the existence of an Unmatured Event of Default or a Borrowing
Base Deficiency), if, upon the occurrence of an Event of Default or on the last day of the
Reinvestment Period, the amount on deposit in the Unfunded Exposure Account is less than the
aggregate Unfunded Exposure Amount, the Borrower shall request an Advance in the amount of such
shortfall (the Unfunded Exposure Amount Shortfall). Following receipt of a Notice of
Borrowing (which shall specify the account details of the Unfunded Exposure Account where the funds
will be made available), each Lender shall fund such Unfunded Exposure Amount Shortfall in
accordance with Section 2.02(b), notwithstanding anything to the contrary herein
(including, without limitation, the Borrowers failure to satisfy any of the conditions precedent
set forth in Section 3.02). For the avoidance of doubt, the Borrower shall not be required
to fund the Unfunded Exposure Account unless and until the occurrence of an Event of Default or the
last day of the Reinvestment Period.
(g) The obligation of each Conduit Lender and each Institutional Lender to remit its Pro Rata
Share of any Advance shall be several from that of each other Lender and the failure of any Conduit
Lender or Institutional Lender to so make such amount available to the Borrower shall not relieve
any other Lender of its obligation hereunder.
SECTION 2.03 Determination of Yield. Each applicable Lender Agent shall determine the
Yield for its portion of the Advances (including unpaid Yield related thereto, if any, due and
payable on a prior Payment Date) to be paid by the Borrower on each Payment Date for the related
Remittance Period and shall advise the Servicer thereof on the third Business Day prior to such
Payment Date.
SECTION 2.04 Remittance Procedures. The Servicer, as agent for the Administrative
Agent and the Lender Agents, shall instruct the Collateral Agent and, if the Servicer fails to do
so, the Administrative Agent may instruct the Collateral Agent, to apply funds on deposit in the
Controlled Accounts as described in this Section 2.04; provided that, at any time after
delivery of Notice of Exclusive Control (as defined in the Collection Account Agreement), the
Administrative Agent shall instruct the Collateral Agent to apply funds on deposit in the
Controlled Accounts as described in this Section 2.04.
(a) Payment Date Transfers During Reinvestment Period and Absent an Event of Default.
During the Reinvestment Period, so long as no Event of Default has occurred and, in any case, prior
to the declaration, or automatic occurrence, of the Facility Maturity Date, the Collateral Agent
shall (as directed pursuant to the first paragraph of this Section 2.04) transfer collected
funds held by the Account Bank in the Collection Account, in accordance with the Servicing Report,
to the following Persons in the following amounts, calculated as of the Determination Date, and
priority:
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(i) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Fees and Collateral Agent Expenses, (b) the Collateral Custodian in payment
in full of all accrued Collateral Custodian Fees and Collateral Custodian Expenses and (c)
the Account Bank in payment in full of all accrued fees and expenses due under the Wells
Fargo Fee Letter; provided that amounts payable with respect to Collateral Agent Expenses,
Collateral Custodian Expenses and the Account Bank pursuant to this clause (i) (and
Section 2.04(b)(i), (c)(i) and (d)(i), if applicable) shall not, collectively,
exceed $170,000 per annum;
(ii) to the Servicer, in payment in full of all accrued Servicing Fees;
(iii) to the Hedge Counterparty, any amounts (other than any Hedge Breakage Costs)
owing to that Hedge Counterparty under its Hedging Agreement in respect of any Hedge
Transaction(s);
(iv) pro rata, in accordance with the amounts due under this clause, to each Lender
Agent, for the account of the applicable Lender, all Yield and the Non-Usage Fee that is
accrued and unpaid as of the last day of the related Remittance Period;
(v) pro rata, to each Lender Agent (for the account of the applicable Lender) and the
Administrative Agent, all accrued and unpaid fees, expenses (including attorneys fees,
costs and expenses) and indemnity amounts payable by the Borrower to the Administrative
Agent, any Lender Agent or any Lender under the Transaction Documents;
(vi) to pay the Advances Outstanding to the extent required to satisfy any outstanding
Borrowing Base Deficiency;
(vii) at the discretion of the Servicer, to fund the Unfunded Exposure Account (in an
amount up to the Unfunded Exposure Amount);
(viii) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Expenses to the extent not previously paid, (b) the Collateral Custodian in
payment in full of all accrued Collateral Custodian Expenses to the extent not previously
paid, and (c) the Account Bank in payment in full of all accrued expenses to the extent not
previously paid;
(ix) to pay the Advances Outstanding, together with any applicable Make-Whole Premium,
in connection with any complete refinancing or termination of this Agreement in accordance
with Section 2.18(b);
(x) to the Hedge Counterparty, any Hedge Breakage Costs owing to the Hedge Counterparty
under its Hedging Agreement;
(xi) to pay any other amounts due (other than with respect to the repayment of
Advances) under this Agreement and the other Transaction Documents (including any indemnity
amounts due from the Borrower hereunder and thereunder not previously paid pursuant to
Section 2.04(a)(v));
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(xii) to the Servicer, in respect of all reasonable expenses (except allocated
overhead) incurred in connection with the performance of its duties hereunder; and
(xiii) to the Borrower, any remaining amounts.
(b) Interest Payments after the Reinvestment Period but Prior to an Event of Default.
After the Reinvestment Period but prior to the occurrence of an Event of Default or the Facility
Maturity Date, the Collateral Agent shall (as directed pursuant to the first paragraph of this
Section 2.04) transfer Interest Collections held by the Account Bank in the Collection
Account, in accordance with the Servicing Report, to the following Persons in the following
amounts, calculated as of the Determination Date, and priority:
(i) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Fees and Collateral Agent Expenses, (b) the Collateral Custodian in payment
in full of all accrued Collateral Custodian Fees and Collateral Custodian Expenses and (c)
the Account Bank in payment in full of all accrued fees and expenses due under the Wells
Fargo Fee Letter; provided that amounts payable with respect to Collateral Agent Expenses,
Collateral Custodian Expenses and the Account Bank pursuant to this clause (i) (and
Section 2.04(a)(i), (c)(i) and (d)(i), if applicable) shall not, collectively,
exceed $170,000 per annum;
(ii) to the Servicer, in payment in full of all accrued Servicing Fees;
(iii) to the Hedge Counterparty, any amounts (other than any Hedge Breakage Costs)
owing to that Hedge Counterparty under its Hedging Agreement in respect of any Hedge
Transaction(s);
(iv) pro rata, in accordance with the amounts due under this clause, to each Lender
Agent, for the account of the applicable Lender, all Yield and the Non-Usage Fee that is
accrued and unpaid as of the last day of the related Remittance Period;
(v) pro rata, to each Lender Agent (for the account of the applicable Lender) and the
Administrative Agent, as applicable, all accrued and unpaid fees, expenses (including
attorneys fees, costs and expenses) and indemnity amounts payable by the Borrower to the
Administrative Agent, any Lender Agent or any Lender under the Transaction Documents;
(vi) to pay the Advances Outstanding to the extent required to satisfy any outstanding
Borrowing Base Deficiency;
(vii) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Expenses to the extent not previously paid, (b) the Collateral Custodian in
payment in full of all accrued Collateral Custodian Expenses to the extent not previously
paid, and (c) the Account Bank in payment in full of all accrued expenses to the extent not
previously paid;
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(viii) to pay the Advances Outstanding, together with any applicable Make-Whole
Premium, in connection with any complete refinancing or termination of this Agreement in
accordance with Section 2.18(b);
(ix) to the Hedge Counterparty, any Hedge Breakage Costs owing to the Hedge
Counterparty under its Hedging Agreement;
(x) to pay any other amounts due (other than with respect to the repayment of Advances)
under this Agreement and the other Transaction Documents (including any indemnity amounts
due from the Borrower hereunder and thereunder not previously paid pursuant to Section
2.04(b)(v));
(xi) to the Servicer, in respect of all reasonable expenses (except allocated overhead)
incurred in connection with the performance of its duties hereunder; and
(xii) to the Borrower, any remaining amounts.
(c) Principal Payments after the Reinvestment Period but Prior to an Event of Default.
After the Reinvestment Period but prior to an Event of Default or the Facility Maturity Date, the
Collateral Agent shall (as directed pursuant to the first paragraph of this Section 2.04)
transfer Principal Collections held by the Account Bank in the Collection Account, in accordance
with the Servicing Report, to the following Persons in the following amounts, calculated as of the
Determination Date, and priority:
(i) to pay amounts due under Section 2.04(b)(i) through (vi), to the
extent not paid thereunder;
(ii) to the Unfunded Exposure Account in an amount necessary to cause the amount on
deposit in the Unfunded Exposure Account to equal the Unfunded Exposure Amount;
(iii) to pay the Advances Outstanding, including any applicable Make-Whole Premium,
until paid in full;
(iv) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Expenses to the extent not previously paid, (b) the Collateral Custodian in
payment in full of all accrued Collateral Custodian Expenses to the extent not previously
paid, and (c) the Account Bank in payment in full of all accrued expenses to the extent not
previously paid;
(v) to the Hedge Counterparty, any Hedge Breakage Costs owing to the Hedge Counterparty
under its Hedging Agreement, to the extent not paid pursuant to Section 2.04(b)(ix);
(vi) to pay any other amounts due under this Agreement and the other Transaction
Documents (including any indemnity amounts due from the Borrower hereunder and thereunder
not previously paid pursuant to Section 2.04(b)(v));
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(vii) to the Servicer, in respect of all reasonable expenses (except allocated
overhead) incurred in connection with the performance of its duties hereunder; and
(viii) to the Borrower, any remaining amounts.
(d) Payment Date Transfers Upon the Occurrence of an Event of Default. If an Event of
Default has occurred or, in any case, after the declaration, or automatic occurrence, of the
Facility Maturity Date, the Collateral Agent shall (as directed pursuant to the first paragraph of
this Section 2.04) transfer collected funds held by the Account Bank in the Collection
Account, in accordance with the Servicing Report, to the following Persons in the following
amounts, calculated as of the Determination Date, and priority:
(i) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Fees and Collateral Agent Expenses, (b) the Collateral Custodian in payment
in full of all accrued Collateral Custodian Fees and Collateral Custodian Expenses and (c)
the Account Bank in payment in full of all accrued fees and expenses due under the Wells
Fargo Fee Letter; provided that amounts payable with respect to Collateral Agent Expenses,
Collateral Custodian Expenses and the Account Bank pursuant to this clause (i) (and
Section 2.04(a)(i), (b)(i) and (c)(i), if applicable) shall not, collectively,
exceed $170,000 per annum;
(ii) to the Servicer, in payment in full of all accrued Servicing Fees;
(iii) to the Hedge Counterparty, any amounts (other than any Hedge Breakage Costs)
owing to that Hedge Counterparty under its Hedging Agreement in respect of any Hedge
Transaction(s);
(iv) pro rata, in accordance with the amounts due under this clause, to each Lender
Agent, for the account of the applicable Lender, all Yield and the Non-Usage Fee that is
accrued and unpaid as of the last day of the related Remittance Period;
(v) pro rata, to each Lender Agent (for the account of the applicable Lender) and the
Administrative Agent, as applicable, all accrued and unpaid fees, expenses (including
attorneys fees, costs and expenses) and indemnity amounts payable by the Borrower to the
Administrative Agent, any Lender Agent or any Lender under the Transaction Documents;
(vi) to the Unfunded Exposure Account in an amount necessary to cause the amount on
deposit in the Unfunded Exposure Account to equal the Unfunded Exposure Amount;
(vii) to pay the Advances Outstanding, including any applicable Make-Whole Premium,
until paid in full;
(viii) pari passu to (a) the Collateral Agent, in payment in full of all accrued
Collateral Agent Expenses to the extent not previously paid, (b) the Collateral Custodian in
payment in full of all accrued Collateral Custodian Expenses to the extent
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not previously paid, and (c) the Account Bank in payment in full of all accrued
expenses to the extent not previously paid;
(ix) to the Hedge Counterparty, any Hedge Breakage Costs owing to the Hedge
Counterparty under its Hedging Agreement;
(x) to pay any other amounts due under this Agreement and the other Transaction
Documents (including any indemnity amounts due from the Borrower hereunder and thereunder
not previously paid pursuant to Section 2.04(d)(v));
(xi) to the Servicer, in respect of all reasonable expenses (except allocated overhead)
incurred in connection with the performance of its duties hereunder; and
(xii) to the Borrower, any remaining amounts.
(e) Unfunded Exposure Account. Funds on deposit in the Unfunded Exposure Account as of
any date of determination may be withdrawn to fund draw requests of the relevant Obligors under any
Revolving Loan Asset or Delayed Draw Loan Asset; provided that, until an Event of Default has
occurred, the amount withdrawn to fund such draw request shall not create any Borrowing Base
Deficiency. Any such draw request made by an Obligor, along with wiring instructions for the
applicable Obligor, shall be forwarded by the Borrower or the Servicer to the Collateral Agent
(with a copy to the Administrative Agent and each Lender Agent) in the form of a Disbursement
Request, and the Collateral Agent shall instruct the Account Bank to fund such draw request in
accordance with the Disbursement Request. At any time, the Servicer (or, after delivery of Notice
of Exclusive Control (as such term is defined in the Unfunded Exposure Account Agreement), the
Administrative Agent) may cause any amounts on deposit in the Unfunded Exposure Account which
exceed the Unfunded Exposure Amount as of any date of determination to be deposited into the
Principal Collection Account as Principal Collections.
(f) Insufficiency of Funds. For the sake of clarity, the parties hereby agree that if
the funds on deposit in the Collection Account are insufficient to pay any amounts due and payable
on a Payment Date or otherwise, the Borrower shall nevertheless remain responsible for, and shall
pay when due, all amounts payable under this Agreement and the other Transaction Documents in
accordance with the terms of this Agreement and the other Transaction Documents.
SECTION 2.05 Instructions to the Collateral Agent and the Account Bank. All
instructions and directions given to the Collateral Agent or the Account Bank by the Servicer, the
Borrower or the Administrative Agent pursuant to Section 2.04 shall be in writing
(including instructions and directions transmitted to the Collateral Agent or the Account Bank by
telecopy or e-mail), and such written instructions and directions shall be delivered with a written
certification that such instructions and directions are in compliance with the provisions of
Section 2.04. The Servicer and the Borrower shall immediately transmit to the
Administrative Agent by telecopy or e-mail a copy of all instructions and directions given to the
Collateral Agent or the Account Bank by such party pursuant to Section 2.04. The
Administrative Agent shall promptly transmit to the Servicer and the Borrower by telecopy or e-mail
a copy of all
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instructions and directions given to the Collateral Agent or the Account Bank by the
Administrative Agent, pursuant to Section 2.04. If either the Administrative Agent or
Collateral Agent disagrees with the computation of any amounts to be paid or deposited by the
Borrower or the Servicer under Section 2.04 or otherwise pursuant to this Agreement, or
upon their respective instructions, it shall so notify the Borrower, the Servicer and the
Collateral Agent in writing and in reasonable detail to identify the specific disagreement. If such
disagreement cannot be resolved within two Business Days, the determination of the Administrative
Agent as to such amounts shall be conclusive and binding on the parties hereto absent manifest
error. In the event the Collateral Agent or the Account Bank receives instructions from the
Servicer or the Borrower which conflict with any instructions received by the Administrative Agent,
the Collateral Agent or the Account Bank, as applicable, shall rely on and follow the instructions
given by the Administrative Agent.
SECTION 2.06 Borrowing Base Deficiency Payments.
(a) In addition to any other obligation of the Borrower to cure any Borrowing Base Deficiency
pursuant to the terms of this Agreement, if, on any day prior to the Collection Date, any Borrowing
Base Deficiency exists, then the Borrower shall, within three Business Days from the date of such
Borrowing Base Deficiency, eliminate such Borrowing Base Deficiency in its entirety by effecting
one or more (or any combination thereof) of the following actions in order to eliminate such
Borrowing Base Deficiency as of such date of determination: (i) deposit cash in United States
dollars into the Principal Collection Account, (ii) repay Advances (together with any Breakage
Fees, Hedge Breakage Costs and all accrued and unpaid costs and expenses of the Administrative
Agent, the Lender Agents and the Lenders, in each case in respect of the amount so prepaid), and/or
(iii) subject to the approval of the Administrative Agent, in its sole discretion, Pledge
additional Eligible Loan Assets; provided, that if the Borrower requests to Pledge another Eligible
Loan Asset within one Business Day of such Borrowing Base Deficiency and the Administrative Agent
does not either reject such Loan Asset or approve such Loan Asset within one Business Day of the
Borrowers request to Pledge such Loan Asset, then the Administrative Agent may, in its sole
discretion, elect in writing to extend the three Business Day grace period set forth in this
Section 2.06 for up to seven Business Days.
(b) No later than 2:00 p.m. on the Business Day prior to the proposed repayment of Advances or
Pledge of additional Eligible Loan Assets pursuant to Section 2.06(a), the Borrower (or the
Servicer on its behalf) shall deliver (i) to the Administrative Agent (with a copy to the
Collateral Agent and the Collateral Custodian), notice of such repayment or Pledge and a duly
completed Borrowing Base Certificate, updated to the date such repayment or Pledge is being made
and giving pro forma effect to such repayment or Pledge, and (ii) to the Administrative Agent, if
applicable, a description of any Eligible Loan Asset and each Obligor of such Eligible Loan Asset
to be Pledged and added to the updated Loan Asset Schedule. Any notice pertaining to any repayment
or any Pledge pursuant to this Section 2.06 shall be irrevocable.
SECTION 2.07 Substitution and Sale of Loan Assets; Affiliate Transactions.
(a) Substitutions. The Borrower may, with the consent of the Administrative Agent in
its sole discretion, replace any Loan Asset as a Loan Asset so long as (i) no event has
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occurred, or would result from such substitution, which constitutes an Event of Default and no
event has occurred and is continuing, or would result from such substitution, which constitutes an
Unmatured Event of Default or a Borrowing Base Deficiency and (ii) simultaneously therewith, the
Borrower Pledges (in accordance with all of the terms and provisions contained herein) a Substitute
Eligible Loan Asset.
(b) Discretionary Sales. The Borrower shall be permitted to sell Loan Assets to
Persons other than the Transferor or its Affiliates from time to time; provided that (i) the
proceeds of such sale shall be deposited into the Collection Account to be disbursed in accordance
with Section 2.04 hereof, (ii) no event has occurred, or would result from such sale, which
constitutes an Event of Default and no event has occurred and is continuing, or would result from
such sale, which constitutes an Unmatured Event of Default or a Borrowing Base Deficiency; and
(iii) the prior written consent of the Administrative Agent shall be required if such Loan Asset is
sold for an amount which is less than the Adjusted Borrowing Value.
(c) Repurchase or Substitution of Warranty Loan Assets. If on any day a Loan Asset is
(or becomes) a Warranty Loan Asset, no later than 10 Business Days following the earlier of
knowledge by the Borrower of such Loan Asset becoming a Warranty Loan Asset or receipt by the
Borrower from the Administrative Agent or the Servicer of written notice thereof, the Borrower
shall either:
(i) make a deposit to the Collection Account (for allocation pursuant to Section
2.04) in immediately available funds in an amount equal to (x) the Advance Date Assigned
Value multiplied by the Outstanding Balance of such Loan Asset, (y) all Hedge Breakage Costs
arising as a result thereof and owed to the relevant Hedge Counterparty for any termination
of one or more Hedge Transactions, in whole or in part, as required by the terms of any
Hedging Agreement and (z) any expenses or fees with respect to such Loan Asset and costs and
damages incurred by the Administrative Agent or by any Lender in connection with any
violation by such Loan Asset of any predatory or abusive lending law which is an Applicable
Law (a notification regarding the amount of such expenses or fees to be provided by the
Administrative Agent to the Borrower); provided that the Administrative Agent shall have the
right to determine whether the amount so deposited is sufficient to satisfy the foregoing
requirements; or
(ii) with the prior written consent of the Administrative Agent, in its sole
discretion, substitute for such Warranty Loan Asset a Substitute Eligible Loan Asset.
Upon confirmation of the deposit of the amounts set forth in Section 2.07(c)(i) into
the Collection Account or the delivery by the Borrower of a Substitute Eligible Loan Asset for each
Warranty Loan Asset (the date of such confirmation or delivery, the Release Date), such
Warranty Loan Asset and related Portfolio Assets shall be removed from the Collateral Portfolio
and, as applicable, the Substitute Eligible Loan Asset and related Portfolio Assets shall be
included in the Collateral Portfolio. On the Release Date of each Warranty Loan Asset, the
Collateral Agent, for the benefit of the Secured Parties, shall automatically and without further
action be deemed to release to the Borrower, without recourse, representation or warranty, all the
right, title and interest and any Lien of the Collateral Agent, for the benefit of the Secured
Parties
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in, to and under the Warranty Loan Asset and any related Portfolio Assets and all future
monies due or to become due with respect thereto.
(d) Conditions to Sales, Substitutions and Repurchases. Any sales, substitutions or
repurchases effected pursuant to Sections 2.07(a), (b), or (c) shall be
subject to the satisfaction of the following conditions (as certified in writing to the
Administrative Agent and Collateral Agent by the Borrower):
(i) the Borrower shall deliver a Borrowing Base Certificate to the Administrative Agent
in connection with such sale, substitution or repurchase;
(ii) the Borrower shall deliver a list of all Loan Assets to be sold, substituted,
repurchased;
(iii) no selection procedures adverse to the interests of the Administrative Agent, the
Lender Agents or the Lenders were utilized by the Borrower in the selection of the Loan
Assets to be sold, repurchased or substituted;
(iv) the Borrower shall give one Business Days notice of such sale, substitution or
repurchase;
(v) the Borrower shall notify the Administrative Agent of any amount to be deposited
into the Collection Account in connection with any sale, substitution or repurchase;
(vi) the representations and warranties contained in Sections 4.01,
4.02 and 4.03 hereof shall continue to be correct in all respects, except to
the extent relating to an earlier date;
(vii) any repayment of Advances Outstanding in connection with any sale, substitution
or repurchase of Loan Assets hereunder shall comply with the requirements set forth in
Section 2.18;
(viii) the Borrower and the Servicer (on behalf of the Borrower) shall agree to pay the
legal fees and expenses of the Administrative Agent, each Lender, each Lender Agent,
Collateral Agent and the Collateral Custodian in connection with any such sale, substitution
or repurchase (including, but not limited to, expenses incurred in connection with the
release of the Lien of the Collateral Agent on behalf of the Secured Parties and any other
party having an interest in the Loan Asset in connection with such sale, substitution or
repurchase); and
(ix) the Borrower shall pay any Hedge Breakage Costs arising as a result of such sale,
substitution or repurchase and owed to the relevant Hedge Counterparty for any termination
of one or more Hedge Transactions, in whole or in part, if applicable, as required by the
terms of any Hedging Agreement.
(e) Affiliate Transactions. Notwithstanding anything to the contrary set forth herein
or in any other Transaction Document, the Transferor (or an Affiliate thereof) shall not
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reacquire from the Borrower and the Borrower shall not transfer to the Transferor or to
Affiliates of the Transferor, and none of the Transferor nor any Affiliates thereof will have a
right or ability to purchase, the Loan Assets without the prior written consent of the
Administrative Agent, except in the case of a Lien Release Dividend or repurchases of Loan Assets
by the Transferor pursuant to Section 6.1 of the Purchase and Sale Agreement or
substitutions of Loan Assets pursuant to Section 6.2 of the Purchase and Sale Agreement.
(f) Limitations on Sales and Substitutions. The Outstanding Balance of all Loan
Assets (other than Warranty Loan Assets) sold pursuant to Section 2.07(b), substituted
pursuant to Section 2.07(a) or released pursuant to a Lien Release Dividend during the
12-month period immediately preceding the proposed date of sale or substitution (or such lesser
number of months as shall have elapsed as of such date) does not exceed 10% of the highest
aggregate Outstanding Balance of any month during such 12-month period (or such lesser number of
months as shall have elapsed as of such date).
(g) Lien Release Dividend. Notwithstanding any provision contained in this Agreement
to the contrary, provided no Event of Default has occurred and no Unmatured Event of Default
exists, on a Lien Release Dividend Date, the Borrower may dividend to the Transferor Loan Assets
that were sold by the Transferor to the Borrower, or portions thereof (each, a Lien Release
Dividend), subject to the following terms and conditions, as certified by the Borrower and the
Transferor to the Administrative Agent (with a copy to the Collateral Agent and the Collateral
Custodian):
(i) The Borrower and the Transferor shall have given the Administrative Agent, with a
copy to the Collateral Agent and the Collateral Custodian, at least five Business Days prior
written notice requesting that the Administrative Agent consent to the effectuation of a
Lien Release Dividend, in the form of Exhibit J hereto (a Notice and Request
for Consent), which consent shall be given in the sole and absolute discretion of the
Administrative Agent; provided that, if the Administrative Agent shall not have responded to
the Notice and Request for Consent by 11:00 a.m. on the day that is one Business Day prior
to the proposed Lien Release Dividend Date, the Administrative Agent shall be deemed not to
have given its consent;
(ii) On any Lien Release Dividend Date, no more than four Lien Release Dividends shall
have been made during the 12-month period immediately preceding the proposed Lien Release
Dividend Date;
(iii) After giving effect to the Lien Release Dividend on the Lien Release Dividend
Date, (A) no Borrowing Base Deficiency, Event of Default or Unmatured Event of Default shall
exist, (B) the representations and warranties contained in Sections 4.01,
4.02 and 4.03 hereof shall continue to be correct in all material respects,
except to the extent relating to an earlier date, (C) the eligibility of any Loan Asset
remaining as part of the Collateral Portfolio after the Lien Release Dividend will be
redetermined as of the Lien Release Dividend Date, (D) no claim shall have been asserted or
proceeding commenced challenging the enforceability or validity of any of the Required Loan
Documents and (E) there shall have been no material adverse change as to the Servicer or the
Borrower;
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(iv) Such Lien Release Dividend must be in compliance with Applicable Law and may not
(A) be made with the intent to hinder, delay or defraud any creditor of the Borrower or (B)
leave the Borrower, immediately after giving effect to the Lien Release Dividend, (x)
insolvent, (y) with insufficient funds to pay its obligations as and when they become due or
(z) with inadequate capital for its present and anticipated business and transactions;
(v) On or prior to the Lien Release Dividend Date, the Borrower shall have (A)
delivered to the Administrative Agent, with a copy to the Collateral Agent and the
Collateral Custodian, a list specifying all Loan Assets or portions thereof to be
transferred pursuant to such Lien Release Dividend and the Administrative Agent shall have
approved the same in its sole discretion and (B) obtained all authorizations, consents and
approvals required to effectuate the Lien Release Dividend;
(vi) A portion of a Loan Asset may be transferred pursuant to a Lien Release Dividend
provided that (A) such transfer does not have an adverse effect on the portion of such Loan
Asset remaining as a part of the Collateral Portfolio, any other aspect of the Collateral
Portfolio, the Lenders, the Lender Agents, the Administrative Agent or any other Secured
Party and (B) a new promissory note (other than with respect to a Noteless Loan Asset) for
the portion of the Loan Asset remaining as a part of the Collateral Portfolio has been
executed, and the original thereof has been endorsed to the Collateral Agent and delivered
to the Collateral Custodian;
(vii) Each Loan Asset, or portion thereof, as applicable, shall be transferred at a
value equal to the Outstanding Balance thereof, exclusive of any accrued and unpaid interest
or PIK Interest thereon;
(viii) The Borrower shall deliver a Borrowing Base Certificate (including a calculation
of the Borrowing Base after giving effect to such Lien Release Dividend) to the
Administrative Agent;
(ix) The Borrower shall have paid in full an aggregate amount equal to the sum of all
amounts due and owing to the Administrative Agent, the Lenders, the Lender Agents, the
Collateral Agent or the Collateral Custodian, as applicable, under this Agreement and the
other Transaction Documents, to the extent accrued to such date (including, without
limitation, Breakage Fees) with respect to the Loan Assets to be transferred pursuant to
such Lien Release Dividend and incurred in connection with the transfer of such Loan Assets
pursuant to such Lien Release Dividend; and
(x) The Borrower and the Servicer (on behalf of the Borrower) shall pay the reasonable
legal fees and expenses of the Administrative Agent, the Lenders, the Lender Agents, the
Collateral Agent and the Collateral Custodian in connection with any Lien Release Dividend
(including, but not limited to, expenses incurred in connection with the release of the Lien
of the Collateral Agent, on behalf of the Secured Parties, and any other party having an
interest in the Loan Assets in connection with such Lien Release Dividend).
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SECTION 2.08 Payments and Computations, Etc.
(a) All amounts to be paid or deposited by the Borrower or the Servicer hereunder shall be
paid or deposited in accordance with the terms hereof no later than 5:00 p.m. on the day when due
in lawful money of the United States in immediately available funds to the Collection Account or
such other account as is designated by the Administrative Agent. The Borrower or the Servicer, as
applicable, shall, to the extent permitted by law, pay to the Secured Parties interest on all
amounts not paid or deposited when due to any of the Secured Parties hereunder at 4.0% per annum
above the Base Rate (other than with respect to any advances outstanding, which shall accrue at the
Yield Rate), payable on demand, from the date of such nonpayment until such amount is paid in full
(as well after as before judgment); provided, that such interest rate shall not at any time exceed
the maximum rate permitted by Applicable Law. Any Obligation hereunder shall not be reduced by any
distribution of any portion of Available Collections if at any time such distribution is rescinded
or required to be returned by any Lender to the Borrower or any other Person for any reason. All
computations of interest and all computations of Yield and other fees hereunder shall be made on
the basis of a year of 360 days for the actual number of days (including the first but excluding
the last day) elapsed, other than calculations with respect to the Base Rate, which shall be based
on a year consisting of 365 or 366 days, as applicable.
(b) Whenever any payment hereunder shall be stated to be due on a day other than a Business
Day, such payment shall be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of Yield or any fee payable hereunder,
as the case may be.
(c) If any Advance requested by the Borrower and approved by the Lender Agents and the
Administrative Agent pursuant to Section 2.02 is not for any reason whatsoever, except as a
result of the gross negligence or willful misconduct of, or failure to fund such Advance on the
part of, the Lenders, the Administrative Agent or an Affiliate thereof, made or effectuated, as the
case may be, on the date specified therefor, the Borrower shall indemnify such Lender against any
loss, cost or expense incurred by such Lender related thereto (other than any such loss, cost or
expense solely due to the gross negligence or willful misconduct or failure to fund such Advance on
the part of the Lenders, the Administrative Agent or an Affiliate thereof), including, without
limitation, any loss (including cost of funds and reasonable out-of-pocket expenses), cost or
expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired
by such Lender to fund Advances or maintain the Advances. Any such Lender shall provide to the
Borrower documentation setting forth the amounts of any loss, cost or expense referred to in the
previous sentence, such documentation to be conclusive absent manifest error.
SECTION 2.09 Non-Usage Fee.
(a) The Borrower shall pay, in accordance with Section 2.04, pro rata to each Lender
(either directly or through the applicable Lender Agent), a non-usage fee (the Non-Usage
Fee) payable in arrears for each Remittance Period, equal to the sum of the products for each
day during such Remittance Period of (i) one divided by 360, (ii) the applicable Non-Usage Fee Rate
(as defined below), and (iii) the aggregate Commitments minus the Advances
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Outstanding on such day (such amount, the Unused Portion). The Non-Usage Fee Rate
(the Non-Usage Fee Rate) shall be (except as set forth pursuant to Section
2.09(b) below), (i) during the first six months following the Closing Date, 0.50% for any
Unused Portion of the aggregate Commitments and (ii) thereafter, (x) 0.50% on any Unused Portion up
to or equal to an amount equal to 20% of the aggregate Commitments and (y) 2.50% on any Unused
Portion in excess of such amount equal to 20% of the aggregate Commitments.
(b) In the event of any Commitment Increase Closing Date, from such Commitment Increase
Closing Date until the date which is six months after such Commitment Increase Closing Date, the
Non-Usage Fee Rate shall be (i) 0.50% on any Unused Portion up to or equal to (x) the Commitment
Increase Amount plus (y) an amount equal to 20% of the aggregate Commitments which existed
prior to giving effect to such Commitment Increase Amount and (ii) 2.50% on any Unused Portion in
excess of the amount obtained by summing subclauses (x) and (y) of the foregoing
clause (i). From and after the date which is six months after such Commitment Increase
Closing Date, the Non-Usage Fee Rate shall equal (i) 0.50% on any Unused Portion up to or equal to
an amount equal to 20% of the aggregate Commitments and (ii) 2.50% on any Unused Portion in excess
of such amount equal to 20% of the aggregate Commitments.
SECTION 2.10 Increased Costs; Capital Adequacy.
(a) If, due to either (i) the introduction of or any change following the date hereof
(including, without limitation, any change by way of imposition or increase of reserve
requirements) in or in the interpretation, administration or application following the date hereof
of any Applicable Law (including, without limitation, any law or regulation resulting in any
interest payments paid to any Lender under this Agreement being subject to any Tax, except for
Taxes on the overall net income of such Lender), in each case whether foreign or domestic or (ii)
the compliance with any guideline or request following the date hereof from any central bank or
other Governmental Authority (whether or not having the force of law), there shall be any increase
in the cost to the Administrative Agent, any Lender, any Lender Agent, any Liquidity Bank or any
Affiliate, participant, successor or assign thereof (each of which shall be an Affected
Party) of agreeing to make or making, funding or maintaining any Advance (or any reduction of
the amount of any payment (whether of principal, interest, fee, compensation or otherwise) to any
Affected Party hereunder), as the case may be, or there shall be any reduction in the amount of any
sum received or receivable by an Affected Party under this Agreement, under any other Transaction
Document or any Liquidity Agreement, the Borrower shall, from time to time, after written demand by
the Administrative Agent (which demand shall be accompanied by a statement setting forth in
reasonable detail the basis for such demand), on behalf of such Affected Party, pay to the
Administrative Agent, on behalf of such Affected Party, additional amounts sufficient to compensate
such Affected Party for such increased costs or reduced payments within 10 days after such demand;
provided, that the amounts payable under this Section 2.10 shall be without duplication of
amounts payable under Section 2.11 and shall not include any Excluded Taxes.
(b) If either (i) the introduction of or any change following the date hereof in or in the
interpretation, administration or application following the date hereof of any law, guideline, rule
or regulation, directive or request or (ii) the compliance by any Affected Party
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with any law, guideline, rule, regulation, directive or request following the date hereof,
from any central bank, any Governmental Authority or agency, including, without limitation,
compliance by an Affected Party with any request or directive regarding capital adequacy, has or
would have the effect of reducing the rate of return on the capital of any Affected Party, as a
consequence of its obligations hereunder or any related document or arising in connection herewith
or therewith to a level below that which any such Affected Party could have achieved but for such
introduction, change or compliance (taking into consideration the policies of such Affected Party
with respect to capital adequacy), by an amount deemed by such Affected Party to be material, then,
from time to time, after demand by such Affected Party (which demand shall be accompanied by a
statement setting forth in reasonable detail the basis for such demand), the Borrower shall pay the
Administrative Agent on behalf of such Affected Party such additional amounts as will compensate
such Affected Party for such reduction. For the avoidance of doubt, any increase in cost and/or
reduction in Yield with respect to any Affected Party caused by regulatory capital allocation
adjustments due to FAS 166, 167 and subsequent statements and interpretations shall constitute a
circumstance on which such Affected Party may base a claim for reimbursement under this Section
2.10.
(c) If as a result of any event or circumstance similar to those described in clause
(a) or (b) of this Section 2.10, any Affected Party is required to compensate a
bank or other financial institution providing liquidity support, credit enhancement or other
similar support to such Affected Party in connection with this Agreement or the funding or
maintenance of Advances hereunder, then within ten days after demand by such Affected Party, the
Borrower shall pay to such Affected Party such additional amount or amounts as may be necessary to
reimburse such Affected Party for any amounts payable or paid by it.
(d) In determining any amount provided for in this Section 2.10, the Affected Party
may use any reasonable averaging and attribution methods. The Administrative Agent, on behalf of
any Affected Party making a claim under this Section 2.10, shall submit to the Borrower a
certificate setting forth in reasonable detail the basis for and the computations of such
additional or increased costs, which certificate shall be conclusive absent manifest error.
(e) Failure or delay on the part of any Affected Party to demand compensation pursuant to this
Section 2.10 shall not constitute a waiver of such Affected Partys right to demand or
receive such compensation.
(f) If at any time the Borrower shall be liable for the payment of any additional amounts in
accordance with this Section 2.10, then the Borrower shall have the option to terminate
this Agreement (in accordance with the provisions of Section 2.18(b) but without the
payment of any Make-Whole Premium); provided that such option to terminate shall in no event
relieve the Borrower of paying any amounts owing pursuant to this Section 2.10 in
accordance with the terms hereof.
SECTION 2.11 Taxes.
(a) All payments made by an Obligor in respect of a Loan Asset and all payments made by the
Borrower or made by the Servicer on behalf of the Borrower under this Agreement will be made free
and clear of and without deduction or withholding for or on
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account of any Taxes. If any Taxes are required to be withheld from any amounts payable to
any Indemnified Party, then the amount payable to such Person will be increased (the amount of such
increase, the Additional Amount) such that every net payment made under this Agreement
after withholding for or on account of any Taxes (including, without limitation, any Taxes on such
increase) is not less than the amount that would have been paid had no such deduction or
withholding been made. The foregoing obligation to pay Additional Amounts with respect to payments
required to be made by the Borrower or Servicer under this Agreement will not, however, apply with
respect to Taxes imposed on or measured by net income or franchise Taxes imposed on any Indemnified
Party by a taxing jurisdiction in which any such Person is organized, conducts business or is
paying Taxes (as the case may be) (Excluded Taxes).
(b) The Borrower will indemnify, from funds available to it pursuant to Section 2.04
(and to the extent the funds available for indemnification provided by the Borrower is insufficient
the Servicer, on behalf of the Borrower, will indemnify) each Indemnified Party for the full amount
of Taxes payable by such Person in respect of Additional Amounts and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto. All payments in
respect of this indemnification shall be made within 10 days from the date a written invoice
therefor is delivered to the Borrower.
(c) Within 30 days after the date of any payment by the Borrower or by the Servicer on behalf
of the Borrower of any Taxes, the Borrower or the Servicer, as applicable, will furnish to the
Administrative Agent and the Lender Agents at the applicable address set forth on this Agreement,
appropriate evidence of payment thereof.
(d) If any assignee of a Lender is not created or organized under the laws of the United
States or a political subdivision thereof, such Lender shall deliver to the Borrower, with a copy
to the Administrative Agent, (i) within 15 days after becoming an assignee hereunder, two (or such
other number as may from time to time be prescribed by Applicable Law) duly completed copies of IRS
Form W-8BEN or Form W-8ECI (or any successor forms or other certificates or statements that may be
required from time to time by the relevant United States taxing authorities or Applicable Law), as
appropriate, to permit the Borrower to make payments hereunder for the account of such Lender
without deduction or withholding of United States federal income or similar Taxes and (ii) upon the
obsolescence of or after the occurrence of any event requiring a change in, any form or certificate
previously delivered pursuant to this Section 2.11(d), copies (in such numbers as may from
time to time be prescribed by Applicable Law or regulations) of such additional, amended or
successor forms, certificates or statements as may be required under Applicable Law to permit the
Borrower or the Servicer to make payments hereunder for the account of such Lender without
deduction or withholding of United States federal income or similar Taxes.
(e) If, in connection with an agreement or other document providing liquidity support, credit
enhancement or other similar support to any Lender in connection with this Agreement or the funding
or maintenance of Advances hereunder, such Lender is required to compensate a bank or other
financial institution in respect of Taxes under circumstances similar to those described in this
Section 2.11, then, within 10 days after demand by each applicable Lender, the Servicer
shall pay (or to the extent the Servicer does not make such payment the
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Borrower shall pay) to such Lender such additional amount or amounts as may be necessary to
reimburse such Lender for any amounts paid by them.
Without prejudice to the survival of any other agreement of the Borrower and the Servicer
hereunder, the agreements and obligations of the Borrower and the Servicer contained in this
Section 2.11 shall survive the termination of this Agreement.
(f) If at any time the Borrower shall be liable for the payment of any additional amounts in
accordance with this Section 2.11, then the Borrower shall have the option to terminate
this Agreement (in accordance with the provisions of Section 2.18(b) but without the
payment of any Make-Whole Premium); provided that such option to terminate shall in no event
relieve the Borrower of paying any amounts owing pursuant to this Section 2.11 in
accordance with the terms hereof.
SECTION 2.12 Collateral Assignment of Agreements. The Borrower hereby collaterally
assigns to the Collateral Agent, for the benefit of the Secured Parties, all of the Borrowers
right and title to and interest in, to and under (but not any obligations under) the Purchase and
Sale Agreement (and any UCC financing statements filed under or in connection therewith), any
Hedging Agreement, the Loan Agreements related to each Loan Asset, all other agreements, documents
and instruments evidencing, securing or guarantying any Loan Asset and all other agreements,
documents and instruments related to any of the foregoing but excluding any Excluded Amounts or
Retained Interest (the Assigned Documents). In furtherance and not in limitation of the
foregoing, the Borrower hereby collaterally assigns to the Collateral Agent, for the benefit of the
Secured Parties, its right to indemnification under Article IX of the Purchase and Sale Agreement.
The Borrower confirms that until the Collection Date the Collateral Agent (at the direction of the
Administrative Agent) on behalf of the Secured Parties shall have the sole right to enforce the
Borrowers rights and remedies under the Purchase and Sale Agreement and any UCC financing
statements filed under or in connection therewith for the benefit of the Secured Parties. The
parties hereto agree that such collateral assignment to the Collateral Agent, for the benefit of
the Secured Parties, shall terminate upon the Collection Date.
SECTION 2.13 Grant of a Security Interest. To secure the prompt, complete and
indefeasible payment in full when due, whether by lapse of time, acceleration or otherwise, of the
Obligations and the performance by the Borrower of all of the covenants and obligations to be
performed by it pursuant to this Agreement and each other Transaction Document, whether now or
hereafter existing, due or to become due, direct or indirect, or absolute or contingent, the
Borrower hereby (a) collaterally assigns and pledges to the Collateral Agent, on behalf of the
Secured Parties, and (b) grants a security interest to the Collateral Agent, on behalf of the
Secured Parties, in all of the Borrowers right, title and interest in, to and under (but none of
the obligations under) all of the Collateral Portfolio (including any Hedging Agreements), whether
now existing or hereafter arising or acquired by the Borrower, and wherever the same may be
located. For the avoidance of doubt, the Collateral Portfolio shall not include any Excluded
Amounts, and the Borrower does not hereby assign, pledge or grant a security interest in any such
amounts. Anything herein to the contrary notwithstanding, (a) the Borrower shall remain liable
under the Collateral Portfolio to the extent set forth therein to perform all of its duties and
obligations thereunder to the same extent as if this Agreement had not been executed, (b) the
exercise by the Collateral Agent, for the benefit of the Secured Parties, of any of its rights in
the
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Collateral Portfolio shall not release the Borrower from any of its duties or obligations
under the Collateral Portfolio, and (c) none of the Administrative Agent, the Collateral Agent, any
Lender (nor its successors and assigns), any Lender Agent, any Liquidity Bank nor any Secured Party
shall have any obligations or liability under the Collateral Portfolio by reason of this Agreement,
nor shall the Administrative Agent, the Collateral Agent, any Lender (nor its successors and
assigns), any Lender Agent, any Liquidity Bank nor any Secured Party be obligated to perform any of
the obligations or duties of the Borrower thereunder or to take any action to collect or enforce
any claim for payment assigned hereunder.
SECTION 2.14 Evidence of Debt. The Administrative Agent shall maintain, solely for
this purpose as the agent of the Borrower, at its address referred to in Section 11.02 a
copy of each assignment and acceptance agreement and participation agreement delivered to and
accepted by it and a register for the recordation of the names and addresses and interests of the
Lenders (the Register). The entries in the Register shall be conclusive and binding for
all purposes, absent manifest error, and the Borrower, the Administrative Agent, each Lender and
each Lender Agent shall treat each person whose name is recorded in the Register as a Lender under
this Agreement for all purposes of this Agreement. The Register shall be available for inspection
by the Borrower or any Lender Agent at any reasonable time and from time to time upon reasonable
prior notice.
SECTION 2.15 Survival of Representations and Warranties. It is understood and agreed
that the representations and warranties set forth in Sections 4.01, 4.02 and
4.03 are made and are true and correct on the date of this Agreement and on each Cut-Off
Date unless such representations and warranties are made as of a specific date.
SECTION 2.16 Release of Loan Assets.
(a) The Borrower may obtain the release of (i) any Loan Asset (and the related Portfolio
Assets pertaining thereto) released pursuant to a Lien Release Dividend or sold or substituted in
accordance with the applicable provisions of Section 2.07 and any Portfolio Assets
pertaining to such Loan Asset and (ii) any Collateral Portfolio that expires by its terms and all
amounts in respect thereof have been paid in full by the related Obligor and deposited in the
Collection Account. The Collateral Agent, for the benefit of the Secured Parties, shall at the sole
expense of the Servicer and at the direction of the Administrative Agent, execute such documents
and instruments of release as may be prepared by the Servicer on behalf of the Borrower, give
notice of such release to the Collateral Custodian (in the form of Exhibit N) (unless the
Collateral Custodian and Collateral Agent are the same Person) and take other such actions as shall
reasonably be requested by the Borrower to effect such release of the Lien created pursuant to this
Agreement. Upon receiving such notification by the Collateral Agent as described in the immediately
preceding sentence, if applicable, the Collateral Custodian shall deliver the Required Loan
Documents to the Borrower.
(b) Promptly after the Collection Date has occurred, each Lender and the Administrative Agent,
in accordance with their respective interests, shall release to the Borrower, for no consideration
but at the sole expense of the Borrower, their respective remaining interests in the Portfolio
Assets, free and clear of any Lien resulting solely from an act by the Collateral
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Agent, any Lender or the Administrative Agent but without any other representation or
warranty, express or implied, by or recourse against any Lender or the Administrative Agent.
SECTION 2.17 Treatment of Amounts Received by the Borrower. Amounts received by the
Borrower pursuant to Section 2.07 on account of Loan Assets shall be treated as payments of
Principal Collections or Interest Collections, as applicable, on Loan Assets hereunder.
SECTION 2.18 Prepayment; Termination.
(a) Except as expressly permitted or required herein, including, without limitation, any
repayment necessary to cure a Borrowing Base Deficiency, Advances may only be prepaid in whole or
in part at the option of the Borrower at any time by delivering a Notice of Reduction (which notice
shall include a Borrowing Base Certificate) to the Administrative Agent, the Collateral Agent, the
Lender Agents and the Hedge Counterparty at least one Business Day prior to such reduction for
prepayments of $25,000,000 or less and three Business Days for all other prepayments. Upon any
prepayment, the Borrower shall also pay in full any Hedge Breakage Costs, Breakage Fees (solely to
the extent such prepayment occurs on any day other than a Payment Date) and other accrued and
unpaid costs and expenses of Administrative Agent, Lender Agents and Lenders related to such
prepayment; provided that no reduction in Advances Outstanding shall be given effect unless (i)
sufficient funds have been remitted to pay all such amounts in full, as determined by the
Administrative Agent, in its sole discretion, (ii) the Borrower has complied with the terms of any
Hedging Agreement requiring that one or more Hedge Transactions be terminated in whole or in part
as the result of any such reduction of the Advances Outstanding, and has paid in full all Hedge
Breakage Costs owing to the relevant Hedge Counterparty for any such termination and (iii) no event
has occurred or would result from such prepayment which would constitute an Event of Default or an
Unmatured Event of Default. The Administrative Agent shall apply amounts received from the Borrower
pursuant to this Section 2.18(a) to the payment of any Hedge Breakage Costs, to the payment
of any Breakage Fees and to the pro rata reduction of the Advances Outstanding. Any notice relating
to any repayment pursuant to this Section 2.18(a) shall be irrevocable.
(b) The Borrower may, at its option, terminate this Agreement and the other Transaction
Documents upon three Business Days prior written notice to the Administrative Agent, the Lender
Agents and any Hedge Counterparty and upon payment in full of all outstanding Advances, all accrued
and unpaid Yield, any Breakage Fees, Hedge Breakage Costs, all accrued and unpaid costs and
expenses of the Administrative Agent, Lender Agents and Lenders, payment of the Make-Whole Premium
pro rata to each Lender Agent (for the account of the applicable Lender) and payment of all other
Obligations (other than unmatured contingent indemnification obligations); provided, further that
no Make-Whole Premium shall be due and payable so long as (i) this Agreement is terminated at least
six months after the Closing Date and (ii) the aggregate Commitments (calculated pursuant to
clause (i) of the definition thereof) at the time of termination is less than $100,000,000.
Any termination of this Agreement shall be subject to Section 11.05.
(c) The Borrower hereby acknowledges and agrees that the Make-Whole Premium constitutes
additional consideration for the Lenders to enter into this Agreement.
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SECTION 2.19 Extension of Stated Maturity Date and Reinvestment Period.
(a) The Borrower may, within 60 days but not less than 45 days prior to the Stated Maturity
Date, make a request to the Lenders to extend the date set forth in the definition of Stated
Maturity Date for an additional period of one year. The Stated Maturity Date may be extended by
one year by mutual agreement among the Administrative Agent, each of the Lenders, the Borrower and
the Servicer (such extension, the Initial Stated Maturity Extension). Following such
Initial Stated Maturity Extension, the Borrower may, within 60 days but not less than 45 days prior
to the Stated Maturity Date (as revised by the Initial Stated Maturity Extension), make a request
to the Lenders to extend the date set forth in the definition of Stated Maturity Date (as revised
by the Initial Stated Maturity Extension) for an additional period of one year. The Stated Maturity
Date (as revised by the Initial Stated Maturity Extension) may be extended by one year upon the
mutual agreement among the Administrative Agent, each of the Lenders, the Borrower and the Servicer
(such extension, the Second Stated Maturity Extension). The effectiveness of either the
Initial Stated Maturity Extension or the Second Stated Maturity Extension shall be conditioned upon
the payment of any fees set forth in any Lender Fee Letter which shall be payable upon such
extension. The Borrower confirms that any of the Lenders or the Administrative Agent, in their sole
and absolute discretion, without regard to the value or performance of the Loan Assets or any other
factor, may elect not to extend the Stated Maturity Date.
(b) The Borrower may, within 60 days but not less than 45 days prior to the date set forth in
clause (i) of the definition of Reinvestment Period, make a request to the Lenders to
extend the date set forth in clause (i) of the definition of Reinvestment Period for an
additional period of one year. Such date may be extended by one year by mutual agreement among the
Administrative Agent, each of the Lenders, the Borrower and the Servicer (such extension, the
Initial Reinvestment Period Extension). Following such Initial Reinvestment Period
Extension, the Borrower may, within 60 days but not less than 45 days prior to the date set forth
in clause (i) of the definition of Reinvestment Period (as revised by the Initial
Reinvestment Period Extension), make a request to the Lenders to extend the date set forth in
clause (i) of the definition of Reinvestment Period (as revised by the Initial
Reinvestment Period Extension) for an additional period of one year. Such date may be extended by
one year upon the mutual agreement among the Administrative Agent, each of the Lenders, the
Borrower and the Servicer (such extension, the Second Reinvestment Period Extension). The
Borrower confirms that any of the Lenders or the Administrative Agent, in their sole and absolute
discretion, without regard to the value or performance of the Loan Assets or any other factor, may
elect not to extend the date set forth in clause (i) of the definition of Reinvestment
Period.
SECTION 2.20 Collections and Allocations.
(a) The Servicer shall promptly identify any collections received as being on account of
Interest Collections, Principal Collections or other Available Collections and shall transfer, or
cause to be transferred, all Available Collections received directly by it to the Collection
Account by the close of business on the Business Day after such Collections are received. Upon the
transfer of Available Collections to the Collection Account, the Servicer shall segregate Principal
Collections and Interest Collections and transfer the same to the Principal Collection Account and
the Interest Collection Account, respectively. The Servicer
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shall further include a statement as to the amount of Principal Collections and Interest
Collections on deposit in the Principal Collection Account and the Interest Collection Account on
each Reporting Date in the Servicing Report delivered pursuant to Section 6.08(b).
(b) On the Cut-Off Date with respect to any Loan Asset, the Servicer will deposit into the
Collection Account all Available Collections received in respect of Eligible Loan Assets being
transferred to and included as part of the Collateral Portfolio on such date.
(c) With the prior written consent of the Administrative Agent (a copy of which will be
provided by the Servicer to the Collateral Agent), the Servicer may withdraw from the Collection
Account any deposits thereto constituting Excluded Amounts if the Servicer has, prior to such
withdrawal and consent, delivered to the Administrative Agent and each Lender Agent a report
setting forth the calculation of such Excluded Amounts in form and substance satisfactory to the
Administrative Agent and each Lender Agent in its sole discretion.
(d) Prior to Notice of Exclusive Control (as defined in the Collection Account Agreement or
Unfunded Exposure Account Agreement, as applicable), the Servicer shall, pursuant to written
instruction (which may be in the form of standing instructions), direct the Collateral Agent to
invest, or cause the investment of, funds on deposit in the Controlled Accounts in Permitted
Investments, from the date of this Agreement until the Collection Date. Absent any such written
instruction, such funds shall not be invested. A Permitted Investment acquired with funds deposited
in any Controlled Account shall mature not later than the Business Day immediately preceding any
Payment Date, and shall not be sold or disposed of prior to its maturity. All such Permitted
Investments shall be registered in the name of the Account Bank or its nominee for the benefit of
the Administrative Agent or Collateral Agent, and otherwise comply with assumptions of the legal
opinions of Rutan & Tucker, LLP and Sutherland Asbill & Brennan LLP dated the Closing Date and
delivered in connection with this Agreement; provided that compliance shall be the responsibility
of the Borrower and the Servicer and not the Collateral Agent and Account Bank. All income and gain
realized from any such investment, as well as any interest earned on deposits in any Controlled
Account shall be distributed in accordance with the provisions of Article II hereof. The
Borrower shall deposit in the Collection Account or the Unfunded Exposure Account, as the case may
be (with respect to investments made hereunder of funds held therein), an amount equal to the
amount of any actual loss incurred, in respect of any such investment, immediately upon realization
of such loss. None of the Account Bank, the Collateral Agent, the Administrative Agent, any Lender
Agent or any Lender shall be liable for the amount of any loss incurred, in respect of any
investment, or lack of investment, of funds held in any Controlled Account, other than with respect
to fraud or their own gross negligence or willful misconduct. The parties hereto acknowledge that
the Collateral Agent or any of its Affiliates may receive compensation with respect to the
Permitted Investments.
(e) Until the Collection Date, neither the Borrower nor the Servicer shall have any rights of
direction or withdrawal, with respect to amounts held in any Controlled Account, except to the
extent explicitly set forth in Section 2.04 or Section 2.21.
SECTION 2.21 Reinvestment of Principal Collections.
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On the terms and conditions hereinafter set forth as certified in writing to the Collateral
Agent, the Lender Agents and Administrative Agent, prior to the end of the Reinvestment Period, the
Servicer may, to the extent of any Principal Collections on deposit in the Principal Collection
Account:
(a) withdraw such funds for the purpose of reinvesting in additional Eligible Loan Assets to
be Pledged hereunder; provided that the following conditions are satisfied:
(i) all conditions precedent set forth in Section 3.04 have been satisfied;
(ii) no Event of Default has occurred, or would result from such withdrawal and
reinvestment, and no Unmatured Event of Default or Borrowing Base Deficiency exists or would
result from such withdrawal and reinvestment;
(iii) the representations and warranties contained in Sections 4.01,
4.02 and 4.03 hereof shall continue to be correct in all respects, except to
the extent relating to an earlier date;
(iv) the Servicer provides same day written notice to the Administrative Agent and the
Collateral Agent by facsimile or email (to be received no later than 1:00 p.m. on such day)
of the request to withdraw Principal Collections and the amount of such request;
(v) the notice required in clause (iv) above shall be accompanied by a
Disbursement Request and a Borrowing Base Certificate, each executed by the Borrower and a
Responsible Officer of the Servicer; and
(vi) the Collateral Agent provides to the Administrative Agent by facsimile (to be
received no later than 1:30 p.m. on that same day) a statement reflecting the total amount
on deposit as of the opening of business on such day in the Principal Collection Account; or
(b) withdraw such funds for the purpose of making payments in respect of the Advances
Outstanding at such time in accordance with and subject to the terms of Section 2.18.
Upon the satisfaction of the applicable conditions set forth in this Section 2.21 (as
certified by the Borrower to the Collateral Agent and the Administrative Agent), the Collateral
Agent will release funds from the Principal Collection Account to the Servicer in an amount not to
exceed the lesser of (A) the amount requested by the Servicer and (B) the amount on deposit in the
Principal Collection Account on such day.
SECTION 2.22 Increase of Commitment; Maximum Facility Amount.
(a) At any time during the Reinvestment Period, provided that no Event of Default has occurred
and no Unmatured Event of Default exists, the Commitment for any Lender may be increased in
connection with a corresponding increase in the Maximum Facility Amount with the prior written
consent of the Borrower, the Administrative Agent and the Lender Agent
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for such Lender; provided that, following such Commitment increase, the Maximum Facility
Amount shall not exceed $100,000,000. Prior to the effectiveness of any such increase, the Borrower
shall execute and deliver to the applicable Lender Agent a revised Variable Funding Note in an
aggregate face amount equal to the revised Commitment. The Borrower confirms that the Lender Agent,
in its sole and absolute discretion, without regard to the value or performance of the Loan Assets
or any other factor, may elect not to increase its Commitment. Upon such increase, Annex A
hereto shall be deemed to be revised to reflect such increase in such Lenders Commitment.
(b) The Borrower may, with the written consent of the Administrative Agent, add additional
Persons as Lenders. Each additional Lender and its applicable Lender Agent shall become a party
hereto by executing and delivering to the Administrative Agent and the Borrower a Joinder
Supplement and a Transferee Letter.
ARTICLE III.
CONDITIONS PRECEDENT
SECTION 3.01 Conditions Precedent to Effectiveness.
(a) This Agreement shall be effective upon satisfaction of the conditions precedent that:
(i) all reasonable up-front expenses and fees (including legal fees, any fees required
under any Lender Fee Letter and the Wells Fargo Fee Letter) that are invoiced at or prior to
the Closing Date shall have been paid in full and all other acts and conditions (including,
without limitation, the obtaining of any necessary consents and regulatory approvals and the
making of any required filings, recordings or registrations) required to be done and
performed and to have happened prior to the execution, delivery and performance of this
Agreement and all related Transaction Documents and to constitute the same legal, valid and
binding obligations, enforceable in accordance with their respective terms, shall have been
done and performed and shall have happened in due and strict compliance with all Applicable
Law;
(ii) in the reasonable judgment of the Administrative Agent and each Lender Agent,
there not having been any change in Applicable Law which adversely affects any Lenders or
the Administrative Agents entering into the transactions contemplated by the Transaction
Documents or any Material Adverse Effect or material disruption after September 10, 2009 in
the financial, banking or commercial loan or capital markets generally;
(iii) any and all information submitted to each Lender, Lender Agent and the
Administrative Agent by the Borrower, the Transferor or the Servicer or any of their
Affiliates is true, accurate, complete in all material respects and not misleading in any
material respect;
(iv) each Lender Agent shall have received, all documentation and other information
requested by such Lender Agent in its sole discretion and/or required
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by regulatory authorities with respect to the Borrower, the Transferor and the Servicer
under applicable know your customer and anti-money laundering rules and regulations,
including, without limitation, the USA PATRIOT Act, all in form and substance reasonably
satisfactory to each Lender Agent;
(v) the Administrative Agent shall have received on or before the date of such
effectiveness the items listed in Schedule I hereto, each in form and substance
satisfactory to the Administrative Agent and each Lender Agent;
(vi) since September 10, 2009, no material adverse change on the business, assets,
financial conditions or performance of the Servicer and its subsidiaries, including the
Borrower, on a consolidated basis, or any material portion of the initial proposed Eligible
Loan Assets has occurred;
(vii) the results of Administrative Agents financial, legal, tax and accounting due
diligence relating to the Transferor, the Borrower, the Servicer, the Eligible Loan Assets
and the transactions contemplated hereunder are satisfactory to Administrative Agent; and
(viii) each applicable Lender Agent shall have received a duly executed copy of its
Variable Funding Note, in a principal amount equal to the Commitment of the related Lender.
(b) By its execution and delivery of this Agreement, each of the Borrower and the Servicer
hereby certifies that each of the conditions precedent to the effectiveness of this Agreement set
forth in this Section 3.01 have been satisfied; provided, that with respect to conditions
precedent that expressly require the consent or approval of the Administrative Agent or another
party (other than the Borrower or the Servicer), the foregoing certification is only to the
knowledge of the Borrower and the Servicer, as applicable, with respect to such consents or
approvals.
SECTION 3.02 Conditions Precedent to All Advances. Each Advance (including the Initial
Advance, except as explicitly set forth below) to the Borrower from the Lenders shall be subject to
the further conditions precedent that:
(a) On the Advance Date of such Advance, the following statements shall be true and correct,
and the Borrower by accepting any amount of such Advance shall be deemed to have certified that:
(i) the Servicer (on behalf of the Borrower) shall have delivered to the Administrative
Agent and each Lender Agent (with a copy to the Collateral Custodian and the Collateral
Agent) no later than 5:00 p.m. on the date that is one Business Day prior to the related
Advance Date (or, in the case of a Same-Day Advance, no later than 2:00 p.m. on the date of
such Advance): (A) a Notice of Borrowing, (B) a Borrowing Base Certificate, (C) a Loan Asset
Schedule and (D) except with respect to an Advance under Section 2.02(f), a Loan
Assignment in the form of Exhibit A to the Purchase and Sale Agreement (including Schedule I
thereto) and containing such additional information as may be reasonably requested by the
Administrative Agent;
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(ii) except with respect to an Advance under Section 2.02(f), the Borrower
shall have delivered to the Collateral Custodian (with a copy to the Administrative Agent),
no later than 2:00 p.m. one Business Day prior to the related Advance Date, a faxed or
e-mailed copy of the duly executed original promissory notes of the Loan Assets (and, in the
case of any Noteless Loan Asset, a fully executed assignment agreement) and if any Loan
Assets are closed in escrow, a certificate (in the form of Exhibit K) from the
closing attorneys of such Loan Assets certifying the possession of the Required Loan
Documents; provided that, notwithstanding the foregoing, the Borrower shall cause the Loan
Asset Checklist and the Required Loan Documents to be in the possession of the Collateral
Custodian within five Business Days of any related Advance Date as to any Loan Assets;
(iii) the representations and warranties contained in Sections 4.01,
4.02 and 4.03 are true and correct in all respects, and (except with respect
to an Advance required by Section 2.02(f)) there exists no breach of any covenant
contained in Sections 5.01, 5.02, 5.03 and 5.04 before and
after giving effect to the Advance to take place on such Advance Date and to the application
of proceeds therefrom, on and as of such day as though made on and as of such date (other
than any representation and warranty that is made as of a specific date);
(iv) on and as of such Advance Date, after giving effect to such Advance and the
addition to the Collateral Portfolio of the Eligible Loan Assets being acquired by the
Borrower using the proceeds of such Advance (except with respect to an Advance required by
Section 2.02(f)), the Advances Outstanding does not exceed the Borrowing Base;
(v) no Event of Default has occurred, or would result from such Advance, and no
Unmatured Event of Default or Borrowing Base Deficiency exists or would result from such
Advance;
(vi) no event has occurred and is continuing, or would result from such Advance, which
constitutes a Servicer Termination Event or any event which, if it continues uncured, will,
with notice or lapse of time, constitute a Servicer Termination Event;
(vii) since the Closing Date, no material adverse change has occurred in the ability of
the Servicer, Transferor or the Borrower to perform its obligations under any Transaction
Document;
(viii) no Liens exist in respect of Taxes which are prior to the lien of the Collateral
Agent on the Eligible Loan Assets to be Pledged on such Advance Date; and
(ix) all terms and conditions of the Purchase and Sale Agreement required to be
satisfied in connection with the assignment of each Eligible Loan Asset being Pledged
hereunder on such Advance Date (and the Portfolio Assets related thereto), including,
without limitation, the perfection of the Borrowers interests therein, shall have been
satisfied in full, and all filings (including, without limitation, UCC filings) required
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to be made by any Person and all actions required to be taken or performed by any
Person in any jurisdiction to give the Collateral Agent, for the benefit of the Secured
Parties, a first priority perfected security interest (subject only to Permitted Liens) in
such Eligible Loan Assets and the Portfolio Assets related thereto and the proceeds thereof
shall have been made, taken or performed.
(b) The Administrative Agent shall have approved in its sole and absolute discretion each of
the Eligible Loan Assets identified in the applicable Loan Asset Schedule for inclusion in the
Collateral Portfolio on the applicable Advance Date.
(c) No Applicable Law shall prohibit, and no order, judgment or decree of any federal, state
or local court or governmental body, agency or instrumentality shall prohibit or enjoin, the making
of such Advances by any Lender or the proposed Pledge of Eligible Loan Assets in accordance with
the provisions hereof.
(d) Except with respect to an Advance required by Section 2.02(f), the proposed
Advance Date shall take place during the Reinvestment Period and the Facility Maturity Date has not
yet occurred.
(e) The Borrower shall have paid all fees then required to be paid, including all fees
required hereunder and under the applicable Lender Fee Letters and the Wells Fargo Fee Letter and
shall have reimbursed the Lenders, the Administrative Agent, each Lender Agent, the Collateral
Custodian, the Account Bank and the Collateral Agent for all fees, costs and expenses of closing
the transactions contemplated hereunder and under the other Transaction Documents, including the
reasonable attorney fees and any other legal and document preparation costs incurred by the
Lenders, the Administrative Agent and each Lender Agent.
The failure of the Borrower to satisfy any of the foregoing conditions precedent in respect of
any Advance shall give rise to a right of the Administrative Agent and the applicable Lender Agent,
which right may be exercised at any time on the demand of the applicable Lender Agent, to rescind
the related Advance and direct the Borrower to pay to the applicable Lender Agent for the benefit
of the applicable Lender an amount equal to the Advances made during any such time that any of the
foregoing conditions precedent were not satisfied.
SECTION 3.03 Advances Do Not Constitute a Waiver. No Advance made hereunder shall
constitute a waiver of any condition to any Lenders obligation to make such an advance unless such
waiver is in writing and executed by such Lender.
SECTION 3.04 Conditions to Pledges of Loan Assets. Each Pledge of an additional
Eligible Loan Asset pursuant to Section 2.06, a Substitute Eligible Loan Asset pursuant to
Section 2.07(a) or (c), an additional Eligible Loan Asset pursuant to Section
2.21 or any other Pledge of a Loan Asset hereunder shall be subject to the further conditions
precedent that (as certified to the Collateral Agent by the Borrower):
(a) the Servicer (on behalf of the Borrower) shall have delivered to the Administrative Agent
and each Lender Agent (with a copy to the Collateral Custodian and the Collateral Agent) no later
than 5:00 p.m. on the date that is one Business Day prior to the related Cut-Off Date: (A) a
Borrowing Base Certificate, (B) a Loan Asset Schedule and (C) a Loan
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Assignment in the form of Exhibit A to the Purchase and Sale Agreement (including Schedule I
thereto) and containing such additional information as may be reasonably requested by the
Administrative Agent;
(b) the Borrower shall have delivered to the Collateral Custodian (with a copy to the
Administrative Agent), no later than 2:00 p.m. one Business Day prior to the related Cut-Off Date,
a faxed or e-mailed copy of the duly executed original promissory notes of the Loan Assets (and, in
the case of any Noteless Loan Asset, a fully executed assignment agreement) and if any Loan Assets
are closed in escrow, a certificate (in the form of Exhibit K) from the closing attorneys
of such Loan Assets certifying the possession of the Required Loan Documents; provided that,
notwithstanding the foregoing, the Borrower shall cause the Loan Asset Checklist and the Required
Loan Documents to be in the possession of the Collateral Custodian within five Business Days of any
related Cut-Off Date as to any Loan Assets;
(c) no Liens exist in respect of Taxes which are prior to the lien of the Collateral Agent on
the Eligible Loan Assets to be Pledged on such Cut-Off Date;
(d) all terms and conditions of the Purchase and Sale Agreement required to be satisfied in
connection with the assignment of each Eligible Loan Asset being Pledged hereunder on such Cut-Off
Date (and the Portfolio Assets related thereto), including, without limitation, the perfection of
the Borrowers interests therein, shall have been satisfied in full, and all filings (including,
without limitation, UCC filings) required to be made by any Person and all actions required to be
taken or performed by any Person in any jurisdiction to give the Collateral Agent, for the benefit
of the Secured Parties, a first priority perfected security interest (subject only to Permitted
Liens) in such Eligible Loan Assets and the Portfolio Assets related thereto and the proceeds
thereof shall have been made, taken or performed;
(e) the Administrative Agent shall have approved in its sole and absolute discretion each of
the Eligible Loan Assets identified in the applicable Loan Asset Schedule for inclusion in the
Collateral Portfolio on the applicable Cut-Off Date;
(f) no Event of Default has occurred, or would result from such Pledge, and no Unmatured Event
of Default exists, or would result from such Pledge (other than, with respect to any Pledge of an
Eligible Loan Asset necessary to cure a Borrowing Base Deficiency in accordance with Section
2.06, an Unmatured Event of Default arising solely pursuant to such Borrowing Base Deficiency);
and
(g) the representations and warranties contained in Sections 4.01, 4.02 and
4.03 are true and correct in all respects, and there exists no breach of any covenant
contained in Sections 5.01, 5.02, 5.03 and 5.04 before and after
giving effect to the Pledge to take place on such Cut-Off Date, on and as of such day as though
made on and as of such date (other than any representation and warranty that is made as of a
specific date).
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
SECTION 4.01 Representations and Warranties of the Borrower. The Borrower hereby
represents and warrants, as of the Closing Date, as of each applicable Cut-Off Date, as of each
applicable Advance Date, as of each Reporting Date and as of each other date provided under this
Agreement or the other Transaction Documents on which such representations and warranties are
required to be (or deemed to be) made (unless a specific date is specified below):
(a) Organization, Good Standing and Due Qualification. The Borrower is a limited
liability company duly organized, validly existing and in good standing under the laws of Delaware
and has the power and all licenses necessary to own its assets and to transact the business in
which it is engaged and is duly qualified and in good standing under the laws of each jurisdiction
where the transaction of such business or its ownership of the Loan Assets and the Collateral
Portfolio requires such qualification.
(b) Power and Authority; Due Authorization; Execution and Delivery. The Borrower has
the power, authority and legal right to make, deliver and perform this Agreement and each of the
Transaction Documents to which it is a party and all of the transactions contemplated hereby and
thereby, and has taken all necessary action to authorize the execution, delivery and performance of
this Agreement and each of the Transaction Documents to which it is a party, and to grant to the
Collateral Agent, for the benefit of the Secured Parties, a first priority perfected security
interest in the Collateral Portfolio on the terms and conditions of this Agreement, subject only to
Permitted Liens.
(c) Binding Obligation. This Agreement and each of the Transaction Documents to which
the Borrower is a party constitutes the legal, valid and binding obligation of the Borrower,
enforceable against it in accordance with their respective terms, except as the enforceability
hereof and thereof may be limited by Bankruptcy Laws and by general principles of equity (whether
such enforceability is considered in a proceeding in equity or at law).
(d) All Consents Required. No consent of any other party and no consent, license,
approval or authorization of, or registration or declaration with, any Governmental Authority,
bureau or agency is required in connection with the execution, delivery or performance by the
Borrower of this Agreement or any Transaction Document to which it is a party or the validity or
enforceability of this Agreement or any such Transaction Document or the Loan Assets or the
transfer of an ownership interest or security interest in such Loan Assets, other than such as have
been met or obtained and are in full force and effect.
(e) No Violation. The execution, delivery and performance of this Agreement and all
other agreements and instruments executed and delivered or to be executed and delivered pursuant
hereto or thereto in connection with the Pledge of the Collateral Portfolio will not (i) create any
Lien on the Collateral Portfolio other than Permitted Liens or (ii) violate any Applicable Law or
the certificate of formation or limited liability company agreement of the Borrower or (iii)
violate any contract or other agreement to which the Borrower is a party or by which the Borrower
or any property or assets of the Borrower may be bound.
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(f) No Proceedings. There is no litigation or administrative proceeding or
investigation pending or, to the knowledge of the Borrower, threatened against the Borrower or any
properties of the Borrower, before any Governmental Authority (i) asserting the invalidity of this
Agreement or any other Transaction Document to which the Borrower is a party, (ii) seeking to
prevent the consummation of any of the transactions contemplated by this Agreement or any other
Transaction Document to which the Borrower is a party or (iii) seeking any determination or ruling
that could reasonably be expected to have a Material Adverse Effect.
(g) Selection Procedures. In selecting the Loan Assets to be Pledged pursuant to this
Agreement, no selection procedures were employed which are intended to be adverse to the interests
of the Lenders.
(h) Bulk Sales. The grant of the security interest in the Collateral Portfolio by the
Borrower to the Collateral Agent, for the benefit of the Secured Parties, pursuant to this
Agreement, is in the ordinary course of business for the Borrower and is not subject to the bulk
transfer or any similar statutory provisions in effect in any applicable jurisdiction.
(i) Pledge of Collateral Portfolio. Except as otherwise expressly permitted by the
terms of this Agreement, no item of Collateral Portfolio has been sold, transferred, assigned or
pledged by the Borrower to any Person, other than as contemplated by Article II and the
Pledge of such Collateral Portfolio to the Collateral Agent, for the benefit of the Secured
Parties, pursuant to the terms of this Agreement.
(j) Indebtedness. The Borrower has no Indebtedness or other indebtedness, secured or
unsecured, direct or contingent (including guaranteeing any obligation), other than (i)
Indebtedness incurred under the terms of the Transaction Documents and (ii) Indebtedness incurred
pursuant to certain ordinary business expenses arising pursuant to the transactions contemplated by
this Agreement and the other Transaction Documents.
(k) Sole Purpose. The Borrower has been formed solely for the purpose of engaging in
transactions of the types contemplated by this Agreement, and has not engaged in any business
activity other than the negotiation, execution and to the extent applicable, performance of this
Agreement and the transactions contemplated by the Transaction Documents.
(l) No Injunctions. No injunction, writ, restraining order or other order of any
nature adversely affects the Borrowers performance of its obligations under this Agreement or any
Transaction Document to which the Borrower is a party.
(m) Taxes. The Borrower has filed or caused to be filed (on a consolidated basis or
otherwise) on a timely basis all tax returns (including, without limitation, all foreign, federal,
state, local and other tax returns) required to be filed by it, is not liable for Taxes payable by
any other Person and has paid or made adequate provisions for the payment of all Taxes, assessments
and other governmental charges due and payable from the Borrower except for those Taxes being
contested in good faith by appropriate proceedings and in respect of which it has established
proper reserves on its books. No Tax lien or similar adverse claim has been filed, and no claim is
being asserted, with respect to any such Tax, assessment or other governmental
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charge. Any Taxes, fees and other governmental charges due and payable by the Borrower, as
applicable, in connection with the execution and delivery of this Agreement and the other
Transaction Documents and the transactions contemplated hereby or thereby have been paid or shall
have been paid if and when due.
(n) Location. The Borrowers location (within the meaning of Article 9 of the UCC) is
Delaware. The chief executive office of the Borrower (and the location of the Borrowers records
regarding the Collateral Portfolio (other than those delivered to the Collateral Custodian)) is
located at the address set forth under its name on the signature pages hereto (or at such other
address as shall be designated by such party in a written notice to the other parties hereto).
(o) Tradenames. Except as permitted hereunder, the Borrowers legal name is as set
forth in this Agreement. Except as permitted hereunder, the Borrower has not changed its name since
its formation; does not have tradenames, fictitious names, assumed names or doing business as
names other than as disclosed on Schedule II hereto (as such schedule may be updated from time to
by the Administrative Agent upon receipt of a notice delivered to the Administrative Agent pursuant
to Section 5.02(r)); the Borrowers only jurisdiction of formation is Delaware, and, except
as permitted hereunder, the Borrower has not changed its jurisdiction of formation.
(p) Solvency. The Borrower is not the subject of any Bankruptcy Proceedings or
Bankruptcy Event. The Borrower is Solvent, and the transactions under this Agreement and any other
Transaction Document to which the Borrower is a party do not and will not render the Borrower not
Solvent. The Borrower is paying its debts as they become due (subject to any applicable grace
period); and the Borrower, after giving effect to the transactions contemplated hereby, will have
adequate capital to conduct its business.
(q) No Subsidiaries. The Borrower has no Subsidiaries.
(r) Value Given. The Borrower has given fair consideration and reasonably equivalent
value to the Transferor in exchange for the purchase of the Loan Assets (or any number of them)
from the Transferor pursuant to the Purchase and Sale Agreement. No such transfer has been made for
or on account of an antecedent debt owed by the Borrower to the Transferor and no such transfer is
or may be voidable or subject to avoidance under any section of the Bankruptcy Code.
(s) Reports Accurate. All Servicers Certificates, Servicing Reports, Notices of
Borrowing, Borrowing Base Certificates and other written or electronic information, exhibits,
financial statements, documents, books, records or reports furnished by the Servicer to the
Administrative Agent, the Collateral Agent, the Lenders, the Lender Agents, or the Collateral
Custodian in connection with this Agreement are, as of their date, accurate, true and correct and
no such document or certificate omits to state a material fact or any fact necessary to make the
statements contained therein not misleading; provided that, solely with respect to written or
electronic information furnished by the Servicer which was provided to the Servicer from an Obligor
with respect to a Loan Asset, such information need only be accurate, true and correct to the
knowledge of the Servicer; provided, further, that the foregoing proviso shall not apply to
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any information presented in a Servicers Certificate, Servicing Report, Notice of Borrowing
or Borrowing Base Certificate.
(t) Exchange Act Compliance; Regulations T, U and X. None of the transactions
contemplated herein or in the other Transaction Documents (including, without limitation, the use
of proceeds from the sale of the Collateral Portfolio) will violate or result in a violation of
Section 7 of the Exchange Act, or any regulations issued pursuant thereto, including, without
limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R., Chapter II. The Borrower does not own or intend to carry or purchase, and no proceeds from
the Advances will be used to carry or purchase, any margin stock within the meaning of Regulation
U or to extend purpose credit within the meaning of Regulation U.
(u) No Adverse Agreements. There are no agreements in effect adversely affecting the
rights of the Borrower to make, or cause to be made, the grant of the security interest in the
Collateral Portfolio contemplated by Section 2.13.
(v) Event of Default/Unmatured Event of Default. No event has occurred which
constitutes an Event of Default, and no event has occurred and is continuing which constitutes an
Unmatured Event of Default (other than any Event of Default or Unmatured Event of Default which has
previously been disclosed to the Administrative Agent as such).
(w) Servicing Standard. Each of the Loan Assets was underwritten or acquired and is
being serviced in conformance with the standard underwriting, credit, collection, operating and
reporting procedures and systems of the Servicer or the Transferor.
(x) ERISA. The present value of all benefits vested under each employee pension
benefit plan, as such term is defined in Section 3 of ERISA, that is, or at any time during the
preceding six years was, maintained by the Borrower or any ERISA Affiliate of the Borrower, or open
to participation by employees of the Borrower or of any ERISA Affiliate of the Borrower, as from
time to time in effect (each, a Pension Plan), does not exceed the value of the assets of
the Pension Plan allocable to such vested benefits (based on the value of such assets as of the
last annual valuation date). No prohibited transactions, failure to meet the minimum funding
standard set forth in Section 302(a) of ERISA and Section 412(a) of the Code (with respect to any
Pension Plan other than a Multiemployer Plan), withdrawals or reportable events have occurred with
respect to any Pension Plan that, in the aggregate, could subject the Borrower to any material tax,
penalty or other liability. No notice of intent to terminate a Pension Plan has been filed, nor
has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension Benefit
Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to administer a
Pension Plan and no event has occurred or condition exists that might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any
Pension Plan.
(y) Allocation of Charges. There is not any agreement or understanding between the
Servicer and the Borrower (other than as expressly set forth herein or as consented to by the
Administrative Agent), providing for the allocation or sharing of obligations to make payments or
otherwise in respect of any taxes, fees, assessments or other governmental charges;
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provided that it is understood and acknowledged that the Borrower will be consolidated with
the Servicer for tax purposes.
(z) Broker-Dealer. The Borrower is not a broker-dealer or subject to the Securities
Investor Protection Act of 1970, as amended.
(aa) Instructions to Obligors. The Collection Account is the only account to which
Obligors have been instructed by the Borrower, or the Servicer on the Borrowers behalf, to send
Principal Collections and Interest Collections on the Collateral Portfolio. The Borrower has not
granted any Person other than the Collateral Agent, on behalf of the Secured Parties, an interest
in the Collection Account.
(bb) Purchase and Sale Agreement. The Purchase and Sale Agreement and the Loan
Assignment contemplated therein are the only agreements pursuant to which the Borrower acquires the
Collateral Portfolio.
(cc) Investment Company Act. The Borrower is not required to register as an
investment company under the provisions of the 1940 Act.
(dd) Compliance with Law. The Borrower has complied in all respects with all
Applicable Law to which it may be subject, and no item of the Collateral Portfolio contravenes any
Applicable Law (including, without limitation, all applicable predatory and abusive lending laws,
laws, rules and regulations relating to licensing, truth in lending, fair credit billing, fair
credit reporting, equal credit opportunity, fair debt collection practices and privacy).
(ee) Collections. The Borrower acknowledges that all Available Collections received
by it or its Affiliates with respect to the Collateral Portfolio Pledged hereunder are held and
shall be held in trust for the benefit of the Collateral Agent, on behalf of the Secured Parties
until deposited into the Collection Account within one Business Day after receipt as required
herein.
(ff) Set-Off, etc. No Loan Asset has been compromised, adjusted, extended, satisfied,
subordinated, rescinded, set-off or modified by the Borrower, the Transferor or the Obligor
thereof, and no Collateral Portfolio is subject to compromise, adjustment, extension, satisfaction,
subordination, rescission, set-off, counterclaim, defense, abatement, suspension, deferment,
deduction, reduction, termination or modification, whether arising out of transactions concerning
the Collateral Portfolio or otherwise, by the Borrower, the Transferor or the Obligor with respect
thereto, except, in each case, for amendments, extensions and modifications, if any, to such
Collateral Portfolio otherwise permitted pursuant to Section 6.04(a) of this Agreement and
in accordance with the Servicing Standard.
(gg) Full Payment. As of the applicable Cut-Off Date thereof, the Borrower has no
knowledge of any fact which should lead it to expect that any Loan Asset will not be paid in full.
(hh) Environmental. With respect to each item of Underlying Collateral as of the
applicable Cut-Off Date for the Loan Asset related to such Underlying Collateral, to the actual
knowledge of a Responsible Officer of the Borrower: (a) the related Obligors operations
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comply in all respects with all applicable Environmental Laws; (b) none of the related
Obligors operations is the subject of a federal or state investigation evaluating whether any
remedial action, involving expenditures, is needed to respond to a release of any Hazardous
Materials into the environment; and (c) the related Obligor does not have any material contingent
liability in connection with any release of any Hazardous Materials into the environment. As of
the applicable Cut-Off Date for the Loan Asset related to such Underlying Collateral, none of the
Borrower, the Transferor nor the Servicer has received any written or verbal notice of, or inquiry
from any Governmental Authority regarding, any violation, alleged violation, non-compliance,
liability or potential liability regarding environmental matters or compliance with Environmental
Laws with regard to any of the Underlying Collateral, nor does any such Person have knowledge or
reason to believe that any such notice will be received or is being threatened.
(ii) USA PATRIOT Act. Neither the Borrower nor any Affiliate of the Borrower is (i) a
country, territory, organization, person or entity named on an Office of Foreign Asset Control
(OFAC) list; (ii) a Person that resides or has a place of business in a country or territory named
on such lists or which is designated as a Non-Cooperative Jurisdiction by the Financial Action
Task Force on Money Laundering, or whose subscription funds are transferred from or through such a
jurisdiction; (iii) a Foreign Shell Bank within the meaning of the USA PATRIOT Act, i.e., a
foreign bank that does not have a physical presence in any country and that is not affiliated with
a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv)
a person or entity that resides in or is organized under the laws of a jurisdiction designated by
the United States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as
warranting special measures due to money laundering concerns.
(jj) Confirmation from Transferor. The Borrower has received in writing from the
Transferor confirmation that the Transferor will not cause the Borrower to file a voluntary
bankruptcy petition under the Bankruptcy Code.
(kk) Accuracy of Representations and Warranties. Each representation or warranty by
the Borrower contained herein or in any certificate or other document furnished by the Borrower
pursuant hereto or in connection herewith is true and correct in all respects.
(ll) Reaffirmation of Representations and Warranties. On each day that any Advance is
made hereunder, the Borrower shall be deemed to have certified that all representations and
warranties described in Section 4.01 and Section 4.02 are correct on and as of such
day as though made on and as of such day, except for any such representations or warranties which
are made as of a specific date.
(mm) Security Interest.
(i) This Agreement creates a valid and continuing security interest (as defined in the
applicable UCC) in the Collateral Portfolio in favor of the Collateral Agent, on behalf of
the Secured Parties, which security interest is prior to all other Liens (except for
Permitted Liens), and is enforceable as such against creditors of and purchasers from the
Borrower;
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(ii) the Collateral Portfolio is comprised of instruments, security entitlements,
general intangibles, tangible chattel paper, accounts, certificated securities,
uncertificated securities, securities accounts, deposit accounts, supporting
obligations or insurance (each as defined in the applicable UCC), real property and/or
such other category of collateral under the applicable UCC as to which the Borrower has
complied with its obligations under this Section 4.01(mm);
(iii) with respect to Collateral Portfolio that constitute security entitlements:
a. all of such security entitlements have been credited to one of the
Controlled Accounts and the securities intermediary for each Controlled Account has
agreed to treat all assets credited to such Controlled Account as financial assets
within the meaning of the applicable UCC;
b. the Borrower has taken all steps necessary to cause the securities
intermediary to identify in its records the Borrower, for the benefit of the Secured
Parties, as the Person having a security entitlement against the securities
intermediary in each of the Controlled Accounts; and
c. the Controlled Accounts are not in the name of any Person other than the
Borrower, subject to the lien of the Collateral Agent, for the benefit of the
Secured Parties. The securities intermediary of any Controlled Account which is a
securities account under the UCC has agreed to comply with the entitlement orders
and instructions of the Borrower, the Servicer and the Collateral Agent (acting at
the direction of the Administrative Agent) in accordance with the Transaction
Documents, including causing cash to be invested in Permitted Investments; provided
that, upon the delivery of a Notice of Exclusive Control (as defined under the
Collection Account Agreement or Unfunded Exposure Account Agreement, as applicable)
by the Collateral Agent (acting at the direction of the Administrative Agent), the
securities intermediary has agreed to only follow the entitlement orders and
instructions of the Collateral Agent, on behalf of the Secured Parties, including
with respect to the investment of cash in Permitted Investments.
(iv) all Controlled Accounts constitute securities accounts or deposit accounts as
defined in the applicable UCC;
(v) with respect to any Controlled Account which constitutes a deposit account as
defined in the applicable UCC, the Borrower, the Account Bank and the Collateral Agent, on
behalf of the Secured Parties, have entered into an account control agreement which permits
the Collateral Agent on behalf of the Secured Parties to direct disposition of the funds in
such deposit account;
(vi) the Borrower owns and has good and marketable title to (or with respect to assets
securing any Loan Assets, a valid security interest in) the Collateral Portfolio free and
clear of any Lien (other than Permitted Liens) of any Person;
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(vii) the Borrower has received all consents and approvals required by the terms of any
Loan Asset to the granting of a security interest in the Loan Assets hereunder to the
Collateral Agent, on behalf of the Secured Parties;
(viii) the Borrower has caused the filing of all appropriate financing statements in
the proper filing office in the appropriate jurisdictions under Applicable Law in order to
perfect the security interest in the Collateral Portfolio and that portion of the Loan
Assets in which a security interest may be perfected by filing granted to the Collateral
Agent, on behalf of the Secured Parties, under this Agreement; provided that filings in
respect of real property shall not be required;
(ix) other than as expressly permitted by the terms of this Agreement and the security
interest granted to the Collateral Agent, on behalf of the Secured Parties, pursuant to this
Agreement, the Borrower has not pledged, assigned, sold, granted a security interest in or
otherwise conveyed any of the Collateral Portfolio. The Borrower has not authorized the
filing of and is not aware of any financing statements against the Borrower that include a
description of collateral covering the Collateral Portfolio other than any financing
statement (A) relating to the security interests granted to the Borrower under the Purchase
and Sale Agreement, or (B) that has been terminated and/or fully and validly assigned to the
Collateral Agent on or prior to the date hereof. The Borrower is not aware of the filing of
any judgment or Tax lien filings against the Borrower;
(x) all original executed copies of each underlying promissory note or copies of each
Loan Asset Register, as applicable, that constitute or evidence each Loan Asset has been, or
subject to the delivery requirements contained herein, will be delivered to the Collateral
Custodian;
(xi) other than in the case of Noteless Loan Assets, the Borrower has received, or
subject to the delivery requirements contained herein will receive, a written acknowledgment
from the Collateral Custodian that the Collateral Custodian, as the bailee of the Collateral
Agent, is holding the underlying promissory notes that constitute or evidence the Loan
Assets solely on behalf of and for the Collateral Agent, for the benefit of the Secured
Parties; provided that the acknowledgement of the Collateral Custodian set forth in
Section 12.11 may serve as such acknowledgement;
(xii) none of the underlying promissory notes, or Loan Asset Registers, as applicable,
that constitute or evidence the Loan Assets has any marks or notations indicating that they
have been pledged, assigned or otherwise conveyed to any Person other than the Collateral
Agent, on behalf of the Secured Parties;
(xiii) with respect to any Collateral Portfolio that constitutes a certificated
security, such certificated security has been delivered to the Collateral Custodian, on
behalf of the Secured Parties and, if in registered form, has been specially Indorsed to the
Collateral Agent, for the benefit of the Secured Parties, or in blank by an effective
Indorsement or has been registered in the name of the Collateral Agent, for the benefit of
the Secured Parties, upon original issue or registration of transfer by the Borrower of such
certificated security; and
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(xiv) with respect to any Collateral Portfolio that constitutes an uncertificated
security, that the Borrower shall cause the issuer of such uncertificated security to
register the Collateral Agent, on behalf of the Secured Parties, as the registered owner of
such uncertificated security.
SECTION 4.02 Representations and Warranties of the Borrower Relating to the Agreement and
the Collateral Portfolio. The Borrower hereby represents and warrants, as of the Closing Date,
as of each applicable Cut-Off Date, as of each applicable Advance Date, as of each Reporting Date
and any date which Loan Assets are Pledged hereunder and as of each other date provided under this
Agreement or the other Transaction Documents on which such representations and warranties are
required to be (or deemed to be) made:
(a) Valid Transfer and Security Interest. This Agreement constitutes a grant of a
security interest in all of the Collateral Portfolio to the Collateral Agent, for the benefit of
the Secured Parties, which upon the delivery of the Required Loan Documents to the Collateral
Custodian, the crediting of Loan Assets to the Controlled Accounts and the filing of the financing
statements, shall be a valid and first priority perfected security interest in the Loan Assets
forming a part of the Collateral Portfolio and in that portion of the Loan Assets in which a
security interest may be perfected by filing subject only to Permitted Liens. Neither the Borrower
nor any Person claiming through or under Borrower shall have any claim to or interest in the
Controlled Accounts and, if this Agreement constitutes the grant of a security interest in such
property, except for the interest of the Borrower in such property as a debtor for purposes of the
UCC.
(b) Eligibility of Collateral Portfolio. (i) The Loan Asset Schedule and the
information contained in each Notice of Borrowing, is an accurate and complete listing of all the
Loan Assets contained in the Collateral Portfolio as of the related Cut-Off Date and the
information contained therein with respect to the identity of such item of Collateral Portfolio and
the amounts owing thereunder is true and correct as of the related Cut-Off Date, (ii) each Loan
Asset designated on any Borrowing Base Certificate as an Eligible Loan Asset and each Loan Asset
included as an Eligible Loan Asset in any calculation of Borrowing Base or Borrowing Base
Deficiency is an Eligible Loan Asset and (iii) with respect to each item of Collateral Portfolio,
all consents, licenses, approvals or authorizations of or registrations or declarations of any
Governmental Authority or any Person required to be obtained, effected or given by the Borrower in
connection with the transfer of a security interest in each item of Collateral Portfolio to the
Collateral Agent, for the benefit of the Secured Parties, have been duly obtained, effected or
given and are in full force and effect.
(c) No Fraud. Each Loan Asset was originated without any fraud or misrepresentation by
the Transferor or, to the best of the Borrowers knowledge, on the part of the Obligor.
SECTION 4.03 Representations and Warranties of the Servicer. The Servicer hereby
represents and warrants, as of the Closing Date, as of each applicable Cut-Off Date, as of each
applicable Advance Date, as of each Reporting Date and as of each other date provided under this
Agreement or the other Transaction Documents on which such representations and warranties are
required to be (or deemed to be) made:
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(a) Organization and Good Standing. The Servicer has been duly organized and is
validly existing as a corporation in good standing under the laws of the State of Delaware (except
as such jurisdiction is changed as permitted hereunder), with all requisite corporate power and
authority to own or lease its properties and to conduct its business as such business is presently
conducted and to enter into and perform its obligations pursuant to this Agreement.
(b) Due Qualification. The Servicer is duly qualified to do business as a corporation
and is in good standing as a corporation, and has obtained all necessary licenses and approvals in
all jurisdictions in which the ownership or lease of its property and or the conduct of its
business requires such qualification, licenses or approvals.
(c) Power and Authority; Due Authorization; Execution and Delivery. The Servicer (i)
has all necessary power, authority and legal right to (a) execute and deliver this Agreement and
the other Transaction Documents to which it is a party, (b) carry out the terms of the Transaction
Documents to which it is a party, and (ii) has duly authorized by all necessary corporate action
the execution, delivery and performance of this Agreement and the other Transaction Documents to
which it is a party. This Agreement and each other Transaction Document to which the Servicer is a
party have been duly executed and delivered by the Servicer.
(d) Binding Obligation. This Agreement and each other Transaction Document to which
the Servicer is a party constitutes a legal, valid and binding obligation of the Servicer
enforceable against the Servicer in accordance with its respective terms, except as such
enforceability may be limited by Bankruptcy Laws and general principles of equity (whether
considered in a suit at law or in equity).
(e) No Violation. The consummation of the transactions contemplated by this Agreement
and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof
and thereof will not (i) conflict with, result in any breach of any of the terms and provisions of,
or constitute (with or without notice or lapse of time or both) a default under, the Servicers
articles of incorporation or by-laws or any contractual obligation of the Servicer, (ii) result in
the creation or imposition of any Lien upon any of the Servicers properties pursuant to the terms
of any such contractual obligation, other than this Agreement, or (iii) violate any Applicable Law.
(f) No Proceedings. There is no litigation, proceeding or investigation pending or,
to the knowledge of the Servicer, threatened against the Servicer, before any Governmental
Authority (i) asserting the invalidity of this Agreement or any other Transaction Document to which
the Servicer is a party, (ii) seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or any other Transaction Document to which the Servicer is a party
or (iii) seeking any determination or ruling that could reasonably be expected to have a Material
Adverse Effect.
(g) All Consents Required. All approvals, authorizations, consents, orders, licenses
or other actions of any Person or of any Governmental Authority (if any) required for the due
execution, delivery and performance by the Servicer of this Agreement and any other Transaction
Document to which the Servicer is a party have been obtained.
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(h) Reports Accurate. No Borrowing Base Certificate, information, exhibit, financial
statement, document, book, record or report furnished by the Servicer to the Administrative Agent,
the Collateral Agent, the Lenders, the Lender Agents, or the Collateral Custodian in connection
with this Agreement is inaccurate in any respect as of the date it is dated, and no such document
contains any material misstatement of fact or omits to state a material fact or any fact necessary
to make the statements contained therein not misleading; provided that, solely with respect to
written or electronic information furnished by the Servicer which was provided to the Servicer from
an Obligor with respect to a Loan Asset, such information need only be accurate, true and correct
to the knowledge of the Servicer; provided, further, that the foregoing proviso shall not apply to
any information presented in a Servicers Certificate, Servicing Report, Notice of Borrowing or
Borrowing Base Certificate.
(i) Servicing Standard. The Servicer has complied in all respects with the Servicing
Standard with regard to the servicing of the Loan Assets.
(j) Collections. The Servicer acknowledges that all Available Collections received by
it or its Affiliates with respect to the Collateral Portfolio transferred or Pledged hereunder are
held and shall be held in trust for the benefit of the Secured Parties until deposited into the
Collection Account within one Business Day from receipt as required herein.
(k) Bulk Sales. The execution, delivery and performance of this Agreement do not
require compliance with any bulk sales act or similar law by the Servicer.
(l) Solvency. The Servicer is not the subject of any Bankruptcy Proceedings or
Bankruptcy Event. The transactions under this Agreement and any other Transaction Document to
which the Servicer is a party do not and will not render the Servicer not Solvent.
(m) Taxes. The Servicer has filed or caused to be filed all tax returns that are
required to be filed by it (subject to any extensions to file properly obtained by the same). The
Servicer has paid or made adequate provisions for the payment of all Taxes and all assessments made
against it or any of its property (other than any amount of Tax the validity of which is currently
being contested in good faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Servicer), and no Tax lien has been
filed and no claim is being asserted, with respect to any such Tax, assessment or other charge.
(n) Exchange Act Compliance; Regulations T, U and X. None of the transactions
contemplated herein or the other Transaction Documents (including, without limitation, the use of
the Proceeds from the sale of the Collateral Portfolio) will violate or result in a violation of
Section 7 of the Exchange Act, or any regulations issued pursuant thereto, including, without
limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R., Chapter II.
(o) Security Interest. The Servicer will take all steps necessary to ensure that the
Borrower has granted a security interest (as defined in the UCC) to the Collateral Agent, for the
benefit of the Secured Parties, in the Collateral Portfolio, which is enforceable in accordance
with Applicable Law upon execution and delivery of this Agreement. Upon the filing of UCC-1
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financing statements naming the Collateral Agent as secured party and the Borrower as debtor,
the Collateral Agent, for the benefit of the Secured Parties, shall have a valid and first priority
perfected security interest in the Loan Assets and that portion of the Collateral Portfolio in
which a security interest may be perfected by filing (except for any Permitted Liens). All filings
(including, without limitation, such UCC filings) as are necessary for the perfection of the
Secured Parties security interest in the Loan Assets and that portion of the Collateral Portfolio
in which a security interest may be perfected by filing have been (or prior to the applicable
Advance will be) made.
(p) ERISA. The present value of all benefits vested under each employee pension
benefit plan, as such term is defined in Section 3 of ERISA, that is, or at any time during the
preceding six years was, maintained by the Servicer or any ERISA Affiliate of the Servicer, or open
to participation by employees of the Servicer or of any ERISA Affiliate of the Servicer, as from
time to time in effect (each, a Servicer Pension Plan) does not exceed the value of the
assets of the Servicer Pension Plan allocable to such vested benefits (based on the value of such
assets as of the last annual valuation date). No prohibited transactions, failure to meet the
minimum funding standard set forth in Section 302(a) of ERISA and Section 412(a) of the Code (with
respect to any Servicer Pension Plan other than a Multiemployer Plan), withdrawals or reportable
events have occurred with respect to any Servicer Pension Plan that, in the aggregate, could
subject the Servicer to any material tax, penalty or other liability. No notice of intent to
terminate a Servicer Pension Plan has been filed, nor has any Servicer Pension Plan been terminated
under Section 4041(f) of ERISA, nor has the Pension Benefit Guaranty Corporation instituted
proceedings to terminate, or appoint a trustee to administer, a Servicer Pension Plan and no event
has occurred or condition exists that might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Servicer Pension Plan.
(q) USA PATRIOT Act. Neither the Servicer nor any Affiliate of the Servicer is (i) a
country, territory, organization, person or entity named on an OFAC list; (ii) a Person that
resides or has a place of business in a country or territory named on such lists or which is
designated as a Non-Cooperative Jurisdiction by the Financial Action Task Force on Money
Laundering, or whose subscription funds are transferred from or through such a jurisdiction; (iii)
a Foreign Shell Bank within the meaning of the USA PATRIOT Act, i.e., a foreign bank that does
not have a physical presence in any country and that is not affiliated with a bank that has a
physical presence and an acceptable level of regulation and supervision; or (iv) a person or entity
that resides in or is organized under the laws of a jurisdiction designated by the United States
Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as warranting special
measures due to money laundering concerns.
(r) Environmental. With respect to each item of Underlying Collateral, to the actual
knowledge of a Responsible Officer of the Servicer: (a) the related Obligors operations comply in
all material respects with all applicable Environmental Laws; (b) none of the related Obligors
operations is the subject of a Federal or state investigation evaluating whether any remedial
action, involving expenditures, is needed to respond to a release of any Hazardous Materials into
the environment; and (c) the related Obligor does not have any material contingent liability in
connection with any release of any Hazardous Materials into the environment. The Servicer has not
received any written or verbal notice of, or inquiry from any Governmental
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Authority regarding, any violation, alleged violation, non-compliance, liability or potential
liability regarding environmental matters or compliance with Environmental Laws with regard to any
of the Underlying Collateral, nor does the Servicer, have knowledge or reason to believe that any
such notice will be received or is being threatened.
(s) No Injunctions. No injunction, writ, restraining order or other order of any
nature adversely affects the Servicers performance of its obligations under this Agreement or any
Transaction Document to which the Servicer is a party.
(t) Instructions to Obligors. The Collection Account is the only account to which
Obligors have been instructed by the Servicer on the Borrowers behalf to send Principal
Collections and Interest Collections on the Collateral Portfolio.
(u) Allocation of Charges. There is not any agreement or understanding between the
Servicer and the Borrower (other than as expressly set forth herein or as consented to by the
Administrative Agent), providing for the allocation or sharing of obligations to make payments or
otherwise in respect of any taxes, fees, assessments or other governmental charges; provided that
it is understood and acknowledged that the Borrower will be consolidated with the Servicer for tax
purposes.
(v) Servicer Termination Event. No event has occurred which constitutes a Servicer
Termination Event (other than any Servicer Termination Event which has previously been disclosed to
the Administrative Agent as such).
(w) Broker-Dealer. The Servicer is not a broker-dealer or subject to the Securities
Investor Protection Act of 1970, as amended.
(x) Compliance with Applicable Law. The Servicer has complied in all respects with all
Applicable Law to which it may be subject, and no item in the Collateral Portfolio contravenes in
any respect any Applicable Law.
SECTION 4.04 Representations and Warranties of the Collateral Agent. The Collateral
Agent in its individual capacity and as Collateral Agent represents and warrants as follows:
(a) Organization; Power and Authority. It is a duly organized and validly existing
national banking association in good standing under the laws of the United States. It has full
corporate power, authority and legal right to execute, deliver and perform its obligations as
Collateral Agent under this Agreement.
(b) Due Authorization. The execution and delivery of this Agreement and the
consummation of the transactions provided for herein have been duly authorized by all necessary
association action on its part, either in its individual capacity or as Collateral Agent, as the
case may be.
(c) No Conflict. The execution and delivery of this Agreement, the performance of the
transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with,
result in any breach of its articles of incorporation or bylaws or any of the
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terms and provisions of, or constitute (with or without notice or lapse of time or both) a
default under any indenture, contract, agreement, mortgage, deed of trust, or other instrument to
which the Collateral Agent is a party or by which it or any of its property is bound.
(d) No Violation. The execution and delivery of this Agreement, the performance of
the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with
or violate, in any respect, any Applicable Law.
(e) All Consents Required. All approvals, authorizations, consents, orders or other
actions of any Person or Governmental Authority applicable to the Collateral Agent, required in
connection with the execution and delivery of this Agreement, the performance by the Collateral
Agent of the transactions contemplated hereby and the fulfillment by the Collateral Agent of the
terms hereof have been obtained.
(f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation
of the Collateral Agent, enforceable against the Collateral Agent in accordance with its terms,
except as such enforceability may be limited by applicable Bankruptcy Laws and general principles
of equity (whether considered in a suit at law or in equity).
SECTION 4.05 Representations and Warranties of each Lender. Each Lender hereby
individually represents and warrants, as to itself, that it is (a) either a Qualified Institutional
Buyer under Rule 144A of the Securities Act or an institutional Accredited Investor as defined in
Rule (1)-501(a)(1)-(3) or (7) under the Securities Act and (b) a qualified purchaser under the
1940 Act.
SECTION 4.06 Representations and Warranties of the Collateral Custodian. The
Collateral Custodian in its individual capacity and as Collateral Custodian represents and warrants
as follows:
(a) Organization; Power and Authority. It is a duly organized and validly existing
national banking association in good standing under the laws of the United States. It has full
corporate power, authority and legal right to execute, deliver and perform its obligations as
Collateral Custodian under this Agreement.
(b) Due Authorization. The execution and delivery of this Agreement and the
consummation of the transactions provided for herein have been duly authorized by all necessary
association action on its part, either in its individual capacity or as Collateral Custodian, as
the case may be.
(c) No Conflict. The execution and delivery of this Agreement, the performance of the
transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with,
result in any breach of its articles of incorporation or bylaws or any of the terms and provisions
of, or constitute (with or without notice or lapse of time or both) a default under any indenture,
contract, agreement, mortgage, deed of trust, or other instrument to which the Collateral Custodian
is a party or by which it or any of its property is bound.
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(d) No Violation. The execution and delivery of this Agreement, the performance of
the transactions contemplated hereby and the fulfillment of the terms hereof will not conflict with
or violate, in any respect, any Applicable Law.
(e) All Consents Required. All approvals, authorizations, consents, orders or other
actions of any Person or Governmental Authority applicable to the Collateral Custodian, required in
connection with the execution and delivery of this Agreement, the performance by the Collateral
Custodian of the transactions contemplated hereby and the fulfillment by the Collateral Custodian
of the terms hereof have been obtained.
(f) Validity, Etc. The Agreement constitutes the legal, valid and binding obligation
of the Collateral Custodian, enforceable against the Collateral Custodian in accordance with its
terms, except as such enforceability may be limited by applicable Bankruptcy Laws and general
principles of equity (whether considered in a suit at law or in equity).
ARTICLE V.
GENERAL COVENANTS
SECTION 5.01 Affirmative Covenants of the Borrower.
From the Closing Date until the Collection Date:
(a) Organizational Procedures and Scope of Business. The Borrower will observe all
organizational procedures required by its certificate of formation, limited liability company
agreement and the laws of its jurisdiction of formation. Without limiting the foregoing, the
Borrower will limit the scope of its business to: (i) the acquisition of Eligible Loan Assets and
the ownership and management of the Portfolio Assets and the related assets in the Collateral
Portfolio; (ii) the sale, transfer or other disposition of Loan Assets as and when permitted under
the Transaction Documents; (iii) entering into and performing under the Transaction Documents; (iv)
consenting or withholding consent as to proposed amendments, waivers and other modifications of the
Loan Agreements to the extent not in conflict with the terms of this Agreement or any other
Transaction Document; (v) exercising any rights (including but not limited to voting rights and
rights arising in connection with a Bankruptcy Event with respect to an Obligor or the consensual
or non-judicial restructuring of the debt or equity of an Obligor) or remedies in connection with
the Loan Assets and participating in the committees (official or otherwise) or other groups formed
by creditors of an Obligor to the extent not in conflict with the terms of this Agreement or any
other Transaction Document; and (vi) to engage in any activity and to exercise any powers permitted
to limited liability companies under the laws of the State of Delaware that are related to the
foregoing and necessary, convenient or advisable to accomplish the foregoing.
(b) Special Purpose Entity Requirements. The Borrower will at all times: (i)
maintain at least one Independent Director; (ii) maintain its own separate books and records and
bank accounts; (iii) hold itself out to the public and all other Persons as a legal entity separate
from the Transferor and any other Person (although, in connection with certain
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advertising and marketing, the Borrower may be identified as a Subsidiary of Fifth Street); (iv) have a Board
of Directors separate from that of the Transferor and any other Person; (v) file its own tax
returns, if any, as may be required under Applicable Law, to the extent (1) not part of a
consolidated group filing a consolidated return or returns or (2) not treated as a division for tax
purposes of another taxpayer, and pay any Taxes so required to be paid under Applicable Law in
accordance with the terms of this Agreement; (vi) except as contemplated by the Transaction
Documents, not commingle its assets with assets of any other Person; (vii) conduct its business in
its own name and strictly comply with all organizational formalities to maintain its separate
existence (although, in connection with certain advertising and marketing, the Borrower may be
identified as a Subsidiary of Fifth Street); (viii) maintain separate financial statements, except
to the extent that the Borrowers financial and operating results are consolidated with those of
Fifth Street in consolidated financial statements; (ix) pay its own liabilities only out of its own
funds; (x) maintain an arms-length relationship with its Affiliates and the Transferor; (xi) pay
the salaries of its own employees, if any; (xii) not hold out its credit or assets as being
available to satisfy the obligations of others; (xiii) allocate fairly and reasonably any overhead
for shared office space; (xiv) use separate stationery, invoices and checks (although, in
connection with certain advertising and marketing, the Borrower may be identified as a Subsidiary
of Fifth Street); (xv) except as expressly permitted by this Agreement, not pledge its assets as
security for the obligations of any other Person; (xvi) correct any known misunderstanding
regarding its separate identity; (xvii) maintain adequate capital in light of its contemplated
business purpose, transactions and liabilities and pay its operating expenses and liabilities from
its own assets; (xviii) cause its Board of Directors to meet at least annually or act pursuant to
written consent and keep minutes of such meetings and actions and observe in all respects all other
Delaware limited liability company formalities; (xix) not acquire the obligations or any securities
of its Affiliates; and (xx) cause the directors, officers, agents and other representatives of the
Borrower to act at all times with respect to the Borrower consistently and in furtherance of the
foregoing and in the best interests of the Borrower. Where necessary, the Borrower will obtain
proper authorization from its members for limited liability company action.
(c) Preservation of Company Existence. The Borrower will maintain its limited
liability company existence in good standing under the laws of its jurisdiction of formation and
will promptly obtain and thereafter maintain qualifications to do business as a foreign limited
liability company in any other state in which it does business and in which it is required to so
qualify under Applicable Law.
(d) Compliance with Legal Opinions. The Borrower shall take all other actions
necessary to maintain the accuracy of the factual assumptions set forth in the legal opinions of
Rutan & Tucker, LLP, as special counsel to the Borrower, issued in connection with the Purchase and
Sale Agreement and relating to the issues of substantive consolidation and true sale of the Loan
Assets.
(e) Deposit of Collections. The Borrower shall promptly (but in no event later than
one Business Day after receipt) deposit or cause to be deposited into the Collection Account any
and all Available Collections received by the Borrower, the Servicer or any of their Affiliates.
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(f) Disclosure of Purchase Price. The Borrower shall disclose to the Administrative
Agent and the Lender Agents the purchase price for each Loan Asset proposed to be transferred to
the Borrower pursuant to the terms of the Purchase and Sale Agreement.
(g) Obligor Defaults and Bankruptcy Events. The Borrower shall give, or shall cause
the Servicer to give, notice to the Administrative Agent and the Lender Agents within two Business
Days of the Borrowers, the Transferors or the Servicers actual knowledge of the occurrence of
any default by an Obligor under any Loan Asset or any Bankruptcy Event with respect to any Obligor
under any Loan Asset.
(h) Required Loan Documents. The Borrower shall deliver to the Collateral Custodian a
hard copy of the Required Loan Documents and the Loan Asset Checklist pertaining to each Loan Asset
within five Business Days of the Cut-Off Date pertaining to such Loan Asset.
(i) Taxes. The Borrower will file or cause to be filed its tax returns and pay any
and all Taxes imposed on it or its property as required by the Transaction Documents (except as
contemplated in Section 4.01(m)).
(j) Notice of Event of Default. The Borrower shall notify the Administrative Agent
and each Lender Agent of the occurrence of any Event of Default under this Agreement promptly upon
obtaining actual knowledge of such event. In addition, no later than two Business Days following
the Borrowers knowledge or notice of the occurrence of any Event of Default or Unmatured Event of
Default, the Borrower will provide to the Administrative Agent and each Lender Agent a written
statement of a Responsible Officer of the Borrower setting forth the details of such event and the
action that the Borrower proposes to take with respect thereto.
(k) Notice of Material Events. The Borrower shall promptly notify the Administrative
Agent and each Lender Agent of any event or other circumstance that is reasonably likely to have a
Material Adverse Effect.
(l) Notice of Income Tax Liability. The Borrower shall furnish to the Administrative
Agent and each Lender Agent telephonic or facsimile notice within 10 Business Days (confirmed in
writing within five Business Days thereafter) of the receipt of revenue agent reports or other
written proposals, determinations or assessments of the Internal Revenue Service or any other
taxing authority which propose, determine or otherwise set forth positive adjustments (i) to the
Tax liability of Fifth Street or any affiliated group (within the meaning of Section 1504(a)(l)
of the Code) of which Fifth Street is a member in an amount equal to or greater than $1,000,000 in
the aggregate, or (ii) to the Tax liability of the Borrower itself in an amount equal to or greater
than $500,000 in the aggregate. Any such notice shall specify the nature of the items giving rise
to such adjustments and the amounts thereof.
(m) Notice of Auditors Management Letters. The Borrower shall promptly notify the
Administrative Agent and each Lender Agent after the receipt of any auditors management letters
received by the Borrower or by its accountants.
(n) Notice of Breaches of Representations and Warranties under this Agreement. The
Borrower shall promptly notify the Administrative Agent and each Lender Agent if any representation
or warranty set forth in Section 4.01 or Section 4.02 was incorrect at
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the time it was given or deemed to have been given and at the same time deliver to the
Collateral Agent, the Administrative Agent and the Lender Agents a written notice setting forth in
reasonable detail the nature of such facts and circumstances. In particular, but without limiting
the foregoing, the Borrower shall notify the Administrative Agent and each Lender Agent in the
manner set forth in the preceding sentence before any Cut-Off Date of any facts or circumstances
within the knowledge of the Borrower which would render any of the said representations and
warranties untrue at the date when such representations and warranties were made or deemed to have
been made.
(o) Notice of Breaches of Representations and Warranties under the Purchase and Sale
Agreement. The Borrower confirms and agrees that the Borrower will, upon receipt of notice or
discovery thereof, promptly send to the Administrative Agent, each Lender Agent and the Collateral
Agent a notice of (i) any breach of any representation, warranty, agreement or covenant under the
Purchase and Sale Agreement or (ii) any event or occurrence that, upon notice, or upon the passage
of time or both, would constitute such a breach.
(p) Notice of Proceedings. The Borrower shall notify the Administrative Agent and
each Lender Agent, as soon as possible and in any event within three Business Days, after the
Borrower receives notice or obtains knowledge thereof, of any settlement of, material judgment
(including a material judgment with respect to the liability phase of a bifurcated trial) in or
commencement of any material labor controversy, material litigation, material action, material suit
or material proceeding before any court or governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, affecting the Collateral Portfolio, the Transaction
Documents, the Collateral Agents, for the benefit of the Secured Parties, interest in the
Collateral Portfolio, or the Borrower, the Servicer or the Transferor or any of their Affiliates.
For purposes of this Section 5.01(p), (i) any settlement, judgment, labor controversy,
litigation, action, suit or proceeding affecting the Collateral Portfolio, the Transaction
Documents, the Collateral Agents, for the benefit of the Secured Parties, interest in the
Collateral Portfolio, or the Borrower in excess of $500,000 shall be deemed to be material and (ii)
any settlement, judgment, labor controversy, litigation, action, suit or proceeding affecting the
Servicer or the Transferor or any of their Affiliates (other than the Borrower) in excess of
$1,000,000 shall be deemed to be material.
(q) Notice of ERISA Reportable Events. The Borrower shall promptly notify the
Administrative Agent and each Lender Agent after receiving notice of any reportable event (as
defined in Title IV of ERISA, other than an event for which the reporting requirements have been
waived by regulations) with respect to the Borrower (or any ERISA Affiliate thereof), and provide
them with a copy of such notice.
(r) Notice of Accounting Changes. As soon as possible and in any event within three
Business Days after the effective date thereof, the Borrower will provide to the Administrative
Agent and each Lender Agent notice of any change in the accounting policies of the Borrower.
(s) Additional Documents. The Borrower shall provide the Administrative Agent and
each Lender Agent with copies of such documents as the Administrative Agent or any
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Lender Agent may reasonably request evidencing the truthfulness of the representations set
forth in this Agreement.
(t) Protection of Security Interest. With respect to the Collateral Portfolio
acquired by the Borrower, the Borrower will (i) acquire such Collateral Portfolio pursuant to and
in accordance with the terms of the Purchase and Sale Agreement, (ii) (at the expense of the
Servicer, on behalf of the Borrower) take all action necessary to perfect, protect and more fully
evidence the Borrowers ownership of such Collateral Portfolio free and clear of any Lien other
than the Lien created hereunder and Permitted Liens, including, without limitation, (a) with
respect to the Loan Assets and that portion of the Collateral Portfolio in which a security
interest may be perfected by filing, filing and maintaining (at the expense of the Servicer, on
behalf of the Borrower), effective financing statements against the Transferor in all necessary or
appropriate filing offices, (including any amendments thereto or assignments thereof) and filing
continuation statements, amendments or assignments with respect thereto in such filing offices,
(including any amendments thereto or assignments thereof) and (b) executing or causing to be
executed such other instruments or notices as may be necessary or appropriate, (iii) (at the
expense of the Servicer, on behalf of the Borrower) take all action necessary to cause a valid,
subsisting and enforceable first priority perfected security interest, subject only to Permitted
Liens, to exist in favor of the Collateral Agent (for the benefit of the Secured Parties) in the
Borrowers interests in all of the Collateral Portfolio being Pledged hereunder including the
filing of a UCC financing statement in the applicable jurisdiction adequately describing the
Collateral Portfolio (which may include an all asset filing), and naming the Borrower as debtor
and the Collateral Agent as the secured party, and filing continuation statements, amendments or
assignments with respect thereto in such filing offices, (including any amendments thereto or
assignments thereof), (iv) permit the Administrative Agent or any Lender Agent or their respective
agents or representatives to visit the offices of the Borrower during normal office hours and upon
reasonable advance notice examine and make copies of all documents, books, records and other
information concerning the Collateral Portfolio and discuss matters related thereto with any of the
officers or employees of the Borrower having knowledge of such matters, and (v) take all additional
action that the Administrative Agent, any Lender Agent or the Collateral Agent may reasonably
request to perfect, protect and more fully evidence the respective first priority perfected
security interests of the parties to this Agreement in the Collateral Portfolio, or to enable the
Administrative Agent or the Collateral Agent to exercise or enforce any of their respective rights
hereunder.
(u) Liens. The Borrower will promptly notify the Administrative Agent and the Lender
Agents of the existence of any Lien on the Collateral Portfolio (other than Permitted Liens) and
the Borrower shall defend the right, title and interest of the Collateral Agent, for the benefit of
the Secured Parties, in, to and under the Collateral Portfolio against all claims of third parties.
(v) Other Documents. At any time from time to time upon prior written request of the
Administrative Agent or any Lender Agent, at the sole expense of the Borrower, the Borrower will
promptly and duly execute and deliver such further instruments and documents and take such further
actions as the Administrative Agent or any Lender Agent may reasonably request for the purposes of
obtaining or preserving the full benefits of this Agreement including the first priority security
interest (subject only to Permitted Liens) granted hereunder
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and of the rights and powers herein granted (including, among other things, authorizing the
filing of such UCC financing statements as the Administrative Agent may request).
(w) Compliance with Law. The Borrower shall at all times comply in all respects with
all Applicable Law applicable to Borrower or any of its assets (including, without limitation,
Environmental Laws, and all federal securities laws), and Borrower shall do or cause to be done all
things necessary to preserve and maintain in full force and effect its legal existence, and all
licenses material to its business.
(x) Proper Records. The Borrower shall at all times keep proper books of records and
accounts in which full, true and correct entries shall be made of its transactions in accordance
with GAAP and set aside on its books from its earning for each fiscal year all such proper reserves
in accordance with GAAP.
(y) Satisfaction of Obligations. The Borrower shall pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may be, all its
obligations of whatever nature, except where the amount or validity thereof is currently being
contested in good faith by appropriate proceedings and reserves with respect thereto have been
provided on the books of the Borrower.
(z) Performance of Covenants. The Borrower shall observe, perform and satisfy all the
material terms, provisions, covenants and conditions required to be observed, performed or
satisfied by it, and shall pay when due all costs, fees and expenses required to be paid by it,
under the Transaction Documents. The Borrower shall pay and discharge all Taxes, levies, liens and
other charges on it or its assets and on the Collateral Portfolio that, in each case, in any manner
would create any lien or charge upon the Collateral Portfolio, except for any such Taxes as are
being appropriately contested in good faith by appropriate proceedings diligently conducted and
with respect to which adequate reserves have been provided in accordance with GAAP.
(aa) Tax Treatment. The Borrower, the Transferor and the Lenders shall treat the
Advances advanced hereunder as indebtedness of the Borrower (or, so long as the Borrower is treated
as a disregarded entity for U.S. federal income tax purposes, as indebtedness of the entity of
which it is considered to be a part) for U.S. federal income tax purposes and to file any and all
tax forms in a manner consistent therewith.
(bb) Maintenance of Records. The Borrower will maintain records with respect to the
Collateral Portfolio and the conduct and operation of its business with no less a degree of
prudence than if the Collateral Portfolio were held by the Borrower for its own account and will
furnish the Administrative Agent and each Lender Agent, upon the reasonable request by the
Administrative Agent and each Lender Agent, information with respect to the Collateral Portfolio
and the conduct and operation of its business.
(cc) Obligor Notification Forms. The Borrower shall furnish the Collateral Agent and
the Administrative Agent with an appropriate power of attorney to send (at the Administrative
Agents discretion on the Collateral Agents behalf, after the occurrence of an Event of Default)
Obligor notification forms to give notice to the Obligors of the Collateral
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Agents interest in the Collateral Portfolio and the obligation to make payments as directed
by the Administrative Agent on the Collateral Agents behalf.
(dd) Officers Certificate. On each anniversary of the date of this Agreement, the
Borrower shall deliver an Officers Certificate, in form and substance acceptable to the Lender
Agents and the Administrative Agent, providing (i) a certification, based upon a review and summary
of UCC search results, that there is no other interest in the Collateral Portfolio perfected by
filing of a UCC financing statement other than in favor of the Collateral Agent and (ii) a
certification, based upon a review and summary of tax and judgment lien searches satisfactory to
the Administrative Agent, that there is no other interest in the Collateral Portfolio based on any
tax or judgment lien.
(ee) Continuation Statements. The Borrower shall, not earlier than six months and not
later than three months prior to the fifth anniversary of the date of filing of the financing
statement referred to in Schedule I hereto or any other financing statement filed pursuant
to this Agreement or in connection with any Advance hereunder, unless the Collection Date shall
have occurred:
(i) authorize and deliver and file or cause to be filed an appropriate continuation
statement with respect to such financing statement; and
(ii) deliver or cause to be delivered to the Collateral Agent, the Administrative Agent
and the Lender Agents an opinion of the counsel for the Borrower, in form and substance
reasonably satisfactory to the Administrative Agent, confirming and updating the opinion
delivered pursuant to Schedule I with respect to perfection and otherwise to the
effect that the security interest hereunder continues to be an enforceable and perfected
security interest, subject to no other Liens of record except as provided herein or
otherwise permitted hereunder, which opinion may contain usual and customary assumptions,
limitations and exceptions.
(ff) Disregarded Entity. The Borrower will be disregarded as an entity separate from
its owner pursuant to Treasury Regulation Section 301.7701-3(b), and neither the Borrower nor any
other Person on its behalf shall make an election to be treated as other than an entity disregarded
from its owner under Treasury Regulation Section 301.7701-3(c).
SECTION 5.02 Negative Covenants of the Borrower.
From the Closing Date until the Collection Date:
(a) Special Purpose Entity Requirements. Except as otherwise permitted by this
Agreement, the Borrower shall not (i) guarantee any obligation of any Person, including any
Affiliate; (ii) engage, directly or indirectly, in any business, other than the actions required or
permitted to be performed under the Transaction Documents; (iii) incur, create or assume any
Indebtedness, other than Indebtedness incurred under the Transaction Documents or under any Hedging
Agreement pursuant to Section 5.09(a); (iv) make or permit to remain outstanding any loan
or advance to, or own or acquire any stock or securities of, any Person, except that the Borrower
may invest in those Loan Assets and other investments permitted under the Transaction Documents and
may make any advance required or expressly permitted to be made
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pursuant to any provisions of the Transaction Documents and permit the same to remain
outstanding in accordance with such provisions; (v) become insolvent or fail to pay its debts and
liabilities from its assets when due; (vi) create, form or otherwise acquire any Subsidiaries or
(vii) release, sell, transfer, convey or assign any Loan Asset unless in accordance with the
Transaction Documents.
(b) Requirements for Material Actions. The Borrower shall not fail to provide (and at
all times the Borrowers organizational documents shall reflect) that the unanimous consent of all
members (including the consent of the Independent Director(s)) is required for the Borrower to (i)
dissolve or liquidate, in whole or part, or institute proceedings to be adjudicated bankrupt or
insolvent, (ii) institute or consent to the institution of bankruptcy or insolvency proceedings
against it, (iii) file a petition seeking or consent to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, (iv) seek or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar
official for the Borrower, (v) make any assignment for the benefit of the Borrowers creditors,
(vi) admit in writing its inability to pay its debts generally as they become due, or (vii) take
any action in furtherance of any of the foregoing.
(c) Protection of Title. The Borrower shall not take any action which would directly
or indirectly impair or adversely affect Borrowers title to the Collateral Portfolio.
(d) Transfer Limitations. The Borrower shall not transfer, assign, convey, grant,
bargain, sell, set over, deliver or otherwise dispose of, or pledge or hypothecate, directly or
indirectly, any interest in the Collateral Portfolio to any person other than the Collateral Agent
for the benefit of the Secured Parties, or engage in financing transactions or similar transactions
with respect to the Collateral Portfolio with any person other than the Administrative Agent and
the Lenders, in each case, except as otherwise expressly permitted by the terms of this Agreement.
(e) Liens. The Borrower shall not create, incur or permit to exist any lien,
encumbrance or security interest in or on any of the Collateral Portfolio subject to the security
interest granted by the Borrower pursuant to this Agreement, other than Permitted Liens.
(f) Organizational Documents. The Borrower shall not modify or terminate any of the
organizational or operational documents of the Borrower without the prior written consent of the
Administrative Agent.
(g) [Reserved].
(h) Merger, Acquisitions, Sales, etc. The Borrower shall not change its
organizational structure, enter into any transaction of merger or consolidation or amalgamation, or
asset sale (other than pursuant to Section 2.07), or liquidate, wind up or dissolve itself
(or suffer any liquidation, winding up or dissolution) without the prior written consent of the
Administrative Agent.
(i) Use of Proceeds. The Borrower shall not use the proceeds of any Advance other
than (x) to finance the purchase by the Borrower from the Transferor on a true sale basis, of
Collateral Portfolio pursuant to the terms of the Purchase and Sale Agreement or (y) to fund
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the Unfunded Exposure Account in order to establish reserves for unfunded commitments of
Revolving Loan Assets and Delayed Draw Loan Assets included in the Collateral Portfolio.
(j) Limited Assets. The Borrower shall not hold or own any assets that are not part
of the Collateral Portfolio.
(k) Tax Treatment. The Borrower shall not elect to be treated as a corporation for
U.S. federal income tax purposes and shall take all reasonable steps necessary to avoid being
treated as a corporation for U. S. federal income tax purposes.
(l) Extension or Amendment of Collateral Portfolio. The Borrower will not, except as
otherwise permitted in Section 6.04(a) of this Agreement and in accordance with the
Servicing Standard, extend, amend or otherwise modify the terms of any Loan Asset (including the
Underlying Collateral).
(m) Purchase and Sale Agreement. The Borrower will not amend, modify, waive or
terminate any provision of the Purchase and Sale Agreement without the prior written consent of the
Administrative Agent.
(n) Restricted Junior Payments. The Borrower shall not make any Restricted Junior
Payment, except that, so long as no Event of Default or Unmatured Event of Default has occurred or
would result therefrom, the Borrower may declare and make distributions to its member on its
membership interests.
(o) ERISA Matters. The Borrower will not (a) engage, and will exercise its best
efforts not to permit any ERISA Affiliate to engage, in any prohibited transaction (within the
meaning of ERISA Section 406(a) or (b) or Code Section 4975) for which an exemption is not
available or has not previously been obtained from the United States Department of Labor, (b) fail
to meet the minimum funding standard set forth in Section 302(a) of ERISA and Section 412(a) of the
Code with respect to any Pension Plan other than a Multiemployer Plan, (c) fail to make any
payments to a Multiemployer Plan that the Borrower or any ERISA Affiliate may be required to make
under the agreement relating to such Multiemployer Plan or any law pertaining thereto, (d)
terminate any Pension Plan so as to result, directly or indirectly in any liability to the
Borrower, or (e) permit to exist any occurrence of any reportable event described in Title IV of
ERISA with respect to any Pension Plan, other than an event for which reporting requirements have
been waived by regulations.
(p) Instructions to Obligors. The Borrower will not make any change, or permit the
Servicer to make any change, in its instructions to Obligors regarding payments to be made with
respect to the Collateral Portfolio to the Collection Account, unless the Administrative Agent has
consented to such change.
(q) Taxable Mortgage Pool Matters. The sum of the Outstanding Balances of all Loan
Assets owned by the Borrower and that are principally secured by an interest in real property
(within the meaning of Treasury Regulation Section 301.7701(i)-1(d)(3)) shall not at any time
exceed 35% of the aggregate Outstanding Balance of all Loan Assets.
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(r) Change of Jurisdiction, Location, Names or Location of Loan Asset Files. The
Borrower shall not change the jurisdiction of its formation, make any change to its corporate name
or use any tradenames, fictitious names, assumed names, doing business as names or other names
(other than those listed on Schedule II hereto, as such schedule may be revised from time to time
to reflect name changes and name usage permitted under the terms of this Section 5.02(r)
after compliance with all terms and conditions of this Section 5.02(r) related thereto)
unless, prior to the effective date of any such change in the jurisdiction of its formation, name
change or use, the Borrower receives prior written consent from the Administrative Agent of such
change and delivers to the Administrative Agent such financing statements as the Administrative
Agent may request to reflect such name change or use, together with such Opinions of Counsel and
other documents and instruments as the Administrative Agent may request in connection therewith.
The Borrower will not change the location of its chief executive office unless prior to the
effective date of any such change of location, the Borrower notifies the Administrative Agent of
such change of location in writing. The Borrower will not move, or consent to the Collateral
Custodian or the Servicer moving, the Loan Asset Files from the location thereof on the Closing
Date, unless the Administrative Agent shall consent to such move in writing and the Servicer shall
provide the Administrative Agent with such Opinions of Counsel and other documents and instruments
as the Administrative Agent may request in connection therewith.
(s) Allocation of Charges. There will not be any agreement or understanding between
the Servicer and the Borrower (other than as expressly set forth herein or as consented to by the
Administrative Agent), providing for the allocation or sharing of obligations to make payments or
otherwise in respect of any Taxes, fees, assessments or other governmental charges; provided that
it is understood and acknowledged that the Borrower will be consolidated with the Servicer for tax
purposes.
SECTION 5.03 Affirmative Covenants of the Servicer.
From the Closing Date until the Collection Date:
(a) Compliance with Law. The Servicer will comply in all respects with all Applicable
Law, including those with respect to servicing the Collateral Portfolio or any part thereof.
(b) Preservation of Company Existence. The Servicer will preserve and maintain its
corporate existence, rights, franchises and privileges in the jurisdiction of its formation, and
qualify and remain qualified in good standing as a corporation in each jurisdiction where the
failure to preserve and maintain such existence, rights, franchises, privileges and qualification
could reasonably be expected to have a Material Adverse Effect.
(c) Obligations and Compliance with Collateral Portfolio. The Servicer will duly
fulfill and comply with all obligations on the part of the Borrower to be fulfilled or complied
with under or in connection with the administration of each item of Collateral Portfolio and will
do nothing to impair the rights of the Collateral Agent, for the benefit of the Secured Parties, or
of the Secured Parties in, to and under the Collateral Portfolio. It is understood and agreed that
the Servicer does not hereby assume any obligations of the Borrower in respect of
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any Advances or assume any responsibility for the performance by the Borrower of any of its
obligations hereunder or under any other agreement executed in connection herewith that would be
inconsistent with the limited recourse undertaking of the Servicer, in its capacity as seller,
under Section 2.1(e) of the Purchase and Sale Agreement.
(d) Keeping of Records and Books of Account.
(i) The Servicer will maintain and implement administrative and operating procedures
(including, without limitation, an ability to recreate records evidencing Collateral
Portfolio in the event of the destruction of the originals thereof), and keep and maintain
all documents, books, records and other information reasonably necessary or advisable for
the collection of all Collateral Portfolio and the identification of the Collateral
Portfolio.
(ii) The Servicer shall permit the Administrative Agent, each Lender Agent or their
respective agents or representatives, to visit the offices of the Servicer during normal
office hours and upon reasonable advance notice and examine and make copies of all
documents, books, records and other information concerning the Collateral Portfolio and the
Servicers servicing thereof and discuss matters related thereto with any of the officers or
employees of the Servicer having knowledge of such matters.
(iii) The Servicer will on or prior to the date hereof, mark its master data processing
records and other books and records relating to the Collateral Portfolio with a legend,
acceptable to the Administrative Agent describing (i) the sale of the Collateral Portfolio
from the Transferor to the Borrower and (ii) the Pledge from the Borrower to the Collateral
Agent, for the benefit of the Secured Parties.
(e) Preservation of Security Interest. The Servicer (at its own expense, on behalf of
the Borrower) will file such financing and continuation statements and any other documents that may
be required by any law or regulation of any Governmental Authority to preserve and protect fully
the first priority perfected security interest of the Collateral Agent, for the benefit of the
Secured Parties, in, to and under the Loan Assets and that portion of the Collateral Portfolio in
which a security interest may be perfected by filing.
(f) [Reserved].
(g) Events of Default. The Servicer will provide the Administrative Agent and each
Lender Agent (with a copy to the Collateral Agent) with immediate written notice of the occurrence
of each Event of Default and each Unmatured Event of Default of which the Servicer has knowledge or
has received notice. In addition, no later than two Business Days following the Servicers
knowledge or notice of the occurrence of any Event of Default or Unmatured Event of Default, the
Servicer will provide to the Collateral Agent, the Administrative Agent and each Lender Agent a
written statement of the chief financial officer or chief accounting officer of the Servicer
setting forth the details of such event and the action that the Servicer proposes to take with
respect thereto.
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(h) Taxes. The Servicer will file its tax returns and pay any and all Taxes imposed
on it or its property as required under the Transaction Documents (except as contemplated by
Section 4.03(m)).
(i) Other. The Servicer will promptly furnish to the Collateral Agent, the
Administrative Agent and each Lender Agent such other information, documents, records or reports
respecting the Collateral Portfolio or the condition or operations, financial or otherwise, of the
Borrower or the Servicer as the Collateral Agent, any Lender Agent or the Administrative Agent may
from time to time reasonably request in order to protect the interests of the Administrative Agent,
the Lender Agents, the Collateral Agent or Secured Parties under or as contemplated by this
Agreement.
(j) Proceedings Related to the Borrower, the Transferor and the Servicer and the
Transaction Documents. The Servicer shall notify the Administrative Agent and each Lender
Agent as soon as possible and in any event within three Business Days after any executive officer
of the Servicer receives notice or obtains knowledge thereof of any settlement of, judgment
(including a judgment with respect to the liability phase of a bifurcated trial) in or commencement
of any labor controversy, litigation, action, suit or proceeding before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or foreign, that could
reasonably be expected to have a Material Adverse Effect on the Borrower, the Transferor or the
Servicer (or any of their Affiliates) or the Transaction Documents. For purposes of this
Section 5.03(j), (i) any settlement, judgment, labor controversy, litigation, action, suit
or proceeding affecting the Transaction Documents or the Borrower in excess of $500,000 shall be
deemed to be expected to have such a Material Adverse Effect and (ii) any settlement, judgment,
labor controversy, litigation, action, suit or proceeding affecting the Servicer or the Transferor
or any of their Affiliates (other than the Borrower) in excess of $1,000,000 shall be deemed to be
expected to have such a Material Adverse Effect.
(k) Deposit of Collections. The Servicer shall promptly (but in no event later than
one Business Day after receipt) deposit or cause to be deposited into the Collection Account any
and all Available Collections received by the Borrower, the Servicer or any of their Affiliates.
(l) Loan Asset Register.
(i) The Servicer shall maintain, or cause to be maintained, with respect to each
Noteless Loan Asset a register (which may be in physical or electronic form and readily
identifiable as the loan asset register) (each, a Loan Asset Register) in which it
will record, or cause to be recorded, (v) the amount of such Noteless Loan Asset, (w) the
amount of any principal or interest due and payable or to become due and payable from the
Obligor thereunder, (x) the amount of any sum in respect of such Noteless Loan Asset
received from the Obligor, (y) the date of origination of such Noteless Loan Asset and (z)
the maturity date of such Noteless Loan Asset.
(ii) At any time a Noteless Loan Asset is included as part of the Collateral Portfolio
pursuant to this Agreement, the Servicer shall deliver to the Administrative Agent, the
Collateral Agent and the Collateral Custodian a copy of the
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related Loan Asset Register, together with a certificate of a Responsible Officer of
the Servicer (in the form of Exhibit R) certifying to the accuracy of such Loan
Asset Register as of the applicable Cut-Off Date.
(m) Special Purpose Entity Requirements. The Servicer shall take such actions as are
necessary to cause the Borrower to be in compliance with the special purpose entity requirements
set forth in Sections 5.01(a) and (b) and 5.02(a) and (b).
(n) Accounting Changes. As soon as possible and in any event within three Business
Days after the effective date thereof, the Servicer will provide to the Administrative Agent and
the Lender Agents notice of any change in the accounting policies of the Servicer.
(o) Proceedings Related to the Collateral Portfolio. The Servicer shall notify the
Administrative Agent and each Lender Agent as soon as possible and in any event within three
Business Days after any Responsible Officer of the Servicer receives notice or has actual knowledge
of any settlement of, judgment (including a judgment with respect to the liability phase of a
bifurcated trial) in or commencement of any labor controversy, litigation, action, suit or
proceeding before any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, that could reasonably be expected to have a Material Adverse
Effect on the interests of the Collateral Agent or the Secured Parties in, to and under the
Collateral Portfolio. For purposes of this Section 5.03(o), any settlement, judgment, labor
controversy, litigation, action, suit or proceeding affecting the Collateral Portfolio or the
Collateral Agents or the Secured Parties interest in the Collateral Portfolio in excess of
$1,000,000 or more shall be deemed to be expected to have such a Material Adverse Effect.
(p) Compliance with Legal Opinions. The Servicer shall take all other actions
necessary to maintain the accuracy of the factual assumptions set forth in the legal opinions of
Rutan & Tucker, LLP, as special counsel to the Servicer, issued in connection with the Transaction
Documents and relating to the issues of substantive consolidation and true sale of the Loan Assets.
(q) Instructions to Agents and Obligors. The Servicer shall direct, or shall cause the
Transferor to direct, any agent or administrative agent for any Loan Asset to remit all payments
and collections with respect to such Loan Asset, and, if applicable, to direct the Obligor with
respect to such Loan Asset to remit all such payments and collections with respect to such Loan
Asset directly to the Collection Account. The Borrower and the Servicer shall take commercially
reasonable steps to ensure, and shall cause the Transferor to take commercially reasonable steps to
ensure, that only funds constituting payments and collections relating to Loan Assets shall be
deposited into the Collection Account.
(r) Capacity as Servicer. The Servicer will ensure that, at all times when it is
dealing with or in connection with the Loan Assets in its capacity as Servicer, it holds itself out
as Servicer, and not in any other capacity.
(s) Notice of Breaches of Representations and Warranties under the Purchase and Sale
Agreement. The Servicer confirms and agrees that the Servicer will, upon receipt of notice or
discovery thereof, promptly send to the Administrative Agent, each Lender Agent and
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the Collateral Agent a notice of (i) any breach of any representation, warranty, agreement or
covenant under the Purchase and Sale Agreement or (ii) any event or occurrence that, upon notice,
or upon the passage of time or both, would constitute such a breach, in each case, promptly upon
learning thereof.
(t) Audits. Prior to the Closing Date and periodically thereafter at the discretion of
the Administrative Agent and each Lender Agent, the Servicer shall allow the Administrative Agent
and each Lender Agent (during normal office hours and upon advance notice) to review the Servicers
collection and administration of the Collateral Portfolio in order to assess compliance by the
Servicer with the Servicing Standard, as well as with the Transaction Documents and to conduct an
audit of the Collateral Portfolio and Required Loan Documents in conjunction with such a review.
Such review shall be reasonable in scope and shall be completed in a reasonable period of time.
(u) Notice of Breaches of Representations and Warranties under this Agreement. The
Servicer shall promptly notify the Administrative Agent and the Lender Agents if any representation
or warranty set forth in Section 4.03 was incorrect at the time it was given or deemed to
have been given and at the same time deliver to the Collateral Agent, the Administrative Agent and
the Lender Agents a written notice setting forth in reasonable detail the nature of such facts and
circumstances. In particular, but without limiting the foregoing, the Servicer shall notify the
Administrative Agent and the Lender Agents in the manner set forth in the preceding sentence before
any Cut-Off Date of any facts or circumstances within the knowledge of the Servicer which would
render any of the said representations and warranties untrue at the date when such representations
and warranties were made or deemed to have been made.
(v) Insurance Policies. The Servicer has caused, and will cause, to be performed any
and all acts reasonably required to be performed to preserve the rights and remedies of the
Collateral Agent and the Secured Parties in any Insurance Policies applicable to Loan Assets (to
the extent the Servicer or an Affiliate of the Servicer is the agent or servicer under the
applicable Loan Agreement) including, without limitation, in each case, any necessary notifications
of insurers, assignments of policies or interests therein, and establishments of co-insured, joint
loss payee and mortgagee rights in favor of the Collateral Agent and the Secured Parties; provided
that, unless the Borrower is the sole lender under such Loan Agreement, the Servicer shall only
take such actions that are customarily taken by or on behalf of a lender in a syndicated loan
facility to preserve the rights of such lender.
(w) Disregarded Entity. The Servicer shall cause the Borrower to be disregarded as an
entity separate from its owner pursuant to Treasury Regulation Section 301.7701-3(b) and shall
cause that neither the Borrower nor any other Person on its behalf shall make an election to be
treated as other than an entity disregarded from its owner under Treasury Regulation Section
301.7701-3(c).
SECTION 5.04 Negative Covenants of the Servicer.
From the Closing Date until the Collection Date:
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(a) Mergers, Acquisition, Sales, etc. The Servicer will not consolidate with or merge
into any other Person or convey or transfer its properties and assets substantially as an entirety
to any Person, unless the Servicer is the surviving entity and unless:
(i) the Servicer has delivered to the Administrative Agent and each Lender Agent an
Officers Certificate and an Opinion of Counsel each stating that any such consolidation,
merger, conveyance or transfer and any supplemental agreement executed in connection
therewith comply with this Section 5.04 and that all conditions precedent herein
provided for relating to such transaction have been complied with and, in the case of the
Opinion of Counsel, that such supplemental agreement is legal, valid and binding with
respect to the Servicer and such other matters as the Administrative Agent may reasonably
request;
(ii) the Servicer shall have delivered notice of such consolidation, merger, conveyance
or transfer to the Administrative Agent and each Lender Agent;
(iii) after giving effect thereto, no Event of Default or Servicer Termination Event or
event that with notice or lapse of time would constitute either an Event of Default or a
Servicer Termination Event shall have occurred; and
(iv) the Administrative Agent shall have consented in writing to such consolidation,
merger, conveyance or transfer.
Notwithstanding the foregoing or anything to the contrary contained in this Agreement, from
time to time, without the consent or approval of the Administrative Agent or any Secured Party or
the satisfaction of any of the conditions set forth in clauses (i), (iii) or (iv)
above, the Servicer may consolidate or merge with any Fifth Street Merger Party, and/or any Fifth
Street Merger Party may convey or transfer its properties and assets substantially as an entirety
to the Servicer (any such transaction, a Fifth Street Affiliate Merger Transaction);
provided that, in each case, the Servicer is the surviving entity in any such transaction or
transactions; provided, further, that the Servicer shall, upon the request of the Administrative
Agent, deliver an Opinion of Counsel that this Agreement and any supplemental agreement executed in
connection therewith is legal, valid and binding with respect to the Servicer after the
consummation of such Fifth Street Affiliate Merger Transaction.
(b) Change of Name or Location of Loan Asset Files. The Servicer shall not (x) change
its name, move the location of its principal place of business and chief executive office, change
the offices where it keeps records concerning the Collateral Portfolio from the address set forth
under its name on the signature pages hereto, or change the jurisdiction of its formation, or (y)
move, or consent to the Collateral Custodian moving, the Required Loan Documents and Loan Asset
Files from the location thereof on the initial Advance Date, unless the Administrative Agent shall
consent of such move in writing and the Servicer shall provide the Administrative Agent with such
Opinions of Counsel and other documents and instruments as the Administrative Agent may request in
connection therewith and has taken all actions required under the UCC of each relevant jurisdiction
in order to continue the first priority perfected security interest of the Collateral Agent, for
the benefit of the Secured Parties, in the Collateral Portfolio.
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(c) Change in Payment Instructions to Obligors. The Servicer will not make any change
in its instructions to Obligors regarding payments to be made with respect to the Collateral
Portfolio to the Collection Account, unless the Administrative Agent has consented to such change.
(d) Extension or Amendment of Loan Assets. The Servicer will not, except as otherwise
permitted in Section 6.04(a), extend, amend or otherwise modify the terms of any Loan Asset
(including the Underlying Collateral).
(e) Taxable Mortgage Pool Matters. The Servicer will manage the portfolio and advise
the Borrower with respect to purchases from the Transferor so as to not at any time allow the sum
of the Outstanding Balances of all Loan Assets owned by the Borrower and that are principally
secured by an interest in real property (within the meaning of Treasury Regulation Section
301.7701(i)-1(d)(3)) to exceed 35% of the aggregate Outstanding Balance of all Loan Assets.
(f) Allocation of Charges. There will not be any agreement or understanding between
the Servicer and the Borrower (other than as expressly set forth herein or as consented to by the
Administrative Agent), providing for the allocation or sharing of obligations to make payments or
otherwise in respect of any Taxes, fees, assessments or other governmental charges; provided that
it is understood and acknowledged that the Borrower will be consolidated with the Servicer for tax
purposes.
SECTION 5.05 Affirmative Covenants of the Collateral Agent.
From the Closing Date until the Collection Date:
(a) Compliance with Law. The Collateral Agent will comply in all material respects
with all Applicable Law.
(b) Preservation of Existence. The Collateral Agent will preserve and maintain its
existence, rights, franchises and privileges in the jurisdiction of its formation and qualify and
remain qualified in good standing in each jurisdiction where failure to preserve and maintain such
existence, rights, franchises, privileges and qualification could reasonably be expected to have a
Material Adverse Effect.
SECTION 5.06 Negative Covenants of the Collateral Agent.
From the Closing Date until the Collection Date, the Collateral Agent will not make any
changes to the Collateral Agent Fees without the prior written approval of the Administrative
Agent.
SECTION 5.07 Affirmative Covenants of the Collateral Custodian.
From the Closing Date until the Collection Date:
(a) Compliance with Law. The Collateral Custodian will comply in all material
respects with all Applicable Law.
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(b) Preservation of Existence. The Collateral Custodian will preserve and maintain
its existence, rights, franchises and privileges in the jurisdiction of its formation and qualify
and remain qualified in good standing in each jurisdiction where failure to preserve and maintain
such existence, rights, franchises, privileges and qualification could reasonably be expected to
have a Material Adverse Effect.
(c) Location of Required Loan Documents. Subject to Article XII of this
Agreement, the Required Loan Documents shall remain at all times in the possession of the
Collateral Custodian at the address set forth under its name on the signature pages hereto unless
notice of a different address is given in accordance with the terms hereof or unless the
Administrative Agent agrees to allow certain Required Loan Documents to be released to the Servicer
on a temporary basis in accordance with the terms hereof, except as such Required Loan Documents
may be released pursuant to the terms of this Agreement.
SECTION 5.08 Negative Covenants of the Collateral Custodian.
From the Closing Date until the Collection Date:
(a) Required Loan Documents. The Collateral Custodian will not dispose of any
documents constituting the Required Loan Documents in any manner that is inconsistent with the
performance of its obligations as the Collateral Custodian pursuant to this Agreement and will not
dispose of any Collateral Portfolio except as contemplated by this Agreement.
(b) No Changes in Collateral Custodian Fees. The Collateral Custodian will not make
any changes to the Collateral Custodian Fees without the prior written approval of the
Administrative Agent.
SECTION 5.09 Covenants of the Borrower Relating to Hedging of Loan Assets.
(a) At any time prior to an Event of Default, the Borrower may enter into Hedge Agreements for
certain Fixed Rate Loan Assets with a Hedge Counterparty with the prior consent of the
Administrative Agent. After an Event of Default or at any time after the Spread Differential has
fallen below 6.00%, the Administrative Agent may, at its sole discretion, direct the Borrower to
enter into Hedge Transactions for certain Fixed Rate Loan Assets.
(b) As additional security hereunder, the Borrower hereby assigns to the Collateral Agent, for
the benefit of the Secured Parties, all right, title and interest of the Borrower (but none of the
obligations) in each Hedging Agreement, each Hedge Transaction, and all present and future amounts
payable by a Hedge Counterparty to the Borrower under or in connection with the respective Hedging
Agreement and Hedge Transaction(s) with that Hedge Counterparty (Hedge Collateral), and
grants a security interest to the Collateral Agent, for the benefit of the Secured Parties, in the
Hedge Collateral. The Borrower acknowledges that as a result of such assignment the Borrower may
not, without the prior written consent of the Administrative Agent and the Collateral Agent,
exercise any rights under any Hedging Agreement or Hedge Transaction, except for the Borrowers
right under any Hedging Agreement to enter into Hedge Transactions in order to meet the Borrowers
obligations under Section 5.09(a) hereof. Nothing herein shall have the effect of
releasing the Borrower from any of its obligations under any Hedging Agreement or any Hedge
Transaction, nor be construed as
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requiring the consent of the Administrative Agent, the Lenders, the Lender Agents, the
Collateral Agent or any Secured Party for the performance by the Borrower of any such obligations.
(c) The Borrower shall, promptly upon execution thereof, provide to the Administrative Agent
and the Collateral Agent a copy of any Hedging Agreement entered into in connection with this
Agreement.
ARTICLE VI.
ADMINISTRATION AND SERVICING OF CONTRACTS
SECTION 6.01 Appointment and Designation of the Servicer.
(a) Initial Servicer. The Borrower, each Lender Agent and the Administrative Agent
hereby appoint Fifth Street, pursuant to the terms and conditions of this Agreement, as Servicer,
with the authority to service, administer and exercise rights and remedies, on behalf of the
Borrower, in respect of the Collateral Portfolio. Until the Administrative Agent gives Fifth Street
a Servicer Termination Notice, Fifth Street hereby accepts such appointment and agrees to perform
the duties and responsibilities of the Servicer pursuant to the terms hereof. The Servicer and the
Borrower hereby acknowledge that the Administrative Agent and the Secured Parties are third party
beneficiaries of the obligations undertaken by the Servicer hereunder.
(b) Servicer Termination Notice. The Borrower, the Servicer, each Lender Agent, and
the Administrative Agent hereby agree that, upon the occurrence of a Servicer Termination Event,
the Administrative Agent, by written notice to the Servicer (with a copy to the Collateral Agent)
(a Servicer Termination Notice), may terminate all of the rights, obligations, power and
authority of the Servicer under this Agreement. On and after the receipt by the Servicer of a
Servicer Termination Notice pursuant to this Section 6.01(b), the Servicer shall continue
to perform all servicing functions under this Agreement until the date specified in the Servicer
Termination Notice or otherwise specified by the Administrative Agent in writing or, if no such
date is specified in such Servicer Termination Notice or otherwise specified by the Administrative
Agent, until a date mutually agreed upon by the Servicer and the Administrative Agent and shall be
entitled to receive, to the extent of funds available therefor pursuant to Section 2.04,
the Servicing Fees therefor until such date. After such date, the Servicer agrees that it will
terminate its activities as Servicer hereunder in a manner that the Administrative Agent believes
will facilitate the transition of the performance of such activities to a successor Servicer, and
the successor Servicer shall assume each and all of the Servicers obligations to service and
administer the Collateral Portfolio, on the terms and subject to the conditions herein set forth,
and the Servicer shall use its best efforts to assist the successor Servicer in assuming such
obligations.
(c) Appointment of Replacement Servicer. At any time following the delivery of a
Servicer Termination Notice, the Administrative Agent may, at its discretion, (i) appoint Wachovia
(or an Affiliate thereof) as Servicer under this Agreement and, in such case, all authority, power,
rights and obligations of the Servicer shall pass to and be vested in Wachovia (or an Affiliate
thereof) or (ii) appoint a new Servicer (the Replacement Servicer), which appointment
shall take effect upon the Replacement Servicer accepting such appointment
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by a written assumption in a form satisfactory to the Administrative Agent in its sole
discretion. In the event that Wachovia (or an Affiliate thereof) or a Replacement Servicer has not
accepted its appointment at the time when the Servicer ceases to act as Servicer, the
Administrative Agent shall petition a court of competent jurisdiction to appoint any established
financial institution, having a net worth of not less than United States $50,000,000 and whose
regular business includes the servicing of Collateral Portfolio, as the Replacement Servicer
hereunder.
(d) Liabilities and Obligations of Replacement Servicer. Upon its appointment,
Wachovia (or an Affiliate thereof) or the Replacement Servicer, as applicable, shall be the
successor in all respects to the Servicer with respect to servicing functions under this Agreement
and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on
the Servicer by the terms and provisions hereof, and all references in this Agreement to the
Servicer shall be deemed to refer to Wachovia (or an Affiliate thereof) or the Replacement
Servicer, as applicable; provided, that Wachovia (or an Affiliate thereof) or Replacement Servicer,
as applicable, shall have (i) no liability with respect to any action performed by the terminated
Servicer prior to the date that Wachovia (or an Affiliate thereof) or Replacement Servicer, as
applicable, becomes the successor to the Servicer or any claim of a third party based on any
alleged action or inaction of the terminated Servicer, (ii) no obligation to perform any advancing
obligations, if any, of the Servicer unless it elects to in its sole discretion, (iii) no
obligation to pay any Taxes required to be paid by the Servicer (provided that Wachovia (or an
Affiliate thereof) or Replacement Servicer, as applicable, shall pay any income Taxes for which it
is liable), (iv) no obligation to pay any of the fees and expenses of any other party to the
transactions contemplated hereby, and (v) no liability or obligation with respect to any Servicer
indemnification obligations of any prior Servicer, including the original Servicer. The
indemnification obligations of Wachovia (or an Affiliate thereof) or the Replacement Servicer, as
applicable, upon becoming a Replacement Servicer, are expressly limited to those arising on account
of its failure to act in good faith and with reasonable care under the circumstances. In addition,
Wachovia (or an Affiliate thereof) or Replacement Servicer, as applicable, shall have no liability
relating to the representations and warranties of the Servicer contained in Section 4.03.
(e) Authority and Power. All authority and power granted to the Servicer under this
Agreement shall automatically cease and terminate upon termination of this Agreement and shall pass
to and be vested in the Borrower and, without limitation, the Borrower is hereby authorized and
empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, all
documents and other instruments, and to do and accomplish all other acts or things necessary or
appropriate to effect the purposes of such transfer of servicing rights. The Servicer agrees to
cooperate with the Borrower in effecting the termination of the responsibilities and rights of the
Servicer to conduct servicing of the Collateral Portfolio.
(f) Subcontracts. The Servicer may, with the prior written consent of the
Administrative Agent, subcontract with any other Person for servicing, administering or collecting
the Collateral Portfolio; provided, that (i) the Servicer shall select any such Person with
reasonable care and shall be solely responsible for the fees and expenses payable to any such
Person, (ii) the Servicer shall not be relieved of, and shall remain liable for, the performance of
the duties and obligations of the Servicer pursuant to the terms hereof without regard to any
subcontracting arrangement and (iii) any such subcontract shall be terminable upon
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the occurrence of a Servicer Termination Event. The Administrative Agent hereby acknowledges
that the Servicer has engaged Fifth Street Management LLC in accordance with terms of the
Management Agreement, a copy of which has been previously delivered to the Administrative Agent.
(g) Waiver. The Borrower acknowledges that the Administrative Agent or any of its
Affiliates may act as the Collateral Agent and/or the Servicer, and the Borrower waives any and all
claims against the Administrative Agent, each Lender Agent or any of their respective Affiliates,
the Collateral Agent and the Servicer (other than claims relating to such partys gross negligence
or willful misconduct) relating in any way to the custodial or collateral administration functions
having been performed by the Administrative Agent or any of its Affiliates in accordance with the
terms and provisions (including the standard of care) set forth in the Transaction Documents.
SECTION 6.02 Duties of the Servicer.
(a) Duties. The Servicer shall take or cause to be taken all such actions as may be
necessary or advisable to service, administer and collect on the Collateral Portfolio from time to
time, all in accordance with Applicable Law and the Servicing Standard. Prior to the occurrence of
a Servicer Termination Event, but subject to the terms of this Agreement (including, without
limitation, Section 6.04), the Servicer has the sole and exclusive authority to make any
and all decisions with respect to the Collateral Portfolio and take or refrain from taking any and
all actions with respect to the Collateral Portfolio. Without limiting the foregoing, the duties of
the Servicer shall include the following:
(i) supervising the Collateral Portfolio, including communicating with Obligors,
executing amendments, providing consents and waivers, enforcing and collecting on the
Collateral Portfolio and otherwise managing the Collateral Portfolio on behalf of the
Borrower;
(ii) maintaining all necessary servicing records with respect to the Collateral
Portfolio and providing such reports to the Administrative Agent and each Lender Agent (with
a copy to the Collateral Agent and the Collateral Custodian) in respect of the servicing of
the Collateral Portfolio (including information relating to its performance under this
Agreement) as may be required hereunder or as the Administrative Agent or any Lender Agent
may reasonably request;
(iii) maintaining and implementing administrative and operating procedures (including,
without limitation, an ability to recreate servicing records evidencing the Collateral
Portfolio in the event of the destruction of the originals thereof) and keeping and
maintaining all documents, books, records and other information reasonably necessary or
advisable for the collection of the Collateral Portfolio;
(iv) promptly delivering to the Administrative Agent, each Lender Agent, the Collateral
Agent or the Collateral Custodian, from time to time, such information and servicing records
(including information relating to its performance
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under this Agreement) as the Administrative Agent, each Lender Agent, Collateral
Custodian or the Collateral Agent may from time to time reasonably request;
(v) identifying each Loan Asset clearly and unambiguously in its servicing records to
reflect that such Loan Asset is owned by the Borrower and that the Borrower is Pledging a
security interest therein to the Secured Parties pursuant to this Agreement;
(vi) notifying the Administrative Agent and each Lender Agent of any material action,
suit, proceeding, dispute, offset, deduction, defense or counterclaim (1) that is or is
threatened to be asserted by an Obligor with respect to any Loan Asset (or portion thereof)
of which it has knowledge or has received notice; or (2) that could reasonably be expected
to have a Material Adverse Effect;
(vii) using its best efforts to maintain the perfected security interest of the
Collateral Agent, for the benefit of the Secured Parties, in the Collateral Portfolio;
(viii) maintaining the Loan Asset File with respect to Loan Assets included as part of
the Collateral Portfolio; provided that, so long as the Servicer is in possession of any
Required Loan Documents, the Servicer will hold such Required Loan Documents in a fireproof
safe or fireproof file cabinet;
(ix) directing the Collateral Agent to make payments pursuant to the terms of the
Servicing Report in accordance with Section 2.04;
(x) directing the sale or substitution of Collateral Portfolio in accordance with
Section 2.07;
(xi) providing assistance to the Borrower with respect to the purchase and sale of and
payment for the Loan Assets;
(xii) instructing the Obligors and the administrative agents on the Loan Assets to make
payments directly into the Collection Account established and maintained with the Collateral
Agent;
(xiii) delivering the Loan Asset Files and the Loan Asset Schedule to the Collateral
Custodian; and
(xiv) complying with such other duties and responsibilities as may be required of the
Servicer by this Agreement.
It is acknowledged and agreed that in circumstances in which a Person other than the Borrower,
the Transferor (so long as the Transferor is also the Servicer) or the Servicer acts as lead agent
with respect to any Loan Asset, the Servicer shall perform its servicing duties hereunder only to
the extent a lender under the related loan syndication Loan Agreements has the right to do so.
Notwithstanding anything to the contrary contained herein, it is acknowledged and agreed that the
performance by the Servicer of its duties hereunder shall be limited insofar as such performance
would conflict with or result in a breach of any of the express terms of the
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related Loan Agreements; provided that the Servicer shall (a) provide prompt written notice to
the Administrative Agent upon becoming aware of such conflict or breach, (b) have determined that
there is no other commercially reasonable performance that it could render consistent with the
express terms of the Loan Agreements which would result in all or a portion of the servicing duties
being performed in accordance with this Agreement, and (c) undertake all commercially reasonable
efforts to mitigate the effects of such non-performance including performing as much of the
servicing duties as possible and performing such other commercially reasonable and/or similar
duties consistent with the terms of the Loan Agreements.
(b) Notwithstanding anything to the contrary contained herein, the exercise by the
Administrative Agent, the Collateral Agent, each Lender Agent and the Secured Parties of their
rights hereunder shall not release the Servicer, the Transferor or the Borrower from any of their
duties or responsibilities with respect to the Collateral Portfolio. The Secured Parties, the
Administrative Agent, each Lender Agent and the Collateral Agent shall not have any obligation or
liability with respect to any Collateral Portfolio, nor shall any of them be obligated to perform
any of the obligations of the Servicer hereunder.
(c) Any payment by an Obligor in respect of any indebtedness owed by it to the Transferor or
the Borrower shall, except as otherwise specified by such Obligor or otherwise required by contract
or law and unless otherwise instructed by the Administrative Agent, be applied as a collection of a
payment by such Obligor (starting with the oldest such outstanding payment due) to the extent of
any amounts then due and payable thereunder before being applied to any other receivable or other
obligation of such Obligor.
SECTION 6.03 Authorization of the Servicer.
(a) Each of the Borrower, the Administrative Agent, each Lender Agent, each Lender and the
Hedge Counterparty hereby authorizes the Servicer (including any successor thereto) to take any and
all reasonable steps in its name and on its behalf necessary or desirable in the determination of
the Servicer and not inconsistent with the sale of the Collateral Portfolio by the Transferor to
the Borrower under the Purchase and Sale Agreement and, thereafter, the Pledge by the Borrower to
the Collateral Agent on behalf of the Secured Parties hereunder, to collect all amounts due under
any and all Collateral Portfolio, including, without limitation, endorsing any of their names on
checks and other instruments representing Interest Collections and Principal Collections, executing
and delivering any and all instruments of satisfaction or cancellation, or of partial or full
release or discharge, and all other comparable instruments, with respect to the Collateral
Portfolio and, after the delinquency of any Collateral Portfolio and to the extent permitted under
and in compliance with Applicable Law, to commence proceedings with respect to enforcing payment
thereof, to the same extent as the Transferor could have done if it had continued to own such
Collateral Portfolio. The Transferor, the Borrower and the Collateral Agent on behalf of the
Secured Parties shall furnish the Servicer (and any successors thereto) with any powers of attorney
and other documents necessary or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder, and shall cooperate with the Servicer to the fullest extent in
order to ensure the collectability of the Collateral Portfolio. In no event shall the Servicer be
entitled to make the Secured Parties, the Administrative Agent, the Collateral Agent, any Lender,
any Lender Agent or any Hedge Counterparty a party to any litigation without such partys express
prior written consent, or to make the Borrower a party to
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any litigation (other than any routine foreclosure or similar collection procedure) without
the Administrative Agents and each Lender Agents consent.
(b) After the declaration of the Facility Maturity Date, at the direction of the
Administrative Agent, the Servicer shall take such action as the Administrative Agent may deem
necessary or advisable to enforce collection of the Collateral Portfolio; provided, that the
Administrative Agent may, at any time that an Event of Default has occurred, notify any Obligor
with respect to any Collateral Portfolio of the assignment of such Collateral Portfolio to the
Collateral Agent on behalf of the Secured Parties and direct that payments of all amounts due or to
become due be made directly to the Administrative Agent or any servicer, collection agent or
account designated by the Administrative Agent and, upon such notification and at the expense of
the Borrower, the Administrative Agent may enforce collection of any such Collateral Portfolio, and
adjust, settle or compromise the amount or payment thereof.
SECTION 6.04 Collection of Payments; Accounts.
(a) Collection Efforts, Modification of Collateral Portfolio. The Servicer will use
its commercially reasonable efforts and judgment to collect or cause to be collected, all payments
called for under the terms and provisions of the Loan Assets included in the Collateral Portfolio
as and when the same become due, all in accordance with the Servicing Standard. The Servicer may
not waive, modify or otherwise vary any provision of an item of Collateral Portfolio in a manner
that would impair the collectability of the Collateral Portfolio or in any manner contrary to the
Servicing Standard.
(b) Acceleration. If consistent with the Servicing Standard, the Servicer shall
accelerate or vote to accelerate, as applicable, the maturity of all or any Scheduled Payments and
other amounts due under any Loan Asset promptly after such Loan Asset becomes defaulted.
(c) Taxes and other Amounts. The Servicer will use its best efforts to collect all
payments with respect to amounts due for Taxes, assessments and insurance premiums relating to each
Loan Asset to the extent required to be paid to the Borrower for such application under the
applicable Loan Agreement and remit such amounts to the appropriate Governmental Authority or
insurer as required by the Loan Agreements.
(d) Payments to Collection Account. On or before the applicable Cut-Off Date, the
Servicer shall have instructed all Obligors to make all payments in respect of the Collateral
Portfolio directly to the Collection Account; provided that the Servicer is not required to so
instruct any Obligor which is solely a guarantor or other surety (or an Obligor that is not
designated as the lead borrower or another such similar term) unless and until the Servicer calls
on the related guaranty or secondary obligation.
(e) Controlled Accounts. Each of the parties hereto hereby agrees that (i) each
Controlled Account is intended to be a securities account or deposit account within the meaning
of the UCC and (ii) except as otherwise expressly provided herein and in the Collection Account
Agreement or Unfunded Exposure Account Agreement, as applicable, prior to the delivery of a Notice
of Exclusive Control (as defined in the Collection Account Agreement or Unfunded Exposure Account
Agreement, as applicable), the Borrower, the Servicer and the
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Collateral Agent (acting at the direction of the Administrative Agent) shall be entitled to
exercise the rights that comprise each Financial Asset held in each Controlled Account which is a
securities account and have the right to direct the disposition of funds in any Controlled Account
which is a deposit account; provided that after the delivery of a Notice of Exclusive Control (as
defined in the Collection Account Agreement or Unfunded Exposure Account Agreement, as applicable),
such rights shall be exclusively held by the Collateral Agent (acting at the direction of the
Administrative Agent). Each of the parties hereto hereby agrees to cause the securities
intermediary that holds any money or other property for the Borrower in a Controlled Account that
is a securities account to agree with the parties hereto that (A) the cash and other property
(subject to Section 6.04(f) below with respect to any property other than investment
property, as defined in Section 9-102(a)(49) of the UCC) is to be treated as a Financial Asset
under Article 8 of the UCC and (B) regardless of any provision in any other agreement, for purposes
of the UCC, with respect to the Controlled Accounts, New York shall be deemed to be the Account
Banks jurisdiction (within the meaning of Section 9-304 of the UCC) and the securities
intermediarys jurisdiction (within the meaning of Section 8-110 of the UCC). All securities or
other property underlying any Financial Assets credited to the Controlled Accounts in the form of
securities or instruments shall be registered in the name of the Account Bank or if in the name of
the Borrower or the Collateral Agent, Indorsed to the Account Bank, Indorsed in blank, or credited
to another securities account maintained in the name of the Account Bank, and in no case will any
Financial Asset credited to the Controlled Accounts be registered in the name of the Borrower,
payable to the order of the Borrower or specially Indorsed to the Borrower, except to the extent
the foregoing have been specially Indorsed to the Account Bank or Indorsed in blank.
(f) Loan Agreements. Notwithstanding any term hereof (or any term of the UCC that
might otherwise be construed to be applicable to a securities intermediary as defined in the UCC)
to the contrary, none of the Collateral Agent, the Collateral Custodian nor any securities
intermediary shall be under any duty or obligation in connection with the acquisition by the
Borrower, or the grant by the Borrower to the Collateral Agent, of any Loan Asset in the nature of
a loan or a participation in a loan to examine or evaluate the sufficiency of the documents or
instruments delivered to it by or on behalf of the Borrower under the related Loan Agreements, or
otherwise to examine the Loan Agreements, in order to determine or compel compliance with any
applicable requirements of or restrictions on transfer (including without limitation any necessary
consents). The Collateral Custodian shall hold any Instrument delivered to it evidencing any Loan
Asset granted to the Collateral Agent hereunder as custodial agent for the Collateral Agent in
accordance with the terms of this Agreement.
(g) Adjustments. If (i) the Servicer makes a deposit into the Collection Account in
respect of a Interest Collection or Principal Collection of a Loan Asset and such Interest
Collection or Principal Collection was received by the Servicer in the form of a check that is not
honored for any reason or (ii) the Servicer makes a mistake with respect to the amount of any
Interest Collection or Principal Collection and deposits an amount that is less than or more than
the actual amount of such Interest Collection or Principal Collection, the Servicer shall
appropriately adjust the amount subsequently deposited into the Collection Account to reflect such
dishonored check or mistake. Any Scheduled Payment in respect of which a dishonored check is
received shall be deemed not to have been paid.
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SECTION 6.05 Realization Upon Loan Assets. The Servicer will use reasonable efforts
consistent with the Servicing Standard to foreclose upon or repossess, as applicable, or otherwise
comparably convert the ownership of any Underlying Collateral relating to a defaulted Loan Asset as
to which no satisfactory arrangements can be made for collection of delinquent payments. The
Servicer will comply with the Servicing Standard and Applicable Law in realizing upon such
Underlying Collateral, and employ practices and procedures including reasonable efforts consistent
with the Servicing Standard to enforce all obligations of Obligors foreclosing upon, repossessing
and causing the sale of such Underlying Collateral at public or private sale in circumstances other
than those described in the preceding sentence. Without limiting the generality of the foregoing,
unless the Administrative Agent has specifically given instruction to the contrary, the Servicer
may cause the sale of any such Underlying Collateral to the Servicer or its Affiliates for a
purchase price equal to the then fair value thereof, any such sale to be evidenced by a certificate
of a Responsible Officer of the Servicer delivered to the Administrative Agent setting forth the
Loan Asset, the Underlying Collateral, the sale price of the Underlying Collateral and certifying
that such sale price is the fair value of such Underlying Collateral. In any case in which any
such Underlying Collateral has suffered damage, the Servicer will not expend funds in connection
with any repair or toward the foreclosure or repossession of such Underlying Collateral unless it
reasonably determines that such repair and/or foreclosure or repossession will increase the
Recoveries by an amount greater than the amount of such expenses. The Servicer will remit to the
Collection Account the Recoveries received in connection with the sale or disposition of Underlying
Collateral relating to a defaulted Loan Asset.
SECTION 6.06 Servicing Compensation. As compensation for its activities hereunder and
reimbursement for its expenses, the Servicer shall be entitled to be paid the Servicing Fees and
reimbursed its reasonable out-of-pocket expenses as provided in Section 2.04.
SECTION 6.07 Payment of Certain Expenses by Servicer. The Servicer will be required
to pay all expenses incurred by it in connection with its activities under this Agreement,
including fees and disbursements of its independent accountants, Taxes imposed on the Servicer,
expenses incurred by the Servicer in connection with payments and reports pursuant to this
Agreement, and all other fees and expenses not expressly stated under this Agreement for the
account of the Borrower. The Servicer will be required to pay all reasonable fees and expenses
owing to any bank or trust company in connection with the maintenance of the Controlled Accounts.
The Servicer may be reimbursed for any reasonable out-of-pocket expenses incurred hereunder
(including out-of-pocket expenses paid by the Servicer on behalf of the Borrower), subject to the
availability of funds pursuant to Section 2.04; provided, that, to the extent funds are not
available for such reimbursement, the Servicer shall be required to pay such expenses for its own
account and shall not be entitled to any payment therefor other than the Servicing Fees.
SECTION 6.08 Reports to the Administrative Agent; Account Statements; Servicing
Information.
(a) Notice of Borrowing. On each Advance Date and on each reduction of Advances
Outstanding pursuant to Section 2.18, the Borrower (and the Servicer on its behalf) will
provide a Notice of Borrowing or a Notice of Reduction, as applicable, and a Borrowing
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Base Certificate, each updated as of such date, to the Administrative Agent and each Lender
Agent (with a copy to the Collateral Agent).
(b) Servicing Report. On each Reporting Date and each Advance Date, the Servicer will
provide to the Borrower, each Lender Agent, the Administrative Agent, the Collateral Agent and any
Liquidity Bank, a monthly statement including (i) a Borrowing Base Certificate calculated as of the
most recent Determination Date, (ii) a summary prepared with respect to each Obligor and with
respect to each Loan Asset for such Obligor prepared as of the most recent Determination Date that
will be required to set forth only (x) calculations of the Net Leverage Ratio and the Interest
Coverage Ratio for each such Loan Asset for the most recently ended Relevant Test Period for each
such Loan Asset and (y) whether or not each such Loan Asset shall have become subject to an
amendment, restatement, supplement, waiver or other modification and whether such amendment,
restatement, supplement, waiver or other modification is a Material Modification and (iii) amounts
to be remitted pursuant to Section 2.04 to the applicable parties (which shall include any
applicable wiring instructions of the parties receiving payment) (such monthly statement, a
Servicing Report), with respect to related calendar month signed by a Responsible Officer
of the Servicer and the Borrower and substantially in the form of Exhibit L.
(c) Servicers Certificate. Together with each Servicing Report, the Servicer shall
submit to the Administrative Agent, each Lender Agent, the Collateral Agent and any Liquidity Bank
a certificate substantially in the form of Exhibit M (a Servicers Certificate),
signed by a Responsible Officer of the Servicer, which shall include a certification by such
Responsible Officer that no Event of Default or Unmatured Event of Default has occurred.
(d) Financial Statements. The Servicer will submit to the Administrative Agent, each
Lender Agent, any Liquidity Bank and the Collateral Agent, (i) within 60 days after the end of each
of its first three fiscal quarters (excluding the fiscal quarter ending on the date specified in
clause (ii)), commencing December 31, 2009, consolidated unaudited financial statements of
the Servicer for the most recent fiscal quarter, and (ii) within 90 days after the end of each
fiscal year, commencing with the fiscal year ended September 30, 2009, consolidated audited
financial statements of the Servicer, audited by a firm of nationally recognized independent public
accountants, as of the end of such fiscal year.
(e) Tax Returns. Upon demand by the Administrative Agent, each Lender Agent or any
Liquidity Bank, the Servicer shall deliver, copies of all federal, state and local tax returns and
reports filed by the Borrower, the Transferor and the Servicer, or in which the Borrower, the
Transferor or Servicer was included on a consolidated or combined basis (excluding sales, use and
similar Taxes).
(f) Obligor Financial Statements; Valuation Reports; Other Reports. The Servicer will
deliver to the Administrative Agent, the Lender Agents and the Collateral Agent, with respect to
each Obligor, (i) to the extent received by the Borrower and/or the Servicer pursuant to the Loan
Agreement, the complete financial reporting package with respect to such Obligor and with respect
to each Loan Asset for such Obligor provided to the Borrower and/or the Servicer either monthly or
quarterly, as the case may be, by such Obligor, which delivery shall be made within 10 days after
Servicers or Borrowers receipt thereof, and (ii) asset and
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portfolio level monitoring reports prepared by the Servicer with respect to the Loan Assets,
which delivery shall be made within 60 days of the end of each calendar month. The Servicer will
promptly deliver to the Administrative Agent and any Lender Agent, upon reasonable request and to
the extent received by the Borrower and/or the Servicer, all other documents and information
required to be delivered by the Obligors to the Borrower with respect to any Loan Asset included in
the Collateral Portfolio.
(g) Amendments to Loan Assets. The Servicer will deliver to the Administrative Agent,
the Lender Agents and the Collateral Custodian a copy of any amendment, restatement, supplement,
waiver or other modification to the Loan Agreement of any Loan Asset (along with any internal
documents prepared by the Servicer and provided to its investment committee in connection with such
amendment, restatement, supplement, waiver or other modification) within 10 Business Days of the
effectiveness of such amendment, restatement, supplement, waiver or other modification.
(h) Website Access to Information. Notwithstanding anything to the contrary contained
herein, information required to be delivered or submitted to any Secured Party pursuant to
Section 5.03(i) and this Article VI shall be deemed to have been delivered on the
date on which such information is posted on a Debtx (or other replacement) website to which the
Administrative Agent and Lender Agents have access or upon receipt of such information through
e-mail or another delivery method acceptable to the Administrative Agent.
SECTION 6.09 Annual Statement as to Compliance. The Servicer will provide to the
Administrative Agent, each Lender Agent and the Collateral Agent within 90 days following the end
of each fiscal year of the Servicer, commencing with the fiscal year ending on September 30, 2009,
a fiscal report signed by a Responsible Officer of the Servicer certifying that (a) a review of the
activities of the Servicer, and the Servicers performance pursuant to this Agreement, for the
fiscal period ending on the last day of such fiscal year has been made under such Persons
supervision and (b) the Servicer has performed or has caused to be performed in all material
respects all of its obligations under this Agreement throughout such year and no Servicer
Termination Event has occurred.
SECTION 6.10 Annual Independent Public Accountants Servicing Reports. The Servicer
will cause a firm of nationally recognized independent public accountants (who may also render
other services to the Servicer) to furnish to the Administrative Agent, each Lender Agent and the
Collateral Agent within 90 days following the end of each fiscal year of the Servicer, commencing
with the fiscal year ending on September 30, 2009, a report covering such fiscal year to the effect
that such accountants have applied certain agreed-upon procedures (a copy of which procedures are
attached hereto as Schedule IV, it being understood that the Servicer and the
Administrative Agent will provide an updated Schedule IV reflecting any further amendments
to such Schedule IV prior to the issuance of the first such agreed-upon procedures report,
a copy of which shall replace the then existing Schedule IV) to certain documents and
records relating to the Collateral Portfolio under any Transaction Document, compared the
information contained in the Servicing Reports and the Servicers Certificates delivered during the
period covered by such report with such documents and records and that no matters came to the
attention of such accountants that caused them to believe that such servicing was not conducted in
compliance with this Article VI, except for such exceptions as such
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accountants shall believe to be immaterial and such other exceptions as shall be set forth in
such statement.
SECTION 6.11 The Servicer Not to Resign. The Servicer shall not resign from the
obligations and duties hereby imposed on it except upon the Servicers determination that (i) the
performance of its duties hereunder is or becomes impermissible under Applicable Law and (ii) there
is no reasonable action that the Servicer could take to make the performance of its duties
hereunder permissible under Applicable Law. Any such determination permitting the resignation of
the Servicer shall be evidenced as to clause (i) above by an Opinion of Counsel to such
effect delivered to the Administrative Agent and each Lender Agent. No such resignation shall
become effective until a Replacement Servicer shall have assumed the responsibilities and
obligations of the Servicer in accordance with Section 6.02.
ARTICLE VII.
EVENTS OF DEFAULT
SECTION 7.01 Events of Default. If any of the following events (each, an Event
of Default) shall occur:
(a) the Borrower, Servicer or the Transferor defaults in making any payment required to be
made under one or more agreements for borrowed money to which it is a party in an aggregate
principal amount in excess of (x) $500,000 for the Borrower or (y) $1,000,000 for the Transferor or
Servicer and any such failure continues unremedied for two Business Days and such default is not
cured within the applicable cure period, if any, provided for under such agreement; or
(b) any failure on the part of the Borrower or the Transferor duly to observe or perform in
any material respect any other covenants or agreements of the Borrower or the Transferor set forth
in this Agreement or the other Transaction Documents to which the Borrower or the Transferor is a
party and the same continues unremedied for a period of 30 days (if such failure can be remedied)
after the earlier to occur of (i) the date on which written notice of such failure requiring the
same to be remedied shall have been given to the Borrower or the Transferor by the Administrative
Agent or Collateral Agent and (ii) the date on which the Borrower or the Transferor acquires
knowledge thereof; or
(c) the occurrence of a Bankruptcy Event relating to the Transferor or the Borrower; or
(d) the occurrence of a Servicer Termination Event (provided that Fifth Street or an Affiliate
is the Servicer) past any applicable notice or cure period provided in the definition thereof; or
(e) (1) the rendering of one or more final judgments, decrees or orders by a court or
arbitrator of competent jurisdiction for the payment of money in excess individually or in the
aggregate of $1,000,000, against the Transferor, or $500,000, against the Borrower and the
Transferor or the Borrower, as applicable, shall not have either (i) discharged or provided for the
discharge of any such judgment, decree or order in accordance with its terms or (ii) perfected a
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timely appeal of such judgment, decree or order and caused the execution of same to be stayed
during the pendency of the appeal or (2) the Transferor or the Borrower shall have made payments of
amounts in excess of $1,000,000 (in the case of the Transferor) or $500,000 (in the case of the
Borrower), in the settlement of any litigation, claim or dispute (excluding payments made from
insurance proceeds); or
(f) the Borrower shall fail to qualify as a bankruptcy-remote entity based upon customary
criteria such that reputable counsel could no longer render a substantive nonconsolidation opinion
with respect to the Borrower and the Transferor; or
(g) (1) any Transaction Document, or any lien or security interest granted thereunder, shall
(except in accordance with its terms), in whole or in part, terminate, cease to be effective or
cease to be the legally valid, binding and enforceable obligation of the Borrower, the Transferor,
or the Servicer,
(2) the Borrower, the Transferor or the Servicer or any other party shall, directly or
indirectly, contest in any manner the effectiveness, validity, binding nature or
enforceability of any Transaction Document or any lien or security interest thereunder, or
(3) any security interest securing any obligation under any Transaction Document shall,
in whole or in part, cease to be a first priority perfected security interest except as
otherwise expressly permitted to be released in accordance with the applicable Transaction
Document; or
(h) the Advances Outstanding on any day exceeds the Borrowing Base and has not been remedied
within three Business Days in accordance with Section 2.06; provided that, during the
period of time that such event remains unremedied, any payments required to be made by the Servicer
on a Payment Date shall be made under Section 2.04(d); or
(i) failure on the part of the Borrower, the Transferor or the Servicer to make any payment or
deposit (including, without limitation, with respect to bifurcation and remittance of Interest
Collections and Principal Collections or any other payment or deposit required to be made by the
terms of the Transaction Documents, including, without limitation, to any Secured Party, Affected
Party or Indemnified Party) required by the terms of any Transaction Document (other than
Section 2.06) within two Business Days of the day such payment or deposit is required to be
made; or
(j) the Borrower shall become required to register as an investment company within the
meaning of the 1940 Act or the arrangements contemplated by the Transaction Documents shall require
registration as an investment company within the meaning of the 1940 Act; or
(k) the Internal Revenue Service shall file notice of a lien pursuant to Section 6323 of the
Code with regard to any assets of the Borrower or the Transferor and such lien shall not have been
released within five Business Days, or the Pension Benefit Guaranty Corporation shall file notice
of a lien pursuant to Section 4068 of ERISA with regard to any of
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the assets of the Borrower or the Transferor and such lien shall not have been released within five Business
Days; or
(l) any Change of Control shall occur; or
(m) any representation, warranty or certification made by the Borrower or the Transferor in
any Transaction Document or in any certificate delivered pursuant to any Transaction Document shall
prove to have been incorrect when made in any material respect, and continues to be unremedied for
a period of 30 days after the earlier to occur of (i) the date on which written notice of such
incorrectness requiring the same to be remedied shall have been given to the Borrower or the
Transferor by the Administrative Agent or the Collateral Agent (which shall be given at the
direction of the Administrative Agent) and (ii) the date on which a Responsible Officer of the
Borrower or the Transferor acquires knowledge thereof; or
(n) failure to pay, on the Facility Maturity Date, the outstanding principal of all
outstanding Advances, if any, and all Yield and all Fees accrued and unpaid thereon together with
all other Obligations, including, but not limited to, any Make-Whole Premium; or
(o) an event has occurred which constitutes an Event of Default under and pursuant to the
terms of the Pledge Agreement (past any applicable notice and/or cure period provided therein); or
(p) without limiting the generality of Section 7.01(i) above, failure of the Borrower
to pay Yield within two Business Days of any Payment Date or within two Business Days of when
otherwise due; or
(q) the Borrower ceases to have a valid, perfected ownership interest in all of the Collateral
Portfolio; or
(r) the Transferor fails to transfer to the Borrower the applicable Loan Assets and the
related Portfolio Assets on an Advance Date (provided that the Lenders shall have funded the
related Advance) unless the related Advance is repaid in full with accrued and unpaid Yield thereon
within five Business Days;
(s) the Borrower makes any assignment or attempted assignment of their respective rights or
obligations under this Agreement or any other Transaction Document without first obtaining the
specific written consent of each of the Lenders and the Administrative Agent, which consent may be
withheld by any Lender or the Administrative Agent in the exercise of its sole and absolute
discretion;
(t) the Borrower, the Servicer or the Transferor fails to observe or perform any covenant,
agreement or obligation with respect to the management and distribution of funds received with
respect to the Collateral Portfolio, and such failure is not cured within three Business Days; or
(u) (i) failure of the Borrower to maintain at least one Independent Director, (ii) the
removal of any Independent Director of the Borrower without cause (as such term is defined in the
organizational document of the Borrower) or without giving prior written notice to
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the Administrative Agent and the Lender Agents, each as required in the organizational
documents of the Borrower or (iii) an Independent Director of the Borrower which is not provided by
CSC or a nationally recognized service reasonably acceptable to the Administrative Agent shall be
appointed without the consent of the Administrative Agent;
then the Administrative Agent or all of the Lenders, may, by notice to the Borrower, declare the
Facility Maturity Date to have occurred; provided, that, in the case of any event described in
Section 7.01(c) above, the Facility Maturity Date shall be deemed to have occurred
automatically upon the occurrence of such event. Upon any such declaration or automatic occurrence,
(i) the Borrower shall cease purchasing Loan Assets from the Transferor under the Purchase and Sale
Agreement, (ii) the Administrative Agent or all of the Lenders may declare the Variable Funding
Notes to be immediately due and payable in full (without presentment, demand, protest or notice of
any kind all of which are hereby waived by the Borrower) and any other Obligations to be
immediately due and payable, and (iii) all proceeds and distributions in respect of the Portfolio
Assets shall be distributed by the Collateral Agent (at the direction of the Administrative Agent)
as described in Section 2.04(d) (provided that the Borrower shall in any event remain
liable to pay such Advances and all such amounts and Obligations immediately in accordance with
Section 2.04(f) hereof). In addition, upon any such declaration or upon any such automatic
occurrence, the Collateral Agent, on behalf of the Secured Parties and at the direction of the
Administrative Agent, shall have, in addition to all other rights and remedies under this Agreement
or otherwise, all other rights and remedies provided under the UCC of the applicable jurisdiction
and other Applicable Law, which rights shall be cumulative. Without limiting any obligation of the
Servicer hereunder, the Borrower confirms and agrees that the Collateral Agent, on behalf of the
Secured Parties and at the direction of the Administrative Agent, (or any designee thereof,
including, without limitation, the Servicer), following an Event of Default, shall, at its option,
have the sole right to enforce the Borrowers rights and remedies under each Assigned Document, but
without any obligation on the part of the Administrative Agent, the Lenders, the Lender Agents or
any of their respective Affiliates to perform any of the obligations of the Borrower under any such
Assigned Document. If any Event of Default shall have occurred, the Yield Rate shall be increased
pursuant to the increase set forth in the definition of Applicable Spread, effective as of the
date of the occurrence of such Event of Default, and shall apply after the occurrence of such Event
of Default.
SECTION 7.02 Additional Remedies of the Administrative Agent.
(a) If, (i) upon the Administrative Agents or the Lenders declaration that the Advances made
to the Borrower hereunder are immediately due and payable pursuant to Section 7.01 upon the
occurrence of an Event of Default, or (ii) on the Facility Maturity Date, the aggregate outstanding
principal amount of the Advances, all accrued and unpaid Fees and Yield and any other Obligations
are not immediately paid in full, then the Collateral Agent (acting as directed by the
Administrative Agent) or the Administrative Agent, in addition to all other rights specified
hereunder, shall have the right, in its own name and as agent for the Lenders and Lender Agents, to
immediately sell (at the Servicers expense) in a commercially reasonable manner, in a recognized
market (if one exists) at such price or prices as the Administrative Agent may reasonably deem
satisfactory, any or all of the Collateral Portfolio and apply the proceeds thereof to the
Obligations; provided, that notwithstanding anything to the contrary herein or in
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any other Transaction Document, in the case of the declaration of the Facility Maturity Date
that arises solely pursuant to a change in Applicable Law which creates an Event of Default
pursuant to Section 7.01(f), the Collateral Agent and the Administrative Agent (as
applicable) may not order the assembly or liquidation of the Collateral Portfolio, or take any
action or exercise any power of attorney furnished hereunder in connection with such assembly or
liquidation, until on or after the earlier of (x) the date that is 90 days after the Administrative
Agent provides written notice to the Borrower of such declaration of the Facility Maturity Date as
a result of Section 7.01(f) or (y) the occurrence of an Event of Default for any other
reason other than pursuant to Section 7.01(f).
(b) The parties recognize that it may not be possible to sell all of the Collateral Portfolio
on a particular Business Day, or in a transaction with the same purchaser, or in the same manner
because the market for the assets constituting the Collateral Portfolio may not be liquid.
Accordingly, the Administrative Agent may elect, in its sole discretion, the time and manner of
liquidating any of the Collateral Portfolio, and nothing contained herein shall obligate the
Administrative Agent to liquidate any of the Collateral Portfolio on the date the Administrative
Agent or all of the Lender Agents declares the Advances made to the Borrower hereunder to be
immediately due and payable pursuant to Section 7.01 or to liquidate all of the Collateral
Portfolio in the same manner or on the same Business Day.
(c) If the Collateral Agent (acting as directed by the Administrative Agent) or the
Administrative Agent proposes to sell the Collateral Portfolio or any part thereof in one or more
parcels at a public or private sale, at the request of the Collateral Agent or the Administrative
Agent, as applicable, the Borrower and the Servicer shall make available to (i) the Administrative
Agent, on a timely basis, all information (including any information that the Borrower and the
Servicer is required by law or contract to be kept confidential) relating to the Collateral
Portfolio subject to sale, including, without limitation, copies of any disclosure documents,
contracts, financial statements of the applicable Obligors, covenant certificates and any other
materials requested by the Administrative Agent, and (ii) each prospective bidder, on a timely
basis, all reasonable information relating to the Collateral Portfolio subject to sale, including,
without limitation, copies of any disclosure documents, contracts, financial statements of the
applicable Obligors, covenant certificates and any other materials reasonably requested by each
such bidder.
(d) Each of the Borrower and the Servicer agrees, to the full extent that it may lawfully so
agree, that neither it nor anyone claiming through or under it will set up, claim or seek to take
advantage of any appraisement, valuation, stay, extension or redemption law now or hereafter in
force in any locality where any Collateral Portfolio may be situated in order to prevent, hinder or
delay the enforcement or foreclosure of this Agreement, or the absolute sale of any of the
Collateral Portfolio or any part thereof, or the final and absolute putting into possession
thereof, immediately after such sale, of the purchasers thereof, and each of the Borrower and the
Servicer, for itself and all who may at any time claim through or under it, hereby waives, to the
full extent that it may be lawful so to do, the benefit of all such laws, and any and all right to
have any of the properties or assets constituting the Collateral Portfolio marshaled upon any such
sale, and agrees that the Collateral Agent, or the Administrative Agent on its behalf, or any court
having jurisdiction to foreclose the security interests granted in this
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Agreement may sell the Collateral Portfolio as an entirety or in such parcels as the
Collateral Agent (acting at the direction of the Administrative Agent) or such court may determine.
(e) Any amounts received from any sale or liquidation of the Collateral Portfolio pursuant to
this Section 7.02 in excess of the Obligations will be applied by the Collateral Agent (as
directed by the Administrative Agent) in accordance with the provisions of Section 2.04(d),
or as a court of competent jurisdiction may otherwise direct.
(f) The Administrative Agent, the Lender Agents and the Lenders shall have, in addition to all
the rights and remedies provided herein and provided by applicable federal, state, foreign, and
local laws (including, without limitation, the rights and remedies of a secured party under the UCC
of any applicable state, to the extent that the UCC is applicable, and the right to offset any
mutual debt and claim), all rights and remedies available to the Lenders at law, in equity or under
any other agreement between any Lender and the Borrower.
(g) Except as otherwise expressly provided in this Agreement, no remedy provided for by this
Agreement shall be exclusive of any other remedy, each and every remedy shall be cumulative and in
addition to any other remedy, and no delay or omission to exercise any right or remedy shall impair
any such right or remedy or shall be deemed to be a waiver of any Event of Default.
(h) Each of the Borrower and the Servicer hereby irrevocably appoints each of the Collateral
Agent and the Administrative Agent its true and lawful attorney (with full power of substitution)
in its name, place and stead and at is expense, in connection with the enforcement of the rights
and remedies provided for in this Agreement, including without limitation the following powers:
(a) to give any necessary receipts or acquittance for amounts collected or received hereunder, (b)
to make all necessary transfers of the Collateral Portfolio in connection with any such sale or
other disposition made pursuant hereto, (c) to execute and deliver for value all necessary or
appropriate bills of sale, assignments and other instruments in connection with any such sale or
other disposition, the Borrower and the Servicer hereby ratifying and confirming all that such
attorney (or any substitute) shall lawfully do hereunder and pursuant hereto, and (d) to sign any
agreements, orders or other documents in connection with or pursuant to any Transaction Document or
Hedging Agreement. Nevertheless, if so requested by the Collateral Agent or the Administrative
Agent, the Borrower shall ratify and confirm any such sale or other disposition by executing and
delivering to the Collateral Agent or the Administrative Agent or all proper bills of sale,
assignments, releases and other instruments as may be designated in any such request.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.01 Indemnities by the Borrower.
(a) Without limiting any other rights which the Affected Parties, the Secured Parties, the
Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the Account Bank, the
Collateral Custodian or any of their respective Affiliates may have hereunder
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or under Applicable Law, the Borrower hereby agrees to indemnify the Affected Parties, the
Secured Parties, Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the
Account Bank, the Collateral Custodian and each of their respective Affiliates, assigns, officers,
directors, employees and agents (each, an Indemnified Party for purposes of this
Article VIII) from and against any and all damages, losses, claims, liabilities and related
costs and expenses, including attorneys fees and disbursements (all of the foregoing being
collectively referred to as Indemnified Amounts), awarded against or actually incurred by
such Indemnified Party arising out of or as a result of this Agreement or in respect of any of the
Collateral Portfolio, excluding, however, Indemnified Amounts to the extent resulting solely from
(a) gross negligence, bad faith or willful misconduct on the part of an Indemnified Party or (b)
Loan Assets which are uncollectible due to the Obligors financial inability to pay. Without
limiting the foregoing, the Borrower shall indemnify each Indemnified Party for Indemnified Amounts
relating to or resulting from any of the following (to the extent not resulting from the conditions
set forth in (a) or (b) above):
(i) any Loan Asset treated as or represented by the Borrower to be an Eligible Loan
Asset which is not at the applicable time an Eligible Loan Asset, or the purchase by any
party or origination of any Loan Asset which violates Applicable Law;
(ii) reliance on any representation or warranty made or deemed made by the Borrower,
the Servicer (if Fifth Street or one of its Affiliates is the Servicer) or any of their
respective officers under or in connection with this Agreement or any Transaction Document,
which shall have been false or incorrect in any respect when made or deemed made or
delivered;
(iii) the failure by the Borrower or the Servicer (if Fifth Street or one of its
Affiliates is the Servicer) to comply with any term, provision or covenant contained in this
Agreement or any agreement executed in connection with this Agreement, or with any
Applicable Law with respect to any item of Collateral Portfolio, or the nonconformity of any
item of Collateral Portfolio with any such Applicable Law;
(iv) the failure to vest and maintain vested in the Collateral Agent, for the benefit
of the Secured Parties, a first priority perfected security interest in the Collateral
Portfolio, free and clear of any Lien other than Permitted Liens, whether existing at the
time of the related Advance or at any time thereafter;
(v) on each Business Day prior to the Collection Date, the occurrence of a Borrowing
Base Deficiency and the same continues unremedied for three Business Days;
(vi) the failure to file, or any delay in filing, financing statements, continuation
statements or other similar instruments or documents under the UCC of any applicable
jurisdiction or other Applicable Law with respect to any Loan Assets included in the
Collateral Portfolio or the other Portfolio Assets related thereto, whether at the time of
any Advance or at any subsequent time;
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(vii) any dispute, claim, offset or defense (other than the discharge in bankruptcy of
an Obligor) to the payment of any Loan Asset included in the Collateral Portfolio
(including, without limitation, a defense based on such Loan Asset (or the Loan Agreement
evidencing such Loan Asset) not being a legal, valid and binding obligation of such Obligor
enforceable against it in accordance with its terms), or any other claim resulting from the
sale of the merchandise or services related to such Collateral Portfolio or the furnishing
or failure to furnish such merchandise or services;
(viii) any failure of the Borrower or the Servicer (if Fifth Street or one of its
Affiliates is the Servicer) to perform its duties or obligations in accordance with the
provisions of the Transaction Documents to which it is a party or any failure by Fifth
Street, the Borrower or any Affiliate thereof to perform its respective duties under any
Collateral Portfolio;
(ix) any inability to obtain any judgment in, or utilize the court or other
adjudication system of, any state in which an Obligor may be located as a result of the
failure of the Borrower or the Transferor to qualify to do business or file any notice or
business activity report or any similar report;
(x) any action taken by the Borrower or the Servicer in the enforcement or collection
of the Collateral Portfolio which results in any claim, suit or action of any kind
pertaining to the Collateral Portfolio or which reduces or impairs the rights of the
Administrative Agent, Lender Agent or Lender with respect to any Loan Asset or the value of
any such Loan Asset;
(xi) any products liability claim or personal injury or property damage suit or other
similar or related claim or action of whatever sort arising out of or in connection with the
Underlying Collateral or services that are the subject of any Collateral Portfolio;
(xii) any claim, suit or action of any kind arising out of or in connection with
Environmental Laws relating to the Borrower or the Collateral Portfolio, including any
vicarious liability;
(xiii) the failure by the Borrower to pay when due any Taxes for which the Borrower is
liable, including, without limitation, sales, excise or personal property Taxes payable in
connection with the Collateral Portfolio;
(xiv) any repayment by the Administrative Agent, the Lender Agents, the Lenders or a
Secured Party of any amount previously distributed in payment of Advances or payment of
Yield or Fees or any other amount due hereunder or under any Hedging Agreement, in each case
which amount the Administrative Agent, the Lender Agents, the Lenders or a Secured Party
believes in good faith is required to be repaid;
(xv) the commingling by the Borrower or the Servicer of payments and collections
required to be remitted to the Collection Account or the Unfunded Exposure Account with
other funds;
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(xvi) any investigation, litigation or proceeding related to this Agreement (or the
Transaction Documents), or the use of proceeds of Advances or the Collateral Portfolio, or
the administration of the Loan Assets by the Borrower or the Servicer (unless such
administration is carried out by Wachovia or any of its Affiliates in the capacity of the
Servicer, if applicable);
(xvii) any failure by the Borrower to give reasonably equivalent value to Transferor in
consideration for the transfer by the Transferor to the Borrower of any item of Collateral
Portfolio or any attempt by any Person to void or otherwise avoid any such transfer under
any statutory provision or common law or equitable action, including, without limitation,
any provision of the Bankruptcy Code;
(xviii) the use of the proceeds of any Advance in a manner other than as provided in
this Agreement and the Transaction Documents;
(xix) any failure of the Borrower, the Servicer or any of their respective agents or
representatives to remit to the Collection Account within one Business Day of receipt,
payments and collections with respect to the Collateral Portfolio remitted to the Borrower,
the Servicer or any such agent or representative (other than such a failure on the part of
Wachovia or any of its Affiliates in the capacity of Servicer, if applicable); and/or
(xx) the failure by the Borrower to comply with any of the covenants relating to the
Hedging Agreement in accordance with the Transaction Documents.
(b) Any amounts subject to the indemnification provisions of this Section 8.01 shall
be paid by the Borrower to the Administrative Agent on behalf of the applicable Indemnified Party
within two Business Days following the Administrative Agents written demand therefor on behalf of
the applicable Indemnified Party (and the Administrative Agent shall pay such amounts to the
applicable Indemnified Party promptly after the receipt by the Administrative Agent of such
amounts). The Administrative Agent, on behalf of any Indemnified Party making a request for
indemnification under this Section 8.01, shall submit to the Borrower a certificate setting
forth in reasonable detail the basis for and the computations of the Indemnified Amounts with
respect to which such indemnification is requested, which certificate shall be conclusive absent
demonstrable error.
(c) If for any reason the indemnification provided above in this Section 8.01 is
unavailable to the Indemnified Party or is insufficient to hold an Indemnified Party harmless in
respect of any losses, claims, damages or liabilities, then the Borrower or the Servicer, as the
case may be, shall contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect not
only the relative benefits received by such Indemnified Party on the one hand and the Borrower or
the Servicer, as the case may be, on the other hand but also the relative fault of such Indemnified
Party as well as any other relevant equitable considerations.
(d) If the Borrower has made any payments in respect of Indemnified Amounts to the
Administrative Agent on behalf of an Indemnified Party pursuant to this Section
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8.01 and such Indemnified Party thereafter collects any of such amounts from others,
such Indemnified Party will promptly repay such amounts collected to the Borrower, without
interest.
(e) The obligations of the Borrower under this Section 8.01 shall survive the
resignation or removal of the Administrative Agent, the Lenders, the Lender Agents, the Servicer,
the Collateral Agent, the Account Bank or the Collateral Custodian and the termination of this
Agreement.
SECTION 8.02 Indemnities by Servicer.
(a) Without limiting any other rights which any Indemnified Party may have hereunder or under
Applicable Law, the Servicer hereby agrees to indemnify each Indemnified Party from and against any
and all Indemnified Amounts, awarded against or incurred by any Indemnified Party as a consequence
of any of the following, excluding, however, Indemnified Amounts to the extent resulting from gross
negligence, bad faith or willful misconduct on the part of any Indemnified Party claiming
indemnification hereunder:
(i) the inclusion, in any computations made by it in connection with any Borrowing Base
Certificate or other report prepared by it hereunder, of any Loan Assets which were not
Eligible Loan Assets as of the date of any such computation;
(ii) reliance on any representation or warranty made or deemed made by the Servicer or
any of its officers under or in connection with this Agreement or any other Transaction
Document, any Servicing Report, Servicers Certificate or any other information or report
delivered by or on behalf of the Servicer pursuant hereto, which shall have been false,
incorrect or misleading in any respect when made or deemed made or delivered;
(iii) the failure by the Servicer to comply with (A) any term, provision or covenant
contained in this Agreement or any other Transaction Document, or any other agreement
executed in connection with this Agreement, or (B) any Applicable Law applicable to it with
respect to any Portfolio Assets;
(iv) any litigation, proceedings or investigation against the Servicer;
(v) any action or inaction by the Servicer that causes the Collateral Agent, for the
benefit of the Secured Parties, not to have a first priority perfected security interest in
the Collateral Portfolio, free and clear of any Lien other than Permitted Liens, whether
existing at the time of the related Advance or any time thereafter;
(vi) the commingling by the Servicer of payments and collections required to be
remitted to the Collection Account or the Unfunded Exposure Account with other funds;
(vii) any failure of the Servicer or any of its agents or representatives (including,
without limitation, agents, representatives and employees of such Servicer acting pursuant
to authority granted under Section 6.01 hereof) to remit to Collection
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Account, payments and collections with respect to Loan Assets remitted to the Servicer
or any such agent or representative within one Business Day of receipt;
(viii) the failure by the Servicer to perform any of its duties or obligations in
accordance with the provisions of this Agreement or any other Transaction Document or errors
or omissions related to such duties;
(ix) the failure by the Servicer to comply with any of the covenants relating to the
Hedging Agreement in accordance with the Transaction Documents;
(x) failure or delay in assisting a successor Servicer in assuming each and all of the
Servicers obligations to service and administer the Collateral Portfolio, or failure or
delay in complying with instructions from the Administrative Agent with respect thereto;
and/or
(xi) any of the events or facts giving rise to a breach of any of the Servicers
representations, warranties, agreements and/or covenants set forth in Article IV,
Article V or Article VI or this Agreement.
(b) Any Indemnified Amounts shall be paid by the Servicer to the Administrative Agent, for the
benefit of the applicable Indemnified Party, within two Business Days following receipt by the
Servicer of the Administrative Agents written demand therefor (and the Administrative Agent shall
pay such amounts to the applicable Indemnified Party promptly after the receipt by the
Administrative Agent of such amounts).
(c) If the Servicer has made any indemnity payments to the Administrative Agent, on behalf of
an Indemnified Party pursuant to this Section 8.02 and such Indemnified Party thereafter
collects any of such amounts from others, such Indemnified Party will promptly repay such amounts
collected to the Servicer, without interest.
(d) The Servicer shall have no liability for making indemnification hereunder to the extent
any such indemnification constitutes recourse for uncollectible or uncollected Loan Assets.
(e) The obligations of the Servicer under this Section 8.02 shall survive the
resignation or removal of the Administrative Agent, the Lenders, the Lender Agents, the Collateral
Agent, the Account Bank or the Collateral Custodian and the termination of this Agreement.
(f) Any indemnification pursuant to this Section 8.02 shall not be payable from the
Collateral Portfolio.
Each applicable Indemnified Party shall deliver to the Indemnifying Party under Section
8.01 and Section 8.02, within a reasonable time after such Indemnified Partys receipt
thereof, copies of all notices and documents (including court papers) received by such Indemnified
Party relating to the claim giving rise to the Indemnified Amounts.
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SECTION 8.03 Legal Proceedings. In the event an Indemnified Party becomes involved in
any action, claim, or legal, governmental or administrative proceeding (an Action) for
which it seeks indemnification hereunder, the Indemnified Party shall promptly notify the other
party or parties against whom it seeks indemnification (the Indemnifying Party) in
writing of the nature and particulars of the Action; provided that its failure to do so shall not
relieve the Indemnifying Party of its obligations hereunder except to the extent such failure has a
material adverse effect on the Indemnifying Party. Upon written notice to the Indemnified Party
acknowledging in writing that the indemnification provided hereunder applies to the Indemnified
Party in connection with the Action (subject to the exclusion in the first sentence of Section
8.01, the first sentence of Section 8.02 or Section 8.02(d), as applicable),
the Indemnifying Party may assume the defense of the Action at its expense with counsel reasonably
acceptable to the Indemnified Party. The Indemnified Party shall have the right to retain separate
counsel in connection with the Action, and the Indemnifying Party shall not be liable for the legal
fees and expenses of the Indemnified Party after the Indemnifying Party has done so; provided that
if the Indemnified Party determines in good faith that there may be a conflict between the
positions of the Indemnified Party and the Indemnifying Party in connection with the Action, or
that the Indemnifying Party is not conducting the defense of the Action in a manner reasonably
protective of the interests of the Indemnified Party, the reasonable legal fees and expenses of the
Indemnified Party shall be paid by the Indemnifying Party; provided, further, that the Indemnifying
Party shall not, in connection with any one Action or separate but substantially similar or related
Actions in the same jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees or expenses of more than one separate firm of attorneys (and any required local
counsel) for such Indemnified Party, which firm (and local counsel, if any) shall be designated in
writing to the Indemnifying Party by the Indemnified Party. If the Indemnifying Party elects to
assume the defense of the Action, it shall have full control over the conduct of such defense;
provided that the Indemnifying Party and its counsel shall, as reasonably requested by the
Indemnified Party or its counsel, consult with and keep them informed with respect to the conduct
of such defense. The Indemnifying Party shall not settle an Action without the prior written
approval of the Indemnified Party unless such settlement provides for the full and unconditional
release of the Indemnified Party from all liability in connection with the Action. The Indemnified
Party shall reasonably cooperate with the Indemnifying Party in connection with the defense of the
Action.
SECTION 8.04 After-Tax Basis. Indemnification under Section 8.01 and
8.02 shall be in an amount necessary to make the Indemnified Party whole after taking into
account any Tax consequences to the Indemnified Party of the receipt of the indemnity provided
hereunder, including the effect of such Tax or refund on the amount of Tax measured by net income
or profits that is or was payable by the Indemnified Party.
ARTICLE IX.
THE ADMINISTRATIVE AGENT AND LENDER AGENTS
SECTION 9.01 The Administrative Agent.
(a) Appointment. Each Lender Agent and each Secured Party hereby appoints and
authorizes the Administrative Agent as its agent hereunder and hereby further authorizes the
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Administrative Agent to appoint additional agents to act on its behalf and for the benefit of
each Lender Agent and each Secured Party. Each Lender Agent and each Secured Party further
authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such
powers under this Agreement and the other Transaction Documents as are delegated to the
Administrative Agent by the terms hereof and thereof, together with such powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Transaction Document, the Administrative Agent shall not have any duties
or responsibilities, except those expressly set forth in this Agreement, nor shall the
Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or Lender
Agent, and no implied covenants, functions, responsibilities, duties, obligations or liabilities
shall be read into this Agreement or any other Transaction Document or otherwise exist against the
Administrative Agent. Without limiting the generality of the foregoing sentence, the use of the
term agent in this Agreement with reference to the Administrative Agent is not intended to
connote any fiduciary or other implied (or express) obligations arising under agency doctrine of
any Applicable Law. Instead, such term is used merely as a matter of market custom, and is
intended to create or reflect only an administrative relationship between independent contracting
parties.
(b) Delegation of Duties. The Administrative Agent may execute any of its duties
under this Agreement or any other Transaction Document by or through agents, employees or attorneys
in fact and shall be entitled to advice of counsel concerning all matters pertaining to such
duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any
agent or attorney in fact that it selects with reasonable care.
(c) Administrative Agents Reliance, Etc. Neither the Administrative Agent nor any of
its directors, officers, agents or employees shall be liable for any action taken or omitted to be
taken by it or them as Administrative Agent under or in connection with this Agreement or any of
the other Transaction Documents, except for its or their own gross negligence or willful
misconduct. Each Lender, Lender Agent and each Secured Party hereby waives any and all claims
against the Administrative Agent or any of its Affiliates for any action taken or omitted to be
taken by the Administrative Agent or any of its Affiliates under or in connection with this
Agreement or any of the other Transaction Documents, except for its or their own gross negligence
or willful misconduct. Without limiting the foregoing, the Administrative Agent: (i) may consult
with legal counsel (including counsel for the Borrower or the Transferor), independent public
accountants and other experts selected by it and shall not be liable for any action taken or
omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants
or experts; (ii) makes no warranty or representation and shall not be responsible for any
statements, warranties or representations made in or in connection with this Agreement; (iii) shall
not have any duty to ascertain or to inquire as to the performance or observance of any of the
terms, covenants or conditions of this Agreement or any of the other Transaction Documents on the
part of the Borrower, the Transferor, or the Servicer or to inspect the property (including the
books and records) of the Borrower, the Transferor, or the Servicer; (iv) shall not be responsible
for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of
this Agreement, any of the other Transaction Documents or any other instrument or document
furnished pursuant hereto or thereto; and (v) shall incur no liability under or in respect of this
Agreement or any of the other Transaction Documents by acting upon any notice (including notice by
telephone), consent, certificate or other instrument or writing
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(which may be by facsimile) believed by it to be genuine and signed or sent by the proper
party or parties.
(d) Actions by Administrative Agent. The Administrative Agent shall be fully
justified in failing or refusing to take any action under this Agreement or any other Transaction
Document unless it shall first receive such advice or concurrence of the Lender Agents as it deems
appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the
Lenders and Lender Agents against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Administrative Agent shall in all
cases be fully protected in acting, or in refraining from acting, under this Agreement or any other
Transaction Document in accordance with a request or consent of the Lender Agents; provided, that,
notwithstanding anything to the contrary herein, the Administrative Agent shall not be required to
take any action hereunder if the taking of such action, in the reasonable determination of the
Administrative Agent, shall be in violation of any Applicable Law or contrary to any provision of
this Agreement or shall expose the Administrative Agent to liability hereunder or otherwise. In
the event the Administrative Agent requests the consent of a Lender Agent pursuant to the foregoing
provisions and the Administrative Agent does not receive a consent (either positive or negative)
from such Person within ten Business Days of such Persons receipt of such request, then such
Lender or Lender Agent shall be deemed to have declined to consent to the relevant action.
(e) Notice of Event of Default, Unmatured Event of Default or Servicer Termination
Event. The Administrative Agent shall not be deemed to have knowledge or notice of the
occurrence of an Event of Default, Unmatured Event of Default or Servicer Termination Event, unless
the Administrative Agent has received written notice from a Lender, Lender Agent, the Borrower or
the Servicer referring to this Agreement, describing such Event of Default, Unmatured Event of
Default or Servicer Termination Event and stating that such notice is a Notice of Event of
Default, Notice of Unmatured Event of Default or Notice of Servicer Termination Event, as
applicable. The Agent shall (subject to Section 9.01(c)) take such action with respect to
such Event of Default, Unmatured Event of Default or Servicer Termination Event as may be requested
by the Lender Agents acting jointly or as the Administrative Agent shall deem advisable or in the
best interest of the Lender Agents.
(f) Credit Decision with Respect to the Administrative Agent. Each Lender Agent and
each Secured Party acknowledges that none of the Administrative Agent or any of its Affiliates has
made any representation or warranty to it, and that no act by the Administrative Agent hereinafter
taken, including any consent to and acceptance of any assignment or review of the affairs of the
Borrower, the Servicer, the Transferor or any of their respective Affiliates or review or approval
of any of the Collateral Portfolio, shall be deemed to constitute any representation or warranty by
any of the Administrative Agent or its Affiliates to any Lender Agent as to any matter, including
whether the Administrative Agent has disclosed material information in its possession. Each Lender
Agent and each Secured Party acknowledges that it has, independently and without reliance upon the
Administrative Agent, or any of the Administrative Agents Affiliates, and based upon such
documents and information as it has deemed appropriate, made its own evaluation and decision to
enter into this Agreement and the other Transaction Documents to which it is a party. Each Lender
Agent and each Secured Party also acknowledges that it will, independently and without reliance
upon the Administrative
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Agent, or any of the Administrative Agents Affiliates, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own decisions in taking
or not taking action under this Agreement and the other Transaction Documents to which it is a
party. Each Lender Agent and each Secured Party hereby agrees that the Administrative Agent shall
not have any duty or responsibility to provide any Lender Agent with any credit or other
information concerning the business, prospects, operations, property, financial and other condition
or creditworthiness of the Borrower, the Servicer, the Transferor or their respective Affiliates
which may come into the possession of the Administrative Agent or any of its Affiliates.
(g) Indemnification of the Administrative Agent. Each Lender Agent agrees to indemnify
the Administrative Agent (to the extent not reimbursed by the Borrower or the Servicer), ratably in
accordance with the Pro Rata Share of its related Lender, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted
against the Administrative Agent in any way relating to or arising out of this Agreement or any of
the other Transaction Documents, or any action taken or omitted by the Administrative Agent
hereunder or thereunder; provided that the Lender Agents shall not be liable for any portion of
such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the Administrative Agents gross negligence or willful
misconduct; provided, further, that no action taken in accordance with the directions of the Lender
Agents shall be deemed to constitute gross negligence or willful misconduct for purposes of this
Article IX. Without limitation of the foregoing, each Lender Agent agrees to reimburse the
Administrative Agent, ratably in accordance with the Pro Rata Share of its related Lender, promptly
upon demand for any out-of-pocket expenses (including counsel fees) incurred by the Administrative
Agent in connection with the administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement and the other Transaction Documents, to the extent that such
expenses are incurred in the interests of or otherwise in respect of the Lender Agents or Lenders
hereunder and/or thereunder and to the extent that the Administrative Agent is not reimbursed for
such expenses by the Borrower or the Servicer.
(h) Successor Administrative Agent. The Administrative Agent may resign at any time,
effective upon the appointment and acceptance of a successor Administrative Agent as provided
below, by giving at least five days written notice thereof to each Lender Agent and the Borrower
and may be removed at any time with cause by the Lender Agents and the Borrower acting jointly.
Upon any such resignation or removal, the Lender Agents acting jointly shall appoint a successor
Administrative Agent. Each Lender Agent agrees that it shall not unreasonably withhold or delay
its approval of the appointment of a successor Administrative Agent. If no such successor
Administrative Agent shall have been so appointed, and shall have accepted such appointment, within
30 days after the retiring Administrative Agents giving of notice of resignation or the removal of
the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the
Secured Parties, appoint a successor Administrative Agent which successor Administrative Agent
shall be either (i) a commercial bank organized under the laws of the United States or of any state
thereof and have a combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of
such a bank. Upon the acceptance of any
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appointment as Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested with all the rights,
powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations under this Agreement. After any retiring
Administrative Agents resignation or removal hereunder as Administrative Agent, the provisions of
this Article IX shall continue to inure to its benefit as to any actions taken or omitted
to be taken by it while it was Administrative Agent under this Agreement.
(i) Payments by the Administrative Agent. Unless specifically allocated to a specific
Lender Agent pursuant to the terms of this Agreement, all amounts received by the Administrative
Agent on behalf of the Lender Agents shall be paid by the Administrative Agent to the Lender Agents
in accordance with their related Lenders respective Pro Rata Shares in the applicable Advances
Outstanding, or if there are no Advances Outstanding in accordance with their related Lenders most
recent Commitments, on the Business Day received by the Administrative Agent, unless such amounts
are received after 12:00 noon on such Business Day, in which case the Administrative Agent shall
use its reasonable efforts to pay such amounts to each Lender Agent on such Business Day, but, in
any event, shall pay such amounts to such Lender Agent not later than the following Business Day.
SECTION 9.02 The Lender Agents.
(a) Authorization and Action. Each Lender, respectively, hereby designates and
appoints its applicable Lender Agent to act as its agent hereunder and under each other Transaction
Document, and authorizes such Lender Agent to take such actions as agent on its behalf and to
exercise such powers as are delegated to such Lender Agent by the terms of this Agreement and the
other Transaction Documents, together with such powers as are reasonably incidental thereto. No
Lender Agent shall have any duties or responsibilities, except those expressly set forth herein or
in any other Transaction Document, or any fiduciary relationship with its related Lender, and no
implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of
such Lender Agent shall be read into this Agreement or any other Transaction Document or otherwise
exist for such Lender Agent. In performing its functions and duties hereunder and under the other
Transaction Documents, each Lender Agent shall act solely as agent for its related Lender and does
not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency
with or for the Borrower or the Servicer or any of the Borrowers or the Servicers successors or
assigns. No Lender Agent shall be required to take any action that exposes such Lender Agent to
personal liability or that is contrary to this Agreement, any other Transaction Document or
Applicable Law. The appointment and authority of each Lender Agent hereunder shall terminate upon
the indefeasible payment in full of all Obligations. Each Lender Agent hereby authorizes the
Administrative Agent to file any UCC financing statement deemed necessary by the Administrative
Agent on behalf of such Lender Agent (the terms of which shall be binding on such Lender Agent).
(b) Delegation of Duties. Each Lender Agent may execute any of its duties under this
Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall
be entitled to advice of counsel concerning all matters pertaining to such duties. No Lender Agent
shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected
by it with reasonable care.
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(c) Exculpatory Provisions. Neither any Lender Agent nor any of its directors,
officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be
taken by it or them under or in connection with this Agreement or any other Transaction Document
(except for its, their or such Persons own gross negligence or willful misconduct), or (ii)
responsible in any manner to its related Lender for any recitals, statements, representations or
warranties made by the Borrower or the Servicer contained in Article IV, any other
Transaction Document or any certificate, report, statement or other document referred to or
provided for in, or received under or in connection with, this Agreement or any other Transaction
Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of
this Agreement, any other Transaction Document or any other document furnished in connection
herewith or therewith, or for any failure of the Borrower or the Servicer to perform its
obligations hereunder or thereunder, or for the satisfaction of any condition specified in this
Agreement, or for the perfection, priority, condition, value or sufficiency of any collateral
pledged in connection herewith. No Lender Agent shall be under any obligation to its related
Lender to ascertain or to inquire as to the observance or performance of any of the agreements or
covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to
inspect the properties, books or records of the Borrower or the Servicer. No Lender Agent shall be
deemed to have knowledge of any Event of Default or Unmatured Event of Default unless such Lender
Agent has received notice from the Borrower or its related Lender.
(d) Reliance by Lender Agent. Each Lender Agent shall in all cases be entitled to
rely, and shall be fully protected in relying, upon any document or conversation believed by it to
be genuine and correct and to have been signed, sent or made by the proper Person or Persons and
upon advice and statements of legal counsel (including, without limitation, counsel to the
Borrower), independent accountants and other experts selected by such Lender Agent. Each Lender
Agent shall in all cases be fully justified in failing or refusing to take any action under this
Agreement or any other Transaction Document unless it shall first receive such advice or
concurrence of its related Lender as it deems appropriate and it shall first be indemnified to its
satisfaction by its related Lender; provided that, unless and until such Lender Agent shall have
received such advice, such Lender Agent may take or refrain from taking any action, as the Lender
Agent shall deem advisable and in the best interests of its related Lender. Each Lender Agent
shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a
request of its related Lender, and such request and any action taken or failure to act pursuant
thereto shall be binding upon its related Lender.
(e) Non-Reliance on Lender Agent. Each Lender expressly acknowledges that neither its
related Lender Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates has made any representations or warranties to it and that no act by such Lender Agent
hereafter taken, including, without limitation, any review of the affairs of the Borrower or the
Servicer, shall be deemed to constitute any representation or warranty by such Lender Agent. Each
Lender represents and warrants to its related Lender Agent that it has and will, independently and
without reliance upon its related Lender Agent, and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation into the business, operations,
property, prospects, financial and other conditions and creditworthiness of the Borrower and made
its own decision to enter into this Agreement, the other Transaction Documents and all other
documents related hereto or thereto.
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(f) Lender Agents are in their Respective Individual Capacities. Each Lender Agent
and its Affiliates may make loans to, accept deposits from and generally engage in any kind of
business with the Borrower or any Affiliate of the Borrower as though such Lender Agent were not a
Lender Agent hereunder. With respect to Advances pursuant to this Agreement, each Lender Agent
shall have the same rights and powers under this Agreement in its individual capacity as any Lender
and may exercise the same as though it were not a Lender Agent, and the terms Lender, and
Lenders, shall include the Lender Agent in its individual capacity.
(g) Successor Lender Agent. Each Lender Agent may, upon five days notice to the
Borrower and its related Lender, and such Lender Agent will, upon the direction of its related
Lender resign as the Lender Agent for such Lender. If any Lender Agent shall resign, then its
related Lender during such five day period shall appoint a successor agent. If for any reason no
successor agent is appointed by such Lender during such five day period, then effective upon the
termination of such five day period, and the Borrower shall make all payments in respect of the
Obligations due to such Lender directly to such Lender, and for all purposes shall deal directly
with such Lender. After any retiring Lender Agents resignation hereunder as a Lender Agent, the
provisions of Articles VIII and IX shall inure to its benefit with respect to any
actions taken or omitted to be taken by it while it was a Lender Agent under this Agreement.
ARTICLE X.
COLLATERAL AGENT
SECTION 10.01 Designation of Collateral Agent.
(a) Initial Collateral Agent. Each of the Borrower, the Lender Agents and the
Administrative Agent hereby designate and appoint the Collateral Agent to act as its agent for the
purposes of perfection of a security interest in the Collateral Portfolio and hereby authorizes the
Collateral Agent to take such actions on its behalf and on behalf of each of the Secured Parties
and to exercise such powers and perform such duties as are expressly granted to the Collateral
Agent by this Agreement. The Collateral Agent hereby accepts such agency appointment to act as
Collateral Agent pursuant to the terms of this Agreement, until its resignation or removal as
Collateral Agent pursuant to the terms hereof.
(b) Successor Collateral Agent. Upon the Collateral Agents receipt of a Collateral
Agent Termination Notice from the Administrative Agent of the designation of a successor Collateral
Agent pursuant to the provisions of Section 10.05, the Collateral Agent agrees that it will
terminate its activities as Collateral Agent hereunder.
(c) Secured Party. The Administrative Agent, the Lender Agents and the Lenders hereby
appoint Wells Fargo, in its capacity as Collateral Agent hereunder, as their agent for the purposes
of perfection of a security interest in the Collateral Portfolio. Wells Fargo, in its capacity as
Collateral Agent hereunder, hereby accepts such appointment and agrees to perform the duties set
forth in Section 10.02(b).
SECTION 10.02 Duties of Collateral Agent.
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(a) Appointment. The Borrower, the Lender Agents and the Administrative Agent each
hereby appoints Wells Fargo to act as Collateral Agent, for the benefit of the Secured Parties.
The Collateral Agent hereby accepts such appointment and agrees to perform the duties and
obligations with respect thereto set forth herein.
(b) Duties. On or before the initial Advance Date, and until its removal pursuant to
Section 10.05, the Collateral Agent shall perform, on behalf of the Secured Parties, the
following duties and obligations:
(i) The Collateral Agent shall calculate amounts to be remitted pursuant to Section
2.04 to the applicable parties and notify the Servicer and the Administrative Agent in
the event of any discrepancy between the Collateral Agents calculations and the Servicing
Report (such dispute to be resolved in accordance with Section 2.05);
(ii) The Collateral Agent shall make payments pursuant to the terms of the Servicing
Report or as otherwise directed in accordance with Sections 2.04 or 2.05
(the Payment Duties).
(iii) The Collateral Agent shall provide to the Servicer a copy of all written notices
and communications identified as being sent to it in connection with the Loan Assets and the
other Collateral Portfolio held hereunder which it receives from the related Obligor,
participating bank and/or agent bank. In no instance shall the Collateral Agent be under
any duty or obligation to take any action on behalf of the Servicer in respect of the
exercise of any voting or consent rights, or similar actions, unless it receives specific
written instructions from the Servicer, prior to the occurrence of an Event of Default or
the Administrative Agent, after the occurrence of Event of Default, in which event the
Collateral Agent shall vote, consent or take such other action in accordance with such
instructions.
(c) (i) The Administrative Agent, each Lender Agent and each Secured Party further
authorizes the Collateral Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Transaction Documents as are expressly
delegated to the Collateral Agent by the terms hereof and thereof, together with such powers
as are reasonably incidental thereto. In furtherance, and without limiting the generality
of the foregoing, each Secured Party hereby appoints the Collateral Agent (acting at the
direction of the Administrative Agent) as its agent to execute and deliver all further
instruments and documents, and take all further action that the Administrative Agent deems
necessary or desirable in order to perfect, protect or more fully evidence the security
interests granted by the Borrower hereunder, or to enable any of them to exercise or enforce
any of their respective rights hereunder, including, without limitation, the execution by
the Collateral Agent as secured party/assignee of such financing or continuation statements,
or amendments thereto or assignments thereof, relative to all or any of the Loan Assets now
existing or hereafter arising, and such other instruments or notices, as may be necessary or
appropriate for the purposes stated hereinabove. Nothing in this Section 10.02(c)
shall be deemed to relieve the Borrower or the Servicer of their respective obligations to
protect the interest of the Collateral Agent
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(for the benefit of the Secured Parties) in the Collateral Portfolio, including to file
financing and continuation statements in respect of the Collateral Portfolio in accordance
with Section 5.01(t).
(ii) The Administrative Agent may direct the Collateral Agent to take any such
incidental action hereunder. With respect to other actions which are incidental to the
actions specifically delegated to the Collateral Agent hereunder, the Collateral Agent shall
not be required to take any such incidental action hereunder, but shall be required to act
or to refrain from acting (and shall be fully protected in acting or refraining from acting)
upon the direction of the Administrative Agent; provided that the Collateral Agent shall not
be required to take any action hereunder at the request of the Administrative Agent, any
Secured Party or otherwise if the taking of such action, in the reasonable determination of
the Collateral Agent, (x) shall be in violation of any Applicable Law or contrary to any
provisions of this Agreement or (y) shall expose the Collateral Agent to liability hereunder
or otherwise (unless it has received indemnity which it reasonably deems to be satisfactory
with respect thereto). In the event the Collateral Agent requests the consent of the
Administrative Agent and the Collateral Agent does not receive a consent (either positive or
negative) from the Administrative Agent within 10 Business Days of its receipt of such
request, then the Administrative Agent shall be deemed to have declined to consent to the
relevant action.
(iii) Except as expressly provided herein, the Collateral Agent shall not be under any
duty or obligation to take any affirmative action to exercise or enforce any power, right or
remedy available to it under this Agreement (x) unless and until (and to the extent)
expressly so directed by the Administrative Agent or (y) prior to the Facility Maturity Date
(and upon such occurrence, the Collateral Agent shall act in accordance with the written
instructions of the Administrative Agent pursuant to clause (x)). The Collateral Agent
shall not be liable for any action taken, suffered or omitted by it in accordance with the
request or direction of any Secured Party, to the extent that this Agreement provides such
Secured Party the right to so direct the Collateral Agent, or the Administrative Agent. The
Collateral Agent shall not be deemed to have notice or knowledge of any matter hereunder,
including an Event of Default, unless a Responsible Officer of the Collateral Agent has
knowledge of such matter or written notice thereof is received by the Collateral Agent.
(d) If, in performing its duties under this Agreement, the Collateral Agent is required to
decide between alternative courses of action, the Collateral Agent may request written instructions
from the Administrative Agent as to the course of action desired by it. If the Collateral Agent
does not receive such instructions within two Business Days after it has requested them, the
Collateral Agent may, but shall be under no duty to, take or refrain from taking any such courses
of action. The Collateral Agent shall act in accordance with instructions received after such two
Business Day period except to the extent it has already, in good faith, taken or committed itself
to take, action inconsistent with such instructions. The Collateral Agent shall be entitled to
rely on the advice of legal counsel and independent accountants in performing its duties hereunder
and shall be deemed to have acted in good faith if it acts in accordance with such advice.
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(e) Concurrently herewith, the Administrative Agent directs the Collateral Agent and the
Collateral Agent is authorized to enter into the Pledge Agreement, Collection Account Agreement and
Unfunded Exposure Account Agreement. For the avoidance of doubt, all of the Collateral Agents
rights, protections and immunities provided herein shall apply to the Collateral Agent for any
actions taken or omitted to be taken under the Pledge Agreement, Collection Account Agreement and
Unfunded Exposure Account Agreement in such capacity.
SECTION 10.03 Merger or Consolidation.
Any Person (i) into which the Collateral Agent may be merged or consolidated, (ii) that may
result from any merger or consolidation to which the Collateral Agent shall be a party, or (iii)
that may succeed to the properties and assets of the Collateral Agent substantially as a whole,
which Person in any of the foregoing cases executes an agreement of assumption to perform every
obligation of the Collateral Agent hereunder, shall be the successor to the Collateral Agent under
this Agreement without further act of any of the parties to this Agreement.
SECTION 10.04 Collateral Agent Compensation.
As compensation for its Collateral Agent activities hereunder, the Collateral Agent shall be
entitled to the Collateral Agent Fees and Collateral Agent Expenses from the Borrower as set forth
in the Wells Fargo Fee Letter, payable to the extent of funds available therefor pursuant to the
provisions of Section 2.04. The Collateral Agents entitlement to receive the Collateral
Agent Fees shall cease on the earlier to occur of: (i) its removal as Collateral Agent pursuant to
Section 10.05 or (ii) the termination of this Agreement.
SECTION 10.05 Collateral Agent Removal.
The Collateral Agent may be removed, with or without cause, by the Administrative Agent by
notice given in writing to the Collateral Agent (the Collateral Agent Termination
Notice); provided, notwithstanding its receipt of a Collateral Agent Termination Notice, the
Collateral Agent shall continue to act in such capacity until a successor Collateral Agent has been
appointed and has agreed to act as Collateral Agent hereunder; provided that the Collateral Agent
shall continue to receive compensation of its fees and expenses in accordance with Section
10.04 above while so serving as the Collateral Agent prior to a successor Collateral Agent
being appointed.
SECTION 10.06 Limitation on Liability.
(a) The Collateral Agent may conclusively rely on and shall be fully protected in acting upon
any certificate, instrument, opinion, notice, letter, telegram or other document delivered to it
and that in good faith it reasonably believes to be genuine and that has been signed by the proper
party or parties. The Collateral Agent may rely conclusively on and shall be fully protected in
acting upon (a) the written instructions of any designated officer of the Administrative Agent or
(b) the verbal instructions of the Administrative Agent.
(b) The Collateral Agent may consult counsel satisfactory to it and the advice or opinion of
such counsel shall be full and complete authorization and protection in respect of
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any action taken, suffered or omitted by it hereunder in good faith and in accordance with the
advice or opinion of such counsel.
(c) The Collateral Agent shall not be liable for any error of judgment, or for any act done or
step taken or omitted by it, in good faith, or for any mistakes of fact or law, or for anything
that it may do or refrain from doing in connection herewith except in the case of its willful
misconduct or grossly negligent performance or omission of its duties.
(d) The Collateral Agent makes no warranty or representation and shall have no responsibility
(except as expressly set forth in this Agreement) as to the content, enforceability, completeness,
validity, sufficiency, value, genuineness, ownership or transferability of the Collateral
Portfolio, and will not be required to and will not make any representations as to the validity or
value (except as expressly set forth in this Agreement) of any of the Collateral Portfolio. The
Collateral Agent shall not be obligated to take any legal action hereunder that might in its
judgment involve any expense or liability unless it has been furnished with an indemnity reasonably
satisfactory to it.
(e) The Collateral Agent shall have no duties or responsibilities except such duties and
responsibilities as are specifically set forth in this Agreement and no covenants or obligations
shall be implied in this Agreement against the Collateral Agent. Notwithstanding any provision to
the contrary elsewhere in the Transaction Documents, the Collateral Agent shall not have any
fiduciary relationship with any party hereto or any Secured Party in its capacity as such, and no
implied covenants, functions, obligations or responsibilities shall be read into this Agreement,
the other Transaction Documents or otherwise exist against the Collateral Agent. Without limiting
the generality of the foregoing, it is hereby expressly agreed and stipulated by the other parties
hereto that the Collateral Agent shall not be required to exercise any discretion hereunder and
shall have no investment or management responsibility.
(f) The Collateral Agent shall not be required to expend or risk its own funds in the
performance of its duties hereunder.
(g) It is expressly agreed and acknowledged that the Collateral Agent is not guaranteeing
performance of or assuming any liability for the obligations of the other parties hereto or any
parties to the Collateral Portfolio.
(h) Subject in all cases to the last sentence of Section 2.05, in case any reasonable
question arises as to its duties hereunder, the Collateral Agent may, prior to the occurrence of an
Event of Default or the Facility Maturity Date, request instructions from the Servicer and may,
after the occurrence of an Event of Default or the Facility Maturity Date, request instructions
from the Administrative Agent, and shall be entitled at all times to refrain from taking any action
unless it has received instructions from the Servicer or the Administrative Agent, as applicable.
The Collateral Agent shall in all events have no liability, risk or cost for any action taken
pursuant to and in compliance with the instruction of the Administrative Agent. In no event shall
the Collateral Agent be liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Collateral Agent has been
advised of the likelihood of such loss or damage and regardless of the form of action.
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(i) The Collateral Agent shall not be liable for the acts or omissions of the Collateral
Custodian under this Agreement and shall not be required to monitor the performance of the
Collateral Custodian. Notwithstanding anything herein to the contrary, the Collateral Agent shall
have no duty to perform any of the duties of the Collateral Custodian under this Agreement.
SECTION 10.07 Collateral Agent Resignation.
The Collateral Agent may resign at any time by giving not less than 90 days written notice
thereof to the Administrative Agent and with the consent of the Administrative Agent, which consent
shall not be unreasonably withheld. Upon receiving such notice of resignation, the Administrative
Agent shall promptly appoint a successor collateral agent or collateral agents by written
instrument, in duplicate, executed by the Administrative Agent, one copy of which shall be
delivered to the Collateral Agent so resigning and one copy to the successor collateral agent or
collateral agents, together with a copy to the Borrower, Servicer and Collateral Custodian. If no
successor collateral agent shall have been appointed and an instrument of acceptance by a successor
Collateral Agent shall not have been delivered to the Collateral Agent within 45 days after the
giving of such notice of resignation, the resigning Collateral Agent may petition any court of
competent jurisdiction for the appointment of a successor Collateral Agent. Notwithstanding
anything herein to the contrary, the Collateral Agent may not resign prior to a successor
Collateral Agent being appointed.
ARTICLE XI.
MISCELLANEOUS
SECTION 11.01 Amendments and Waivers.
(a) (i) No amendment or modification of any provision of this Agreement shall be effective
without the written agreement of the Borrower, the Servicer, the Required Lenders, the
Administrative Agent and, solely if such amendment or modification would adversely affect the
rights and obligations of the Collateral Agent, the Account Bank or the Collateral Custodian, the
written agreement of the Collateral Agent, the Account Bank or the Collateral Custodian, as
applicable; (ii) no termination or waiver of any provision of this Agreement or consent to any
departure therefrom by the Borrower or the Servicer shall be effective without the written
concurrence of the Administrative Agent and the Required Lenders and (iii) no amendment, waiver or
modification adversely affecting the rights or obligations of any Hedge Counterparty shall be
effective without the written agreement of such Person. Any waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
(b) Notwithstanding the provisions of Section 11.01(a), the written consent of all of
the Lenders shall be required for any amendment, modification or waiver (i) reducing any
outstanding Advances, or the Yield thereon, (ii) postponing any date for any payment of any
Advance, or the Yield thereon, (iii) modifying the provisions of this Section 11.01, (iv)
modifying the provisions of Section 2.22 or (v) extending the Stated Maturity Date or
clause (i) of the definition of Reinvestment Period.
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SECTION 11.02 Notices, Etc. All notices and other communications hereunder shall,
unless otherwise stated herein, be in writing (which shall include facsimile communication and
communication by e-mail) and faxed, e-mailed or delivered, to each party hereto, at its address set
forth under its name on the signature pages hereto or at such other address as shall be designated
by such party in a written notice to the other parties hereto. Notices and communications by
facsimile and e-mail shall be effective when sent (and shall be followed by hard copy sent by
regular mail), and notices and communications sent by other means shall be effective when received.
SECTION 11.03 No Waiver; Remedies. No failure on the part of the Administrative Agent,
the Collateral Agent, any Lender or any Lender Agent to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise of any other right.
The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
SECTION 11.04 Binding Effect; Assignability; Multiple Lenders.
(a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the
Servicer, the Administrative Agent, each Lender, the Lender Agents, the Collateral Agent, the
Account Bank, the Collateral Custodian and their respective successors and permitted assigns. Each
Lender and their respective successors and assigns may assign, or grant a security interest or sell
a participation interest in, (i) this Agreement and such Lenders rights and obligations hereunder
and interest herein in whole or in part (including by way of the sale of participation interests
therein) and/or (ii) any Advance (or portion thereof) or any Variable Funding Note (or any portion
thereof) to any Person other than the Borrower or an Affiliate thereof; provided that, (x) unless
the Borrower shall otherwise consent, a Lender may only assign, grant a security interest or sell a
participation in, its rights and obligations hereunder to an Affiliate or a Permitted Assignee who
is not a Prohibited Transferee, (y) after an Event of Default has occurred, a Lender may assign its
rights and obligations hereunder to any Person and (z) any Conduit Lender shall not need prior
consent to at any time assign, or grant a security interest or sell a participation interest in,
any Advance (or portion thereof) to a Liquidity Bank or any commercial paper conduit sponsored by a
Liquidity Bank or an Affiliate of its related Lender Agent. Any such assignee shall execute and
deliver to the Servicer, the Borrower and the Administrative Agent a fully-executed Transferee
Letter substantially in the form of Exhibit O hereto (a Transferee Letter) and a
fully-executed Joinder Supplement. The parties to any such assignment, grant or sale of a
participation interest shall execute and deliver to the related Lender Agent for its acceptance and
recording in its books and records, such agreement or document as may be satisfactory to such
parties and the applicable Lender Agent. None of the Borrower, the Transferor or the Servicer may
assign, or permit any Lien to exist upon, any of its rights or obligations hereunder or under any
Transaction Document or any interest herein or in any Transaction Document without the prior
written consent of each Lender Agent and the Administrative Agent.
(b) Notwithstanding any other provision of this Section 11.04, any Lender may at any
time pledge or grant a security interest in all or any portion of its rights (including, without
limitation, rights to payment of principal and interest) under this Agreement to secure
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obligations of such Lender to a Federal Reserve Bank, without notice to or consent of the
Borrower or the Administrative Agent; provided that no such pledge or grant of a security interest
shall release such Lender from any of its obligations hereunder, or substitute any such pledgee or
grantee for such Lender as a party hereto.
(c) Each Hedge Counterparty, each Affected Party and each Indemnified Party shall be an
express third party beneficiary of this Agreement.
SECTION 11.05 Term of This Agreement. This Agreement, including, without limitation,
the Borrowers representations and covenants set forth in Articles IV and V and the
Servicers representations, covenants and duties set forth in Articles IV, V and
VI, shall remain in full force and effect until the Collection Date; provided that the
rights and remedies with respect to any breach of any representation and warranty made or deemed
made by the Borrower or the Servicer pursuant to Articles III and IV and the
indemnification and payment provisions of Article VIII, IX and Article XI
and the provisions of Section 2.10, Section 2.11, Section 11.07,
Section 11.08 and Section 11.09 shall be continuing and shall survive any
termination of this Agreement.
SECTION 11.06 GOVERNING LAW; JURY WAIVER. THIS AGREEMENT SHALL, IN ACCORDANCE WITH
SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR
INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREUNDER.
SECTION 11.07 Costs, Expenses and Taxes.
(a) In addition to the rights of indemnification granted to the Collateral Agent, the Account
Bank, the Administrative Agent, the Lenders, the Lender Agents, the Collateral Custodian and their
respective Affiliates under Section 8.01 and Section 8.02 hereof, each of the
Borrower, the Servicer and the Transferor agrees to pay on demand all out-of-pocket costs and
expenses of the Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the
Account Bank and the Collateral Custodian incurred in connection with the preparation, execution,
delivery, administration (including periodic auditing), syndication, renewal, amendment or
modification of, any waiver or consent issued in connection with, this Agreement, the Transaction
Documents and the other documents to be delivered hereunder or in connection herewith, including,
without limitation, the fees and out-of-pocket expenses of counsel for the Administrative Agent,
the Lenders, the Lender Agents, the Collateral Agent, the Account Bank and the Collateral Custodian
with respect thereto and with respect to advising the Administrative Agent, the Lenders, the Lender
Agents, the Collateral Agent, the Account Bank and the Collateral Custodian as to their respective
rights and remedies under this Agreement and the other documents to be delivered hereunder or in
connection herewith, and all out-of-pocket costs and expenses, if any (including counsel fees and
expenses), incurred by the Administrative Agent, the Lenders, the Lender Agents, the Collateral
Agent, the Account Bank or the Collateral Custodian in connection with the enforcement or potential
enforcement of this Agreement or any
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Transaction Document by such Person and the other documents to be delivered hereunder or in
connection herewith.
(b) The Borrower, the Servicer and the Transferor shall pay on demand any and all stamp,
sales, excise and other Taxes and fees payable or determined to be payable to any Governmental
Authority in connection with the execution, delivery, filing and recording of this Agreement, the
other Transaction Documents or any other document providing liquidity support, credit enhancement
or other similar support to the Lenders in connection with this Agreement or the funding or
maintenance of Advances hereunder.
(c) The Servicer and the Transferor shall pay on demand all other out-of-pocket costs,
expenses and Taxes (excluding Taxes imposed on or measured by net income) incurred by the
Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the Collateral
Custodian and the Account Bank, including, without limitation, all costs and expenses incurred by
the Administrative Agent, the Lender Agents and the Lenders in connection with periodic audits of
the Borrowers, the Transferors or the Servicers books and records.
SECTION 11.08 No Proceedings.
(a) Each of the parties hereto (other than the Administrative Agent with the consent of the
Lender Agents) and each Hedge Counterparty (by accepting the benefits of this Agreement) agree
that it will not institute against, or join any other Person in instituting against, the Borrower
any proceedings of the type referred to in the definition of Bankruptcy Event so long as there
shall not have elapsed one year and one day (or such longer preference period as shall then be in
effect) since the Collection Date.
(b) Each of the parties hereto (other than any Conduit Lender) and each Hedge Counterparty (by
accepting the benefits of this Agreement) hereby agrees that it will not institute against, or join
any other Person in instituting against, any Conduit Lender, the Administrative Agent, or any
Liquidity Banks any Bankruptcy Proceeding so long as any commercial paper issued by such Conduit
Lender shall be outstanding and there shall not have elapsed one year and one day (or such longer
preference period as shall then be in effect) since the last day on which any such commercial paper
shall have been outstanding.
SECTION 11.09 Recourse Against Certain Parties.
(a) No recourse under or with respect to any obligation, covenant or agreement (including,
without limitation, the payment of any fees or any other obligations) of the Administrative Agent,
the Lenders, the Lender Agents or any Secured Party as contained in this Agreement or any other
agreement, instrument or document entered into by the Administrative Agent, the Lenders, the Lender
Agents or any Secured Party pursuant hereto or in connection herewith shall be had against any
administrator of the Administrative Agent, the Lenders, the Lender Agents or any Secured Party or
any incorporator, affiliate, stockholder, officer, employee or director of the Administrative
Agent, the Lenders, the Lender Agents or any Secured Party or of any such administrator, as such,
by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any
statute or otherwise; it being expressly agreed and
understood that the agreements of each party hereto contained in this Agreement and all of
the
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other agreements, instruments and documents entered into by the Administrative Agent, the
Lenders, the Lender Agents or any Secured Party pursuant hereto or in connection herewith are, in
each case, solely the corporate obligations of such party (and nothing in this Section
11.09 shall be construed to diminish in any way such corporate obligations of such party), and
that no personal liability whatsoever shall attach to or be incurred by any administrator of the
Administrative Agent, the Lenders, the Lender Agents or any Secured Party or any incorporator,
stockholder, affiliate, officer, employee or director of the Lenders, the Lender Agents or the
Administrative Agent or of any such administrator, as such, or any of them, under or by reason of
any of the obligations, covenants or agreements of the Administrative Agent, the Lenders, the
Lender Agents or any Secured Party contained in this Agreement or in any other such instruments,
documents or agreements, or are implied therefrom, and that any and all personal liability of every
such administrator of the Administrative Agent, the Lenders, the Lender Agents or any Secured Party
and each incorporator, stockholder, affiliate, officer, employee or director of the Administrative
Agent, the Lenders, the Lender Agents or any Secured Party or of any such administrator, or any of
them, for breaches by the Administrative Agent, the Lenders, the Lender Agents or any Secured Party
of any such obligations, covenants or agreements, which liability may arise either at common law or
in equity, by statute or constitution, or otherwise, is hereby expressly waived as a condition of
and in consideration for the execution of this Agreement.
(b) Notwithstanding any contrary provision set forth herein, no claim may be made by the
Borrower, the Transferor or the Servicer or any other Person against the Administrative Agent, the
Lenders, the Lender Agents or any Secured Party or their respective Affiliates, directors,
officers, employees, attorneys or agents for any special, indirect, consequential or punitive
damages in respect to any claim for breach of contract or any other theory of liability arising out
of or related to the transactions contemplated by this Agreement, or any act, omission or event
occurring in connection therewith; and the Borrower, the Transferor and the Servicer each hereby
waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued
and whether or not known or suspected.
(c) No obligation or liability to any Obligor under any of the Loan Assets is intended to be
assumed by the Administrative Agent, the Lenders, the Lender Agents or any Secured Party under or
as a result of this Agreement and the transactions contemplated hereby.
(d) Notwithstanding anything in this Agreement to the contrary, no Conduit Lender shall have
any obligation to pay any amount required to be paid by it hereunder in excess of any amount
available to such Conduit Lender after paying or making provision for the payment of its Commercial
Paper Notes. All payment obligations of each Conduit Lender hereunder are contingent on the
availability of funds in excess of the amounts necessary to pay its Commercial Paper Notes; and
each of the other parties hereto agrees that it will not have a claim under Section 101(5) of the
Bankruptcy Code if and to the extent that any such payment obligation owed to it by a Conduit
Lender exceeds the amount available to such Conduit Lender to pay such amount after paying or
making provision for the payment of its Commercial Paper Notes.
(e) The provisions of this Section 11.09 shall survive the termination of this
Agreement.
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SECTION 11.10 Execution in Counterparts; Severability; Integration. This Agreement may
be executed in any number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed shall be deemed to be an original and all of which when taken
together shall constitute one and the same agreement. Delivery of an executed counterpart of a
signature page to this Agreement by e-mail in portable document format (.pdf) or facsimile shall be
effective as delivery of a manually executed counterpart of this Agreement. In the event that any
provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations,
or of such provision or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby. This Agreement and any agreements or letters (including fee letters) executed in
connection herewith contains the final and complete integration of all prior expressions by the
parties hereto with respect to the subject matter hereof and shall constitute the entire agreement
among the parties hereto with respect to the subject matter hereof, superseding all prior oral or
written understandings other than any fee letter delivered by the Servicer to the Administrative
Agent and the Lender Agents.
SECTION 11.11 Consent to Jurisdiction; Service of Process.
(a) Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of any New
York State or Federal court sitting in New York City in any action or proceeding arising out of or
relating to the Transaction Documents, and each party hereto hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in such New York State
court or, to the extent permitted by law, in such Federal court. The parties hereto hereby
irrevocably waive, to the fullest extent they may effectively do so, the defense of an inconvenient
forum to the maintenance of such action or proceeding. The parties hereto agree that a final
judgment in any such action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
(b) Each of the Borrower and the Servicer agrees that service of process may be effected by
mailing a copy thereof by registered or certified mail, postage prepaid, to the Borrower or the
Servicer, as applicable, at its address specified in Section 11.02 or at such other address
as the Administrative Agent shall have been notified in accordance herewith. Nothing in this
Section 11.11 shall affect the right of the Lenders, the Lender Agents or the
Administrative Agent to serve legal process in any other manner permitted by law.
SECTION 11.12 Characterization of Conveyances Pursuant to the Purchase and Sale
Agreement.
(a) It is the express intent of the parties hereto that the conveyance of the Eligible Loan
Assets by the Transferor to the Borrower as contemplated by the Purchase and Sale Agreement be, and
be treated for all purposes (other than accounting purposes and subject to the tax characterization
of the Borrower and the Advances described in Section 5.01(aa) and Section 5.02(k)
hereof) as, a sale by the Transferor of such Eligible Loan Assets. It is, further, not the
intention of the parties that such conveyance be deemed a pledge of the Eligible Loan Assets by the
Transferor to the Borrower to secure a debt or other obligation of the Transferor. However, in the
event that, notwithstanding the intent of the parties, the Eligible Loan Assets are
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held to continue to be property of the Transferor, then the parties hereto agree that: (i) the
Purchase and Sale Agreement shall also be deemed to be a security agreement under Applicable Law;
(ii) as set forth in the Purchase and Sale Agreement, the transfer of the Eligible Loan Assets
provided for in the Purchase and Sale Agreement shall be deemed to be a grant by the Transferor to
the Borrower of a first priority security interest (subject only to Permitted Liens) in all of the
Transferors right, title and interest in and to the Eligible Loan Assets and all amounts payable
to the holders of the Eligible Loan Assets in accordance with the terms thereof and all proceeds of
the conversion, voluntary or involuntary, of the foregoing into cash, instruments, securities or
other property, including, without limitation, all amounts from time to time held or invested in
the Controlled Accounts, whether in the form of cash, instruments, securities or other property;
(iii) the possession by the Borrower (or the Collateral Custodian on its behalf) of Loan Assets and
such other items of property as constitute instruments, money, negotiable documents or chattel
paper shall be, subject to clause (iv), for purposes of perfecting the security interest
pursuant to the UCC; and (iv) acknowledgements from Persons holding such property shall be deemed
acknowledgements from custodians, bailees or agents (as applicable) of the Borrower for the purpose
of perfecting such security interest under Applicable Law. The parties further agree that any
assignment of the interest of the Borrower pursuant to any provision hereof shall also be deemed to
be an assignment of any security interest created pursuant to the terms of the Purchase and Sale
Agreement. The Borrower shall, to the extent consistent with this Agreement and the other
Transaction Documents, take such actions as may be necessary to ensure that, if the Purchase and
Sale Agreement was deemed to create a security interest in the Eligible Loan Assets, such security
interest would be deemed to be a perfected security interest of first priority (subject only to
Permitted Liens) under Applicable Law and will be maintained as such throughout the term of this
Agreement.
(b) It is the intention of each of the parties hereto that the Eligible Loan Assets conveyed
by the Transferor to the Borrower pursuant to the Purchase and Sale Agreement shall constitute
assets owned by the Borrower and shall not be part of the Transferors estate in the event of the
filing of a bankruptcy petition by or against the Transferor under any bankruptcy or similar law.
(c) The Borrower agrees to treat, and shall cause the Transferor to treat, for all purposes
(other than accounting purposes and subject to the tax characterization of the Borrower and the
Advances described in Section 5.01(aa) and Section 5.02(k) hereof), the
transactions effected by the Purchase and Sale Agreement as sales of assets to the Borrower. The
Borrower and the Servicer each hereby agree to cause the Transferor to reflect in the Transferors
financial records and to include a note in the publicly filed annual and quarterly financial
statements of Fifth Street indicating that: (i) assets related to transactions (including
transactions pursuant to the Transaction Documents) that do not meet SFAS 140 requirements for
accounting sale treatment are reflected in the consolidated balance sheet of Fifth Street, as
finance receivables pledged and non-recourse, secured borrowings and (ii) those assets are owned by
a special purpose entity that is consolidated in the financial statements of Fifth Street, and the
creditors of that special purpose entity have received ownership and/or security interests in such
assets and such assets are not intended to be available to the creditors of sellers (or any
affiliate of the sellers) of such assets to that special purpose entity.
SECTION 11.13 Confidentiality.
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(a) Each of the Administrative Agent, the Lenders, the Lender Agents, the Servicer, the
Collateral Agent, the Borrower, the Account Bank, the Transferor and the Collateral Custodian shall
maintain and shall cause each of its employees and officers to maintain the confidentiality of the
Agreement and all information with respect to the other parties, including all information
regarding the business of the Borrower and the Servicer hereto and their respective businesses
obtained by it or them in connection with the structuring, negotiating and execution of the
transactions contemplated herein, except that each such party and its officers and employees may
(i) disclose such information to its external accountants, investigators, auditors, attorneys or
other agents, including any valuation firm engaged by such party in connection with any due
diligence or comparable activities with respect to the transactions and Loan Assets contemplated
herein and the agents of such Persons (Excepted Persons); provided that each Excepted
Person shall, as a condition to any such disclosure, agree for the benefit of the Administrative
Agent, the Lenders, the Lender Agents, the Servicer, the Collateral Agent, the Borrower, the
Account Bank, the Transferor and the Collateral Custodian that such information shall be used
solely in connection with such Excepted Persons evaluation of, or relationship with, the Borrower
and its affiliates, (ii) disclose the existence of the Agreement, but not the financial terms
thereof, (iii) disclose such information as is required by Applicable Law and (iv) disclose the
Agreement and such information in any suit, action, proceeding or investigation (whether in law or
in equity or pursuant to arbitration) involving any of the Transaction Documents for the purpose of
defending itself, reducing its liability, or protecting or exercising any of its claims, rights,
remedies, or interests under or in connection with any of the Transaction Documents.
Notwithstanding the foregoing provisions of this Section 11.13(a), the Servicer may,
subject to Applicable Law and the terms of any Loan Agreements, make available copies of the
documents in the Servicing Files and such other documents it holds in its capacity as Servicer
pursuant to the terms of this Agreement, to any of its creditors. It is understood that the
financial terms that may not be disclosed except in compliance with this Section 11.13(a)
include, without limitation, all fees and other pricing terms, and all Events of Default, Servicer
Termination Events, and priority of payment provisions.
(b) Anything herein to the contrary notwithstanding, the Borrower and the Servicer each hereby
consents to the disclosure of any nonpublic information with respect to it (i) to the
Administrative Agent, the Lenders, the Lender Agents, the Account Bank, the Collateral Agent or the
Collateral Custodian by each other, (ii) by the Administrative Agent, the Lenders, the Lender
Agents, the Account Bank, the Collateral Agent and the Collateral Custodian to any prospective or
actual assignee or participant of any of them provided such Person agrees to hold such information
confidential, or (iii) by the Administrative Agent, the Lenders, the Lender Agents, the Account
Bank, the Collateral Agent and the Collateral Custodian to any commercial paper dealer or provider
of a surety, guaranty or credit or liquidity enhancement to any Lender or any Person providing
financing to, or holding equity interests in, any Conduit Lender, as applicable, and to any
officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided
each such Person is informed of the confidential nature of such information. In addition, the
Lenders, the Lender Agents, the Administrative Agent, the Collateral Agent, the Account Bank and
the Collateral Custodian may disclose any such nonpublic information as required pursuant to any
law, rule, regulation, direction, request or order of any judicial, administrative or regulatory
authority or proceedings (whether or not having the force or effect of law).
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(c) Notwithstanding anything herein to the contrary, the foregoing shall not be construed to
prohibit (i) disclosure of any and all information that is or becomes publicly known; (ii)
disclosure of any and all information (a) if required to do so by any applicable statute, law, rule
or regulation, (b) to any government agency or regulatory body having or claiming authority to
regulate or oversee any respects of the Lenders, the Lender Agents, the Administrative Agents,
the Collateral Agents, the Account Banks or the Collateral Custodians business or that of their
affiliates, (c) pursuant to any subpoena, civil investigative demand or similar demand or request
of any court, regulatory authority, arbitrator or arbitration to which the Administrative Agent,
any Lender, any Lender Agent, the Collateral Agent, the Collateral Custodian or the Account Bank or
an officer, director, employer, shareholder or affiliate of any of the foregoing is a party, (d) in
any preliminary or final offering circular, registration statement or contract or other document
approved in advance by the Borrower, the Servicer or the Transferor or (e) to any affiliate,
independent or internal auditor, agent, employee or attorney of the Collateral Agent or the
Collateral Custodian having a need to know the same, provided that the disclosing party advises
such recipient of the confidential nature of the information being disclosed; or (iii) any other
disclosure authorized by the Borrower, Servicer or the Transferor.
SECTION 11.14 Non-Confidentiality of Tax Treatment.
All parties hereto agree that each of them and each of their employees, representatives, and
other agents may disclose to any and all Persons, without limitation of any kind, the tax treatment
and tax structure of the transaction and all materials of any kind (including, without limitation,
opinions or other tax analyses) that are provided to any of them relating to such tax treatment and
tax structure. Tax treatment and tax structure shall have the same meaning as such terms have
for purposes of Treasury Regulation Section 1.6011-4; provided that with respect to any document or
similar item that in either case contains information concerning the tax treatment or tax structure
of the transaction as well as other information, the provisions of this Section 11.14 shall
only apply to such portions of the document or similar item that relate to the tax treatment or tax
structure of the transactions contemplated hereby.
SECTION 11.15 Waiver of Set Off.
Each of the parties hereto hereby waives any right of setoff it may have or to which it may be
entitled under this Agreement from time to time against the Administrative Agent, the Lenders, the
Lender Agents or their respective assets.
SECTION 11.16 Headings and Exhibits.
The headings herein are for purposes of references only and shall not otherwise affect the
meaning or interpretation of any provision hereof. The schedules and exhibits attached hereto and
referred to herein shall constitute a part of this Agreement and are incorporated into this
Agreement for all purposes.
SECTION 11.17 Ratable Payments.
If any Lender, whether by setoff or otherwise, shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of setoff, or otherwise) on account of
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Advances owing to it (other than pursuant to Breakage Fees, Section 2.10 or
Section 2.11) in excess of its ratable share of payments on account of the Advances
obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such
participations in the Advances owing to them as shall be necessary to cause such purchasing Lender
to share the excess payment ratably with each of them; provided, that, if all or any portion of
such excess payment is thereafter recovered from such purchasing Lender, such purchase from each
Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price
to the extent of such recovery together with an amount equal to such Lenders ratable share
(according to the proportion of (i) the amount of such Lenders required repayment to (ii) the
total amount so recovered from the purchasing Lender) of any interest or other amount paid or
payable by the purchasing Lender in respect of the total amount so recovered.
SECTION 11.18 Failure of Borrower or Servicer to Perform Certain Obligations.
If the Borrower or the Servicer, as applicable, fails to perform any of its agreements or
obligations under Section 5.01(t), Section 5.02(r) or Section 5.03(e), the
Administrative Agent may (but shall not be required to) itself perform, or cause performance of,
such agreement or obligation, and the expenses of the Administrative Agent incurred in connection
therewith shall be payable by the Borrower or the Servicer (on behalf of the Borrower), as
applicable, upon the Administrative Agents demand therefor.
SECTION 11.19 Power of Attorney. The Borrower irrevocably authorizes the
Administrative Agent and appoints the Administrative Agent as its attorney-in-fact to act on behalf
of the Borrower (i) to file financing statements necessary or desirable in the Administrative
Agents sole discretion to perfect and to maintain the perfection and priority of the interest of
the Secured Parties in the Collateral Portfolio and (ii) to file a carbon, photographic or other
reproduction of this Agreement or any financing statement with respect to the Collateral Portfolio
as a financing statement in such offices as the Administrative Agent in its sole discretion deems
necessary or desirable to perfect and to maintain the perfection and priority of the interests of
the Secured Parties in the Collateral Portfolio. This appointment is coupled with an interest and
is irrevocable.
SECTION 11.20 Delivery of Termination Statements, Releases, etc. Upon payment in full
of all of the Obligations (other than unmatured contingent indemnification obligations) and the
termination of this Agreement, the Administrative Agent and the Collateral Agent shall deliver to
the Borrower termination statements, reconveyances, releases and other documents necessary or
appropriate to evidence the termination of the Pledge and other Liens securing the Obligations, all
at the expense of the Borrower.
ARTICLE XII.
COLLATERAL CUSTODIAN
SECTION 12.01 Designation of Collateral Custodian.
(a) Initial Collateral Custodian. The role of Collateral Custodian with respect to
the Required Loan Documents shall be conducted by the Person designated as Collateral
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Custodian hereunder from time to time in accordance with this Section 12.01. Each of
the Borrower, the Lender Agents and the Administrative Agent hereby designate and appoint the
Collateral Custodian to act as its agent and hereby authorizes the Collateral Custodian to take
such actions on its behalf and to exercise such powers and perform such duties as are expressly
granted to the Collateral Custodian by this Agreement. The Collateral Custodian hereby accepts
such agency appointment to act as Collateral Custodian pursuant to the terms of this Agreement,
until its resignation or removal as Collateral Custodian pursuant to the terms hereof.
(b) Successor Collateral Custodian. Upon the Collateral Custodians receipt of a
Collateral Custodian Termination Notice from the Administrative Agent of the designation of a
successor Collateral Custodian pursuant to the provisions of Section 12.05, the Collateral
Custodian agrees that it will terminate its activities as Collateral Custodian hereunder.
SECTION 12.02 Duties of Collateral Custodian.
(a) Appointment. The Borrower, the Lender Agents and the Administrative Agent each
hereby appoints Wells Fargo to act as Collateral Custodian, for the benefit of the Secured Parties.
The Collateral Custodian hereby accepts such appointment and agrees to perform the duties and
obligations with respect thereto set forth herein.
(b) Duties. From the Closing Date until its removal pursuant to Section
12.05, the Collateral Custodian shall perform, on behalf of the Secured Parties, the following
duties and obligations:
(i) The Collateral Custodian shall take and retain custody of the Required Loan
Documents delivered by the Borrower pursuant to Section 3.02(a) and Section
3.04(b) hereof in accordance with the terms and conditions of this Agreement, all for
the benefit of the Secured Parties. Within five Business Days of its receipt of any
Required Loan Documents, the related Loan Asset Schedule and a hard copy of the Loan Asset
Checklist, the Collateral Custodian shall review the Required Loan Documents to confirm that
(A) such Required Loan Documents have been executed (either an original or a copy, as
indicated on the Loan Asset Checklist) and have no mutilated pages, (B) filed stamped copies
of the UCC and other filings (required by the Required Loan Documents) are included, (C) if
listed on the Loan Asset Checklist, a copy of an Insurance Policy with respect to any real
or personal property constituting the Underlying Collateral is included, and (D) the related
original balance (based on a comparison to the note or assignment agreement, as applicable),
Loan Asset number and Obligor name, as applicable, with respect to such Loan Asset is
referenced on the related Loan Asset Schedule (such items (A) through (D) collectively, the
Review Criteria). In order to facilitate the foregoing review by the Collateral
Custodian, in connection with each delivery of Required Loan Documents hereunder to the
Collateral Custodian, the Servicer shall provide to the Collateral Custodian a hard copy
(which may be preceded by an electronic copy, as applicable) of the related Loan Asset
Checklist which contains the Loan Asset information with respect to the Required Loan
Documents being delivered, identification number and the name of the Obligor with respect to
such Loan Asset. Notwithstanding anything herein to the contrary, the Collateral
Custodians obligation to review the Required Loan Documents shall be limited to reviewing
such Required Loan
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Documents based on the information provided on the Loan Asset Checklist. If, at the
conclusion of such review, the Collateral Custodian shall determine that (i) the original
balance of the Loan Asset with respect to which it has received Required Loan Documents is
less than as set forth on the Loan Asset Schedule, the Collateral Custodian shall notify the
Administrative Agent and the Servicer of such discrepancy within one Business Day, or (ii)
any Review Criteria is not satisfied, the Collateral Custodian shall within one Business Day
notify the Servicer of such determination and provide the Servicer with a list of the
non-complying Loan Assets and the applicable Review Criteria that they fail to satisfy. The
Servicer shall have five Business Days after notice or knowledge thereof to correct any
non-compliance with any Review Criteria. In addition, if requested in writing (in the form
of Exhibit N) by the Servicer and approved by the Administrative Agent within 10
Business Days of the Collateral Custodians delivery of such report, the Collateral
Custodian shall return any Loan Asset which fails to satisfy a Review Criteria to the
Borrower. Other than the foregoing, the Collateral Custodian shall not have any
responsibility for reviewing any Required Loan Documents. Notwithstanding anything to the
contrary contained herein, the Collateral Custodian shall have no duty or obligation with
respect to any Loan Asset checklist delivered to it in electronic form.
(ii) In taking and retaining custody of the Required Loan Documents, the Collateral
Custodian shall be deemed to be acting as the agent of the Secured Parties; provided that
the Collateral Custodian makes no representations as to the existence, perfection or
priority of any Lien on the Required Loan Documents or the instruments therein; and
provided, further, that, the Collateral Custodians duties shall be limited to those
expressly contemplated herein.
(iii) All Required Loan Documents shall be kept in fire resistant vaults, rooms or
cabinets at the locations specified on the address of the Collateral Custodian on the
signature pages attached hereto, or at such other office as shall be specified to the
Administrative Agent and the Servicer by the Collateral Custodian in a written notice
delivered at least 30 days prior to such change. All Required Loan Documents shall be
placed together with an appropriate identifying label and maintained in such a manner so as
to permit retrieval and access. The Collateral Custodian shall segregate the Required Loan
Documents on its inventory system and will not commingle the physical Required Loan
Documents with any other files of the Collateral Custodian other than those, if any,
relating to Fifth Street and its Affiliates and subsidiaries; provided, however, the
Collateral Custodian shall segregate any commingled files upon written request of the
Administrative Agent and the Borrower.
(iv) On the 12th calendar day of every month (or if such day is not a
Business Day, the next succeeding Business Day), the Collateral Custodian shall provide a
written report to the Administrative Agent and the Servicer (in a form mutually agreeable to
the Administrative Agent and the Collateral Custodian) identifying each Loan Asset for which
it holds Required Loan Documents and the applicable Review Criteria that any Loan Asset
fails to satisfy.
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(v) Notwithstanding any provision to the contrary elsewhere in the Transaction
Documents, the Collateral Custodian shall not have any fiduciary relationship with any party
hereto or any Secured Party in its capacity as such, and no implied covenants, functions,
obligations or responsibilities shall be read into this Agreement, the other Transaction
Documents or otherwise exist against the Collateral Custodian. Without limiting the
generality of the foregoing, it is hereby expressly agreed and stipulated by the other
parties hereto that the Collateral Custodian shall not be required to exercise any
discretion hereunder and shall have no investment or management responsibility.
(c) (i) The Collateral Custodian agrees to cooperate with the Administrative Agent and
the Collateral Agent and deliver any Required Loan Documents to the Collateral Agent or
Administrative Agent (pursuant to a written request in the form of Exhibit N), as
applicable, as requested in order to take any action that the Administrative Agent deems
necessary or desirable in order to perfect, protect or more fully evidence the security
interests granted by the Borrower hereunder, or to enable any of them to exercise or enforce
any of their respective rights hereunder, including any rights arising with respect to
Article VII. In the event the Collateral Custodian receives instructions from the
Collateral Agent, the Servicer or the Borrower which conflict with any instructions received
by the Administrative Agent, the Collateral Custodian shall rely on and follow the
instructions given by the Administrative Agent.
(ii) The Administrative Agent may direct the Collateral Custodian to take any such
incidental action hereunder. With respect to other actions which are incidental to the
actions specifically delegated to the Collateral Custodian hereunder, the Collateral
Custodian shall not be required to take any such incidental action hereunder, but shall be
required to act or to refrain from acting (and shall be fully protected in acting or
refraining from acting) upon the direction of the Administrative Agent; provided that the
Collateral Custodian shall not be required to take any action hereunder at the request of
the Administrative Agent, any Secured Party or otherwise if the taking of such action, in
the reasonable determination of the Collateral Custodian, (x) shall be in violation of any
Applicable Law or contrary to any provisions of this Agreement or (y) shall expose the
Collateral Custodian to liability hereunder or otherwise (unless it has received indemnity
which it reasonably deems to be satisfactory with respect thereto). In the event the
Collateral Custodian requests the consent of the Administrative Agent and the Collateral
Custodian does not receive a consent (either positive or negative) from the Administrative
Agent within 10 Business Days of its receipt of such request, then the Administrative Agent
shall be deemed to have declined to consent to the relevant action.
(iii) The Collateral Custodian shall not be liable for any action taken, suffered or
omitted by it in accordance with the request or direction of any Secured Party, to the
extent that this Agreement provides such Secured Party the right to so direct the Collateral
Custodian, or the Administrative Agent. The Collateral Custodian shall not be deemed to
have notice or knowledge of any matter hereunder, including an Event of Default, unless a
Responsible Officer of the Collateral Custodian has knowledge of such matter or written
notice thereof is received by the Collateral Custodian.
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SECTION 12.03 Merger or Consolidation.
Any Person (i) into which the Collateral Custodian may be merged or consolidated, (ii) that
may result from any merger or consolidation to which the Collateral Custodian shall be a party, or
(iii) that may succeed to the properties and assets of the Collateral Custodian substantially as a
whole, which Person in any of the foregoing cases executes an agreement of assumption to perform
every obligation of the Collateral Custodian hereunder, shall be the successor to the Collateral
Custodian under this Agreement without further act of any of the parties to this Agreement.
SECTION 12.04 Collateral Custodian Compensation.
As compensation for its Collateral Custodian activities hereunder, the Collateral Custodian
shall be entitled to the Collateral Custodian Fees from the Borrower as set forth in the Wells
Fargo Fee Letter, payable pursuant to the extent of funds available therefor pursuant to the
provisions of Section 2.04. The Collateral Custodians entitlement to receive the
Collateral Custodian Fees shall cease on the earlier to occur of: (i) its removal as Collateral
Custodian pursuant to Section 12.05, (ii) its resignation as Collateral Custodian pursuant
to Section 12.07 of this Agreement or (iii) the termination of this Agreement.
SECTION 12.05 Collateral Custodian Removal.
The Collateral Custodian may be removed, with or without cause, by the Administrative Agent by
notice given in writing to the Collateral Custodian (the Collateral Custodian Termination
Notice); provided, notwithstanding its receipt of a Collateral Custodian Termination Notice,
the Collateral Custodian shall continue to act in such capacity until a successor Collateral
Custodian has been appointed and has agreed to act as Collateral Custodian hereunder.
SECTION 12.06 Limitation on Liability.
(a) The Collateral Custodian may conclusively rely on and shall be fully protected in acting
upon any certificate, instrument, opinion, notice, letter, telegram or other document delivered to
it and that in good faith it reasonably believes to be genuine and that has been signed by the
proper party or parties. The Collateral Custodian may rely conclusively on and shall be fully
protected in acting upon (a) the written instructions of any designated officer of the
Administrative Agent or (b) the verbal instructions of the Administrative Agent.
(b) The Collateral Custodian may consult counsel satisfactory to it and the advice or opinion
of such counsel shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in accordance with the advice or
opinion of such counsel.
(c) The Collateral Custodian shall not be liable for any error of judgment, or for any act
done or step taken or omitted by it, in good faith, or for any mistakes of fact or law, or for
anything that it may do or refrain from doing in connection herewith except in the case of its
willful misconduct or grossly negligent performance or omission of its duties.
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(d) The Collateral Custodian makes no warranty or representation and shall have no
responsibility (except as expressly set forth in this Agreement) as to the content, enforceability,
completeness, validity, sufficiency, value, genuineness, ownership or transferability of the
Collateral Portfolio, and will not be required to and will not make any representations as to the
validity or value (except as expressly set forth in this Agreement) of any of the Collateral
Portfolio. The Collateral Custodian shall not be obligated to take any legal action hereunder that
might in its judgment involve any expense or liability unless it has been furnished with an
indemnity reasonably satisfactory to it.
(e) The Collateral Custodian shall have no duties or responsibilities except such duties and
responsibilities as are specifically set forth in this Agreement and no covenants or obligations
shall be implied in this Agreement against the Collateral Custodian.
(f) The Collateral Custodian shall not be required to expend or risk its own funds in the
performance of its duties hereunder.
(g) It is expressly agreed and acknowledged that the Collateral Custodian is not guaranteeing
performance of or assuming any liability for the obligations of the other parties hereto or any
parties to the Collateral Portfolio.
(h) Subject in all cases to the last sentence of Section 12.02(c)(i), in case any
reasonable question arises as to its duties hereunder, the Collateral Custodian may, prior to the
occurrence of an Event of Default or the Facility Maturity Date, request instructions from the
Servicer and may, after the occurrence of an Event of Default or the Facility Maturity Date,
request instructions from the Administrative Agent, and shall be entitled at all times to refrain
from taking any action unless it has received instructions from the Servicer or the Administrative
Agent, as applicable. The Collateral Custodian shall in all events have no liability, risk or cost
for any action taken pursuant to and in compliance with the instruction of the Administrative
Agent. In no event shall the Collateral Custodian be liable for special, indirect or consequential
loss or damage of any kind whatsoever (including but not limited to lost profits), even if the
Collateral Custodian has been advised of the likelihood of such loss or damage and regardless of
the form of action.
SECTION 12.07 Collateral Custodian Resignation.
Collateral Custodian may resign and be discharged from its duties or obligations hereunder,
not earlier than 90 days after delivery to the Administrative Agent of written notice of such
resignation specifying a date when such resignation shall take effect. Upon the effective date of
such resignation, or if the Administrative Agent gives Collateral Custodian written notice of an
earlier termination hereof, Collateral Custodian shall (i) be reimbursed for any costs and expenses
Collateral Custodian shall incur in connection with the termination of its duties under this
Agreement and (ii) deliver all of the Required Loan Documents in the possession of Collateral
Custodian to the Administrative Agent or to such Person as the Administrative Agent may designate
to Collateral Custodian in writing upon the receipt of a request in the form of Exhibit N;
provided that the Borrower shall consent to any successor Collateral Custodian appointed by the
Administrative Agent (such consent not to be unreasonably withheld).
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Notwithstanding anything herein to the contrary, the Collateral Custodian may not resign prior
to a successor Collateral Custodian being appointed.
SECTION 12.08 Release of Documents.
(a) Release for Servicing. From time to time and as appropriate for the enforcement
or servicing of any of the Collateral Portfolio, the Collateral Custodian is hereby authorized
(unless and until such authorization is revoked by the Administrative Agent), upon written receipt
from the Servicer of a request for release of documents and receipt in the form annexed hereto as
Exhibit N, to release to the Servicer within two Business Days of receipt of such request,
the related Required Loan Documents or the documents set forth in such request and receipt to the
Servicer. All documents so released to the Servicer shall be held by the Servicer in trust for the
benefit of the Collateral Agent, on behalf of the Secured Parties in accordance with the terms of
this Agreement. The Servicer shall return to the Collateral Custodian the Required Loan Documents
or other such documents (i) promptly upon the request of the Administrative Agent, or (ii) when the
Servicers need therefor in connection with such foreclosure or servicing no longer exists, unless
the Loan Asset shall be liquidated, in which case, the Servicer shall deliver an additional request
for release of documents to the Collateral Custodian and receipt certifying such liquidation from
the Servicer to the Collateral Agent, all in the form annexed hereto as Exhibit N.
(b) Limitation on Release. The foregoing provision with respect to the release to the
Servicer of the Required Loan Documents and documents by the Collateral Custodian upon request by
the Servicer shall be operative only to the extent that the Administrative Agent has consented to
such release. Promptly after delivery to the Collateral Custodian of any request for release of
documents, the Servicer shall provide notice of the same to the Administrative Agent. Any
additional Required Loan Documents or documents requested to be released by the Servicer may be
released only upon written authorization of the Administrative Agent. The limitations of this
paragraph shall not apply to the release of Required Loan Documents to the Servicer pursuant to the
immediately succeeding subsection.
(c) Release for Payment. Upon receipt by the Collateral Custodian of the Servicers
request for release of documents and receipt in the form annexed hereto as Exhibit N (which
certification shall include a statement to the effect that all amounts received in connection with
such payment or repurchase have been credited to the Collection Account as provided in this
Agreement), the Collateral Custodian shall promptly release the related Required Loan Documents to
the Servicer.
SECTION 12.09 Return of Required Loan Documents.
The Borrower may, with the prior written consent of the Administrative Agent (such consent not
to be unreasonably withheld), require that the Collateral Custodian return each Required Loan
Document (a) delivered to the Collateral Custodian in error or (b) released from the Lien of the
Collateral Agent hereunder pursuant to Section 2.16, in each case by submitting to the
Collateral Custodian and the Administrative Agent a written request in the form of Exhibit
N hereto (signed by both the Borrower and the Administrative Agent) specifying the Collateral
Portfolio to be so returned and reciting that the conditions to such release have been met (and
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specifying the Section or Sections of this Agreement being relied upon for such release). The
Collateral Custodian shall upon its receipt of each such request for return executed by the
Borrower and the Administrative Agent promptly, but in any event within five Business Days, return
the Required Loan Documents so requested to the Borrower.
SECTION 12.10 Access to Certain Documentation and Information Regarding the Collateral
Portfolio; Audits of Servicer.
The Collateral Custodian shall provide to the Administrative Agent and each Lender Agent
access to the Required Loan Documents and all other documentation regarding the Collateral
Portfolio including in such cases where the Administrative Agent and each Lender Agent is required
in connection with the enforcement of the rights or interests of the Secured Parties, or by
applicable statutes or regulations, to review such documentation, such access being afforded
without charge but only (i) upon two Business Days prior written request, (ii) during normal
business hours and (iii) subject to the Servicers and the Collateral Custodians normal security
and confidentiality procedures. Prior to the Closing Date and periodically thereafter at the
discretion of the Administrative Agent and each Lender Agent, the Administrative Agent and each
Lender Agent may review the Servicers collection and administration of the Collateral Portfolio in
order to assess compliance by the Servicer with the Servicing Standard, as well as with this
Agreement and may conduct an audit of the Collateral Portfolio, and Required Loan Documents in
conjunction with such a review. Such review shall be (subject to Section 5.03(d)(ii))
reasonable in scope and shall be completed in a reasonable period of time. Without limiting the
foregoing provisions of this Section 12.10, from time to time on request of the
Administrative Agent, the Collateral Custodian shall permit certified public accountants or other
auditors acceptable to the Administrative Agent to conduct, at the expense of the Servicer (on
behalf of the Borrower), a review of the Required Loan Documents and all other documentation
regarding the Collateral Portfolio.
SECTION 12.11 Bailment.
The Collateral Custodian agrees that, with respect to any Required Loan Documents at any time
or times in its possession or held in its name, the Collateral Custodian shall be the agent and
bailee of the Collateral Agent, for the benefit of the Secured Parties, for purposes of perfecting
(to the extent not otherwise perfected) the Collateral Agents security interest in the Collateral
Portfolio and for the purpose of ensuring that such security interest is entitled to first priority
status under the UCC.
[Signature pages to follow.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective
officers thereunto duly authorized, as of the date first above written.
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THE BORROWER: |
FIFTH STREET FUNDING, LLC
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By: |
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Name: |
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Title: |
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Fifth Street Funding, LLC
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
Fifth Street Funding, LLC
Loan and Servicing Agreement
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THE SERVICER: |
FIFTH STREET FINANCE CORP.
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By: |
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Name: |
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Title: |
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Fifth Street Finance Corp.
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
Fifth Street Funding, LLC
Loan and Servicing Agreement
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THE TRANSFEROR: |
FIFTH STREET FINANCE CORP.
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By: |
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Name: |
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Title: |
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Fifth Street Finance Corp.
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
Fifth Street Funding, LLC
Loan and Servicing Agreement
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THE ADMINISTRATIVE AGENT: |
WELLS FARGO SECURITIES, LLC
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By: |
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Name: |
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Title: |
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Wells Fargo Securities, LLC
One Wachovia Center, Mail Code: NC0600
Charlotte, North Carolina 28288
Attention: Kevin Sunday
Facsimile No.: (704) 715-0067
Confirmation No: (704) 374-6230 |
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Fifth Street Funding, LLC
Loan and Servicing Agreement
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INSTITUTIONAL LENDER: |
WACHOVIA BANK, NATIONAL ASSOCIATION
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By: |
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Name: |
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Title: |
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Wachovia Bank, National Association
One Wachovia Center, Mail Code: NC0600
Charlotte, North Carolina 28288
Attention: Kevin Sunday
Facsimile No.: (704) 715-0067
Confirmation No: (704) 374-6230
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
Fifth Street Funding, LLC
Loan and Servicing Agreement
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THE COLLATERAL AGENT: |
WELLS FARGO BANK, NATIONAL ASSOCIATION
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By: |
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Name: |
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Wells Fargo Bank, National Association
9062 Old Annapolis Rd.
Columbia, Maryland 21045
Attn: CDO Trust ServicesFifth Street
Funding, LLC
Fax: (281) 667-3933
Phone: (410) 884-2000
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
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Loan and Servicing Agreement
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THE ACCOUNT BANK: |
WELLS FARGO BANK, NATIONAL ASSOCIATION
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By: |
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Name: |
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Title: |
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Wells Fargo Bank, National Association
9062 Old Annapolis Rd.
Columbia, Maryland 21045
Attn: CDO Trust ServicesFifth Street
Funding, LLC
Fax: (281) 667-3933
Phone: (410) 884-2000
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[SIGNATURES CONTINUE ON THE FOLLOWING PAGE]
Fifth Street Funding, LLC
Loan and Servicing Agreement
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THE COLLATERAL CUSTODIAN: |
WELLS FARGO BANK, NATIONAL ASSOCIATION
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By: |
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Wells Fargo Bank, National Association
ABS Custody Vault
1055 10th Avenue SE
MAC N9401-011
Minneapolis, MN 55414
Attention: Corporate Trust Services Asset-
Backed Securities Vault
Phone: (612) 667-8058
Fax: (612) 667-1080
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With a copy to:
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Wells Fargo Bank, National Association
Sixth Street and Marquette Avenue
MAC N9311-161
Minneapolis, MN 55479
Attention: Corporate Trust Services Asset-
Backed Administration
Phone: (612) 667-8058
Fax: (612) 667-3464
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With a copy to:
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Wells Fargo Bank, National Association
9062 Old Annapolis Rd.
Columbia, Maryland 21045
Attn: CDO Trust ServicesFifth Street
Funding, LLC
Fax: (281) 667-3933
Phone: (410) 884-2000
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Fifth Street Funding, LLC
Loan and Servicing Agreement
exv10w7
Exhibit 10.7
EXECUTION COPY
PURCHASE AND SALE AGREEMENT
by and between
FIFTH STREET FUNDING, LLC,
as the Purchaser
and
FIFTH STREET FINANCE CORP.,
as the Seller
Dated as of November 16, 2009
TABLE OF CONTENTS
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Page |
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ARTICLE I. DEFINITIONS |
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1 |
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Section 1.1. |
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General |
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1 |
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Section 1.2. |
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Specific Terms |
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2 |
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Section 1.3. |
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Other Terms |
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5 |
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Section 1.4. |
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Computation of Time Periods |
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5 |
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Section 1.5. |
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Certain References |
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5 |
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ARTICLE II. SALE AND PURCHASE OF THE ELIGIBLE LOAN ASSETS AND OTHER PORTFOLIO ASSETS |
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5 |
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Section 2.1. |
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Sale and Purchase of the Eligible Loan Assets and the Other Portfolio Assets |
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Section 2.2. |
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Purchase Price |
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8 |
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Section 2.3. |
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Payment of Purchase Price |
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8 |
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Section 2.4. |
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Nature of the Sales |
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9 |
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ARTICLE III. CONDITIONS OF SALE AND PURCHASE |
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10 |
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Section 3.1. |
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Conditions Precedent to Effectiveness |
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Section 3.2. |
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Conditions Precedent to All Purchases |
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ARTICLE IV. REPRESENTATIONS AND WARRANTIES |
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Section 4.1. |
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Representations and Warranties of the Seller |
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Section 4.2. |
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Representations and Warranties of the Seller Relating to the Agreement and the Sale Portfolio |
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Section 4.3. |
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Representations and Warranties of the Purchaser |
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ARTICLE V. COVENANTS OF THE SELLER |
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Section 5.1. |
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Protection of Title of the Purchaser |
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Section 5.2. |
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Affirmative Covenants of the Seller |
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Section 5.3. |
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Negative Covenants of the Seller |
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ARTICLE VI. REPURCHASES AND SUBSTITUTION BY THE SELLER |
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Section 6.1. |
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Repurchase of Loan Assets |
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Section 6.2. |
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Substitution of Loan Assets |
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Section 6.3. |
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Repurchase Limitations |
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ARTICLE VII. ADDITIONAL RIGHTS AND OBLIGATIONS IN RESPECT OF THE SALE PORTFOLIO |
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Section 7.1. |
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Rights of the Purchaser |
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Section 7.2. |
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Rights With Respect to Loan Asset Files |
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i
TABLE OF CONTENTS
(contd)
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Section 7.3. |
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Notice to Collateral Agent, Administrative Agent and each Lender Agent |
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ARTICLE VIII. SELLER TERMINATION EVENTS |
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Section 8.1. |
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Seller Termination Events |
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Section 8.2. |
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Survival of Certain Provisions |
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ARTICLE IX. INDEMNIFICATION |
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Section 9.1. |
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Indemnification by the Seller |
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Section 9.2. |
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Assignment of Indemnities |
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ARTICLE X. MISCELLANEOUS |
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Section 10.1. |
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Liability of the Seller |
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Section 10.2. |
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Limitation on Liability |
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Section 10.3. |
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Amendments; Limited Agency |
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Section 10.4. |
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Waivers; Cumulative Remedies |
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Section 10.5. |
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Notices |
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Section 10.6. |
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Merger and Integration |
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Section 10.7. |
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Severability of Provisions |
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Section 10.8. |
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GOVERNING LAW; JURY WAIVER |
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Section 10.9. |
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Consent to Jurisdiction; Service of Process |
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Section 10.10. |
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Costs, Expenses and Taxes |
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43 |
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Section 10.11. |
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Counterparts |
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43 |
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Section 10.12. |
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Bankruptcy Non-Petition and Limited Recourse; Claims |
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Section 10.13. |
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Binding Effect; Assignability |
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44 |
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Section 10.14. |
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Waiver of Setoff |
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44 |
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Section 10.15. |
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Headings and Exhibits |
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44 |
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Section 10.16. |
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Rights of Inspection |
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Section 10.17. |
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Subordination |
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Section 10.18. |
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Confidentiality |
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SCHEDULES AND EXHIBITS
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Schedule I
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Sale Portfolio List |
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Exhibit A
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Form of Loan Assignment |
Exhibit B
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Form of Officers Purchase Date Certificate |
Exhibit C
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Form of Power of Attorney for Seller |
ii
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT, dated as of November 16, 2009, by and between FIFTH STREET
FINANCE CORP., a Delaware corporation, as the seller (the Seller) and FIFTH STREET
FUNDING, LLC, a Delaware limited liability company, as the purchaser (the Purchaser).
WITNESSETH:
WHEREAS, the Purchaser has agreed to Purchase (as hereinafter defined) from the Seller from
time to time, and the Seller has agreed to Sell (as hereinafter defined) to the Purchaser from time
to time, certain Loan Assets and Portfolio Assets related thereto on the terms set forth herein;
WHEREAS, it is contemplated that the Loan Assets and Portfolio Assets Purchased hereunder may
be Pledged by the Purchaser pursuant to the Loan and Servicing Agreement (as defined herein) and
the related Transaction Documents, to the Collateral Agent, for the benefit of the Secured Parties;
and
WHEREAS, the Seller agrees that all representations, warranties, covenants and agreements made
by the Seller herein with respect to the Sale Portfolio shall also be for the benefit of any
Secured Party.
NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter
contained, and for other good and valuable consideration, the receipt of which is hereby
acknowledged, the Purchaser and the Seller, intending to be legally bound, hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. General. The specific terms defined in this Article include the plural
as well as the singular. Words herein importing a gender include the other gender. References
herein to writing include printing, typing, lithography and other means of reproducing words in
visible form. References to agreements and other contractual instruments include all subsequent
amendments thereto or changes therein entered into in accordance with their respective terms and
not prohibited by this Agreement or the Loan and Servicing Agreement (as hereinafter defined).
References herein to Persons include their successors and assigns permitted hereunder or under the
Loan and Servicing Agreement. The terms include or including mean include without limitation
or including without limitation. The words herein, hereof and hereunder and other words of
similar import refer to this Agreement as a whole and not to any particular Article, Section or
other subdivision, and Article, Section, Schedule and Exhibit references, unless otherwise
specified, refer to Articles and Sections of and Schedules and Exhibits to this Agreement.
References to any Applicable Law means such Applicable Law as amended, modified, codified, replaced
or reenacted, in whole or in part, and in effect from time to time, including rules and regulations
promulgated thereunder, and reference to any Section or other provision of any Applicable Law means
that provision of such Applicable Law
from time to time in effect and constituting the substantive amendment, modification,
codification, replacement or reenactment of such Section or other provision. Capitalized terms used
herein but not defined herein shall have the respective meanings assigned to such terms in the Loan
and Servicing Agreement, provided that, if, within such definition in the Loan and Servicing
Agreement a further term is used which is defined herein, then such further term shall have the
meaning given to such further term herein.
Section 1.2. Specific Terms. Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the following meanings:
Agreement means this Purchase and Sale Agreement, as the same may be amended,
restated, waived, supplemented and/or otherwise modified from time to time hereafter.
Available Collections means all cash collections and other cash proceeds with
respect to any Loan Asset, including, without limitation, all Principal Collections, all Interest
Collections, all proceeds of any sale or disposition with respect to such Loan Asset, cash proceeds
or other funds received by the Seller or the Servicer with respect to any Underlying Collateral
(including from any guarantors).
Early Termination has the meaning specified in Section 8.1.
Facility Financing Statements has the meaning specified in Section 3.1(iv).
Indemnified Amounts has the meaning specified in Section 9.1(a).
Indemnified Party has the meaning specified in Section 9.1(a).
Loan and Servicing Agreement means that certain Loan and Servicing Agreement, dated
as of the Closing Date, by and among the Purchaser, as the Borrower, the Seller, as the Servicer
and the Transferor, Wells Fargo Securities, LLC, as the Administrative Agent, each of the Conduit
Lenders and Institutional Lenders from time to time party thereto, each of the Lender Agents from
time to time party thereto and Wells Fargo Bank, National Association, as the Collateral Agent, as
the Account Bank and as the Collateral Custodian, as such may be amended, restated, supplemented or
otherwise modified from time to time pursuant to the terms thereof.
Loan Asset means any loan listed on Schedule I hereto, as the same may be
amended, supplemented, restated or replaced from time to time, and all accounts, payment
intangibles, instruments and other property related to the foregoing.
Loan Assignment means a Loan Assignment executed by the Seller, substantially in the
form of Exhibit A attached hereto.
Non-Consolidation/True Sale Opinion has the meaning specified in Section
4.1(jj).
Pension Plan has the meaning specified in Section 4.1(r).
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Portfolio Assets means all Loan Assets owned by the Seller, together with all
proceeds thereof and other assets or property related thereto, including all right, title and
interest of the Seller in and to:
(a) any amounts on deposit in any cash reserve, collection, custody or lockbox accounts
securing the Loan Assets;
(b) all rights with respect to the Loan Assets to which the Seller is entitled as lender under
the applicable Loan Agreement;
(c) any Underlying Collateral securing a Loan Asset and all Recoveries related thereto, all
payments paid in respect thereof and all monies due, to become due and paid in respect thereof
accruing after the applicable Cut-Off Date and all liquidation proceeds;
(d) all Required Loan Documents, the Loan Asset Files related to any Loan Asset, any Records,
and the documents, agreements, and instruments included in the Loan Asset Files or Records;
(e) all Insurance Policies with respect to any Loan Asset;
(f) all Liens, guaranties, indemnities, warranties, letters of credit, accounts, bank accounts
and property subject thereto from time to time purporting to secure or support payment of any Loan
Asset, together with all UCC financing statements, mortgages or similar filings signed or
authorized by an Obligor relating thereto;
(g) all records (including computer records) with respect to the foregoing; and
(h) all collections, income, payments, proceeds and other benefits of each of the foregoing.
Purchase means a purchase by the Purchaser of an Eligible Loan Asset and the related
Portfolio Assets from the Seller pursuant to Article II.
Purchase Date has the meaning specified in Section 2.1(b).
Purchase Price has the meaning specified in Section 2.2.
Purchaser has the meaning specified in the Preamble.
Purchaser Restricted Junior Payment means (i) any dividend or other distribution,
direct or indirect, on account of any class of membership interests of the Purchaser now or
hereafter outstanding, except a dividend paid solely in interests of that class of membership
interests or in any junior class of membership interests of the Purchaser; (ii) any redemption,
retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or
indirect, of any class of membership interests of the Purchaser now or hereafter outstanding, (iii)
any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire membership interests of the Purchaser now
or hereafter outstanding, and (iv) any payment of management fees by the
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Purchaser. For the avoidance of doubt, (x) payments and reimbursements due to the Servicer in
accordance with the Transaction Documents do not constitute Purchaser Restricted Junior Payments,
and (y) distributions by the Purchaser to holders of its membership interests of Loan Assets or of
cash or other proceeds relating thereto which have been substituted by the Purchaser in accordance
with the Loan and Servicing Agreement shall not constitute Purchaser Restricted Junior Payments.
Replaced Loan Asset has the meaning specified in Section 6.2(b)(i).
Repurchase Price means, with respect to a Loan Asset to be repurchased pursuant to
Article VI hereof, (i) the greater of (a) an amount equal to the Purchase Price less all
Principal Collections received in respect of such Loan Asset from the Purchase Date to the date of
repurchase hereunder and (b) an amount equal to the Advance Date Assigned Value multiplied by the
Outstanding Balance of such Loan Asset, plus (ii) all Hedge Breakage Costs arising as a result
thereof and owed to the relevant Hedge Counterparty for any termination of one or more Hedge
Transactions, in whole or in part, as required by the terms of any Hedging Agreement plus any
expenses or fees with respect to such Loan Asset and costs and damages incurred by the
Administrative Agent or by any Lender in connection with any violation by such Loan Asset of any
predatory or abusive lending law which is an Applicable Law.
Sale and Sell have the meanings specified in Section 2.1(a), and
the term Sold shall have the corresponding meaning.
Sale Portfolio means all right, title, and interest (whether now owned or hereafter
acquired or arising, and wherever located) of the Seller in the property identified below in
clauses (i) through (iii) and all accounts, cash and currency, chattel paper,
tangible chattel paper, electronic chattel paper, copyrights, copyright licenses, equipment,
fixtures, contract rights, general intangibles, instruments, certificates of deposit, certificated
securities, uncertificated securities, financial assets, securities entitlements, commercial tort
claims, deposit accounts, inventory, investment property, letter-of-credit rights, software,
supporting obligations, accessions, or other property consisting of, arising out of, or related to
any of the following (in each case excluding the Retained Interest and the Excluded Amounts):
(i) the Loan Assets, and all monies due or to become due in payment under such Loan Assets on
and after the related Cut-Off Date, including, but not limited to, all Available Collections;
(ii) the Portfolio Assets with respect to the Loan Assets referred to in clause (i);
and
(iii) all income and Proceeds of the foregoing.
Schedule I means the schedule of all Sale Portfolio that is Sold by the Seller to
the Purchaser on a Purchase Date, as supplemented on any subsequent Purchase Date by the Schedule
I attached to the applicable Loan Assignment, and incorporated herein by reference, as such
schedule may be supplemented and amended from time to time pursuant to the terms hereof, which
schedule shall, together with all supplements and amendments thereto, be included in and made part
of the Loan Asset Schedule attached to the Loan and Servicing Agreement.
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SEC has the meaning specified in Section 5.2(n)(i).
Seller Purchase Event means with respect to any Loan Asset, the occurrence of a
breach of the Sellers representations and warranties under Section 4.2 on the Cut-Off Date
for such Loan Asset.
Seller Termination Event has the meaning specified in Section 8.1(a).
Substitute Eligible Loan Asset has the meaning specified in Section 6.2(a).
Substitution has the meaning specified in Section 6.2(a).
Transfer Taxes means any tax, fee or governmental charge payable by the Purchaser,
the Seller or any other Person to any federal, state or local government arising from or otherwise
related to the Sale of any Loan Asset, the related Underlying Collateral (if any) and/or any other
related Portfolio Assets from the Seller to the Purchaser under this Agreement (excluding taxes
measured by net income).
Section 1.3. Other Terms. All accounting terms used but not specifically defined
herein shall be construed in accordance with GAAP. All terms used in Article 9 of the UCC in the
State of New York, and used but not specifically defined herein, are used herein as defined in such
Article 9.
Section 1.4. Computation of Time Periods. Unless otherwise stated in this Agreement,
in the computation of a period of time from a specified date to later specified date, the word
from means from and including and the words to and until each mean to but excluding.
Reference to days or days without further qualification means calendar days. Reference to any time
means New York, New York time.
Section 1.5. Certain References. All references to the Outstanding Balance of a Loan
Asset as of a Purchase Date shall refer to the close of business on such day.
ARTICLE II.
SALE AND PURCHASE OF THE ELIGIBLE LOAN ASSETS
AND OTHER PORTFOLIO ASSETS
Section 2.1. Sale and Purchase of the Eligible Loan Assets and the Other Portfolio
Assets.
(a) Subject to the terms and conditions of this Agreement (including the conditions to
Purchase set forth in Article III), on and after the Closing Date, the Seller hereby agrees
to (i) sell, transfer and otherwise convey (collectively, Sell and any such sale,
transfer and/or other conveyance, a Sale), from time to time, to the Purchaser, without
recourse (except to the extent specifically provided herein), and the Purchaser hereby agrees to
purchase, all right, title and interest of the Seller (whether now owned or hereafter acquired or
arising, and wherever located) in and to certain Sale Portfolio designated by the Seller and (ii)
transfer, or cause the deposit into, the Collection Account of all Available Collections received
by the Seller on
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account of any Sale Portfolio hereunder on and after the Purchase Date with respect to such
Sale Portfolio, in each case, within one Business Day of the receipt thereof. The Seller hereby
acknowledges that each Sale to the Purchaser hereunder is absolute and irrevocable, without
reservation or retention of any interest whatsoever by the Seller.
(b) The Seller shall on or prior to any Business Day prior to a Seller Termination Event (each
a Purchase Date) execute and deliver to the Purchaser a proposed Loan Assignment
identifying the Sale Portfolio to be Sold by the Seller to the Purchaser on such Purchase Date.
From and after such Purchase Date, the Sale Portfolio listed on Schedule I to the related
Loan Assignment shall be deemed to be listed on Schedule I hereto and constitute part of
the Sale Portfolio hereunder.
(c) On or before any Purchase Date with respect to the Sale Portfolio to be acquired by the
Purchaser on such date, the Seller shall provide the Purchaser with an Officers Certificate, in
the form of Exhibit B hereto, signed by a duly authorized Responsible Officer certifying,
as of such Purchase Date, to each of the items in Section 4.2.
(d) On and after each Purchase Date hereunder and upon payment of the Purchase Price therefor,
the Purchaser shall own the Sale Portfolio Sold by the Seller to the Purchaser on such Purchase
Date, and the Seller shall not take any action inconsistent with such ownership and shall not claim
any ownership interest in such Sale Portfolio.
(e) Except as specifically provided in this Agreement, the Sale and Purchase of the Sale
Portfolio under this Agreement shall be without recourse to the Seller; it being understood that
the Seller shall be liable to the Purchaser for all representations, warranties, covenants and
indemnities made by the Seller pursuant to the terms of this Agreement, all of which obligations
are limited so as not to constitute recourse to the Seller for the credit risk of the Obligors.
(f) Neither the Purchaser nor any assignee of the Purchaser (including the Secured Parties)
shall have any obligation or liability to any Obligor or client of the Seller (including any
obligation to perform any obligation of the Seller, including with respect to any other related
agreements) in respect of the Sale Portfolio (other than with respect to funding obligations to
Obligors pursuant to the terms of the applicable Loan Agreement for Revolving Loan Assets and
Delayed Draw Loan Assets, as applicable, which shall solely be an obligation of the Purchaser and
not any of the Secured Parties). No such obligation or liability is intended to be assumed by the
Purchaser or any assignee of the Purchaser (including the Secured Parties) and any such assumption
is expressly disclaimed. Without limiting the generality of the foregoing, the Sale of the Sale
Portfolio by the Seller to the Purchaser pursuant to this Agreement does not constitute and is not
intended to result in a creation or assumption by the Purchaser or any assignee of the Purchaser
(including the Secured Parties), of any obligation of the Seller, as lead agent, collateral agent
or paying agent under any Agented Note.
(g) In connection with each Purchase of Sale Portfolio hereunder, the Seller shall cause to be
delivered to the Collateral Custodian (with a copy to the Administrative Agent), no later than 2:00
p.m. one Business Day prior to the related Purchase Date, a faxed or e-mailed copy of the duly
executed original promissory notes of the Loan Assets (and, in the case of any
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Noteless Loan Asset, a fully executed assignment agreement) and if any Loan Assets are closed
in escrow, a certificate (in the form of Exhibit K to the Loan and Servicing Agreement) from the
closing attorneys of such Loan Assets certifying the possession of the Required Loan Documents;
provided that, notwithstanding the foregoing, the Seller shall cause the Loan Asset Checklist and
the Required Loan Documents to be in the possession of the Collateral Custodian within five
Business Days after the related Purchase Date.
(h) In accordance with the Loan and Servicing Agreement, certain documents relating to Sale
Portfolio shall be delivered to and held in trust by the Collateral Custodian for the benefit of
the Purchaser and its assignees, and the Purchaser hereby instructs the Seller to cause such
documents to be delivered to the Collateral Custodian. Such delivery to the Collateral Custodian
of such documents and the possession thereof by the Collateral Custodian is at the will of the
Purchaser and its assignees and in a custodial capacity for their benefit only.
(i) The Seller shall provide all information, and any other reasonable assistance, to the
Servicer, the Collateral Custodian and the Collateral Agent necessary for the Servicer, the
Collateral Custodian and the Collateral Agent, as applicable, to conduct the management,
administration and collection of the Sale Portfolio Purchased hereunder in accordance with the
terms of the Loan and Servicing Agreement.
(j) In connection with the Purchase by the Purchaser of Sale Portfolio as contemplated by this
Agreement, the Seller further agrees that it shall, at its own expense, indicate clearly and
unambiguously in its computer files on or prior to each Purchase Date, and its financial
statements, that such Sale Portfolio has been purchased by the Purchaser in accordance with this
Agreement.
(k) The Seller further agrees to deliver to the Purchaser on or before each Purchase Date a
computer file containing a true, complete and correct list of all Loan Assets to be Sold hereunder
on such Purchase Date, identified by Obligors name and Outstanding Balance as of the related
Cut-Off Date. Such file or list shall be marked as Schedule I to the applicable Loan
Assignment and shall be delivered to the Purchaser as confidential and proprietary, and is hereby
incorporated into and made a part of Schedule I to this Agreement, as such Schedule
I may be supplemented and amended from time to time.
(l) The Seller shall, at all times, continue to fulfill its obligations under, and in strict
conformance with, the terms of all Loan Agreements (other than with respect to funding obligations
to Obligors in connection with Revolving Loan Assets and Delayed Draw Loan Assets, as applicable)
related to any Sale Portfolio purchased hereunder, including without limitation any obligations
pertaining to any Retained Interest.
(m) The Seller and the Purchaser each acknowledge with respect to itself that the
representations and warranties of the Seller in Sections 4.1 and 4.2 hereof and of
the Purchaser in Section 4.3 hereof, and the covenants and agreements of the Seller herein,
including without limitation, in Article V and Article VI hereof, will run to and
be for the benefit of the Purchaser and the Collateral Agent (on behalf of the Secured Parties) and
the Collateral Agent (on behalf of the Secured Parties) may enforce directly (without joinder of
the Purchaser when enforcing against the Seller), the obligations of the Seller or the Purchaser,
as applicable, with
7
respect to breaches of such representations, warranties, covenants and all other obligations
as set forth in this Agreement.
Section 2.2. Purchase Price.
The purchase price for each item of Sale Portfolio Sold to the Purchaser hereunder (the
Purchase Price) shall be in a dollar amount equal to the fair market value of such Loan
Asset as determined from time to time by the Seller and the Purchaser. Each of the Purchaser and
the Seller hereby agree that the fair market value of each Loan Asset Sold hereunder as of the
related Purchase Date shall not be less than the Advance Date Assigned Value thereof multiplied by
the Outstanding Balance of such Loan Asset on the related Purchase Date.
Section 2.3. Payment of Purchase Price.
(a) The Purchase Price for any Sale Portfolio Sold by the Seller to the Purchaser on any
Purchase Date shall be paid in a combination of: (i) immediately available funds; and (ii) if the
Purchaser does not have sufficient funds to pay the full amount of the Purchase Price (after taking
into account the proceeds the Purchaser expects to receive pursuant to the Advances under the Loan
and Servicing Agreement), by means of a capital contribution by the Seller to the Purchaser.
(b) The portion of such Purchase Price to be paid in immediately available funds shall be paid
by wire transfer on the applicable Purchase Date to an account designated by the Seller on or
before such Purchase Date or by means of proper accounting entries being entered upon the accounts
and records of the Seller and the Purchaser on the applicable Purchase Date.
(c) In connection with each delivery of a Loan Assignment, the Seller hereunder shall be
deemed to have certified, with respect to the Sale Portfolio to be Sold by it on such day, that its
representations and warranties contained in Sections 4.1 and 4.2 are true and
correct in all respects on and as of such day, with the same effect as though made on and as of
such day (other than any representation or warranty that is made as of a specific date), that no
Event of Default has occurred or would result therefrom and no Unmatured Event of Default exists or
would result therefrom.
(d) Upon the payment of the Purchase Price for any Purchase, title to the Sale Portfolio
included in such Purchase shall vest in the Purchaser, whether or not the conditions precedent to
such Purchase and the other covenants and agreements contained herein were in fact satisfied;
provided that the Purchaser shall not be deemed to have waived any claim it may have under this
Agreement for the failure by the Seller in fact to satisfy any such condition precedent, covenant
or agreement.
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Section 2.4. Nature of the Sales.
(a) It is the express intent of the parties hereto that the Sale of the Sale Portfolio by the
Seller to the Purchaser hereunder be, and be treated for all purposes (other than tax and
accounting purposes) as an absolute sale by the Seller (free and clear of any Lien, security
interest, charge or encumbrance other than Permitted Liens) of such Sale Portfolio. It is, further,
not the intention of the parties that such Sale be deemed a pledge of the Sale Portfolio by the
Seller to the Purchaser to secure a debt or other obligation of the Seller. However, in the event
that, notwithstanding the intent of the parties, the Sale Portfolio is held to continue to be
property of the Seller, then the parties hereto agree that: (i) this Agreement shall also be
deemed to be, and hereby is, a security agreement within the meaning of Article 9 of the UCC;
(ii) the transfer of the Sale Portfolio provided for in this Agreement shall be deemed to be a
grant by the Seller to the Purchaser of a first priority security interest (subject only to
Permitted Liens) in all of the Sellers right, title and interest in and to the Sale Portfolio and
all amounts payable to the holders of the Sale Portfolio in accordance with the terms thereof and
all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, instruments,
securities or other property, including, without limitation, all amounts from time to time held or
invested in the Controlled Accounts, whether in the form of cash, instruments, securities or other
property, to secure the prompt and complete payment of a loan deemed to have been made in an amount
equal to the aggregate Purchase Price of the Sale Portfolio together with all of the other
obligations of the Seller hereunder; (iii) the possession by the Purchaser (or the Collateral
Custodian on behalf of the Collateral Agent, for the benefit of the Secured Parties) of Sale
Portfolio and such other items of property as constitute instruments, money, negotiable documents
or chattel paper shall be, subject to clause (iv), for purposes of perfecting the security
interest pursuant to the UCC; and (iv) acknowledgements from Persons holding such property shall be
deemed acknowledgements from custodians, bailees or agents (as applicable) of the Purchaser for the
purpose of perfecting such security interest under Applicable Law. The parties further agree in
such event that any assignment of the interest of the Purchaser pursuant to any provision hereof
shall also be deemed to be an assignment of any security interest created pursuant to the terms of
this Agreement. The Purchaser shall, to the extent consistent with this Agreement and the other
Transaction Documents, take such actions as may be necessary to ensure that, if this Agreement were
deemed to create a security interest in the Sale Portfolio, such security interest would be deemed
to be a perfected security interest of first priority (subject only to Permitted Liens) under
Applicable Law and will be maintained as such throughout the term of this Agreement. The Purchaser
shall have, in addition to the rights and remedies which it may have under this Agreement, all
other rights and remedies provided to a secured creditor under the UCC and other Applicable Law,
which rights and remedies shall be cumulative.
(b) It is the intention of each of the parties hereto that the Sale Portfolio Sold by the
Seller to the Purchaser pursuant to this Agreement shall constitute assets owned by the Purchaser
and shall not be part of the Sellers estate in the event of the filing of a bankruptcy petition by
or against the Seller under any bankruptcy or similar law.
(c) The Purchaser agrees to treat, and shall cause the Seller to treat, for all purposes
(other than tax and accounting purposes), the transactions effected by this Agreement as sales of
assets to the Purchaser. The Seller agrees to reflect in the Sellers financial records and to
include a note in the publicly filed annual and quarterly financial statements of Fifth Street
9
indicating that: (i) assets related to transactions (including transactions pursuant to the
Transaction Documents) that do not meet SFAS 140 requirements for accounting sale treatment are
reflected in the consolidated balance sheet of Fifth Street as finance receivables pledged and
non-recourse, secured borrowings and (ii) those assets are owned by a special purpose entity that
is consolidated in the financial statements of Fifth Street, and the creditors of that special
purpose entity have received ownership and/or security interests in such assets and such assets are
not intended to be available to the creditors of sellers (or any affiliate of the sellers) of such
assets to that special purpose entity.
ARTICLE III.
CONDITIONS OF SALE AND PURCHASE
Section 3.1. Conditions Precedent to Effectiveness. This Agreement shall be effective
upon the satisfaction of the conditions precedent that the Purchaser shall have received on or
before the Closing Date, in form and substance satisfactory to the Purchaser, all of the following:
(i) a copy of this Agreement duly executed by each of the parties hereto;
(ii) a certificate of the Secretary or Assistant Secretary of the Seller, dated the
Closing Date, certifying (A) the names and true signatures of the incumbent officers of the
Seller authorized to sign on behalf of the Seller this Agreement, the Loan Assignments and
all other documents to be executed by the Seller hereunder or in connection herewith (on
which certificate the Purchaser and its assignees may conclusively rely until such time as
the Purchaser and such assignees shall receive from the Seller, a revised certificate
meeting the requirements of this Section 3.1(ii)), (B) that the copy of the
certificate of incorporation of the Seller is a complete and correct copy and that such
certificate of incorporation has not been amended, modified or supplemented and is in full
force and effect, (C) that the copy of the by-laws of the Seller are a complete and correct
copy, and that such by-laws have not been amended, modified or supplemented and are in full
force and effect, and (D) the resolutions of the board of directors of the Seller approving
and authorizing the execution, delivery and performance by the Seller of this Agreement, the
Loan Assignments and all other documents to be executed by the Seller hereunder or in
connection herewith;
(iii) a good standing certificate, dated as of a recent date for the Seller, issued by
the Secretary of State of the Sellers State of incorporation;
(iv) filed, original copies of proper financing statements (the Facility Financing
Statements) describing the Sale Portfolio, and naming the Seller as the
Debtor/Seller, the Purchaser as Secured Party/Buyer and the Collateral Agent, for the
benefit of the Secured Parties, as Total Assignee, or other similar instruments or
documents, in form and substance sufficient for filing under the UCC or any comparable law
of any and all jurisdictions as may be necessary to perfect the Purchasers ownership
interest in all Sale Portfolio;
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(v) copies of properly authorized termination statements or statements of release (on
Form UCC-3) or other similar instruments or documents, if any, in form and substance
sufficient for filing under the UCC or any comparable law of any and all jurisdictions as
may be necessary to release all security interests and similar rights of any Person in the
Sale Portfolio previously granted by the Seller;
(vi) copies of tax and judgment lien searches in all jurisdictions reasonably requested
by the Purchaser or its assignees and requests for information (or a similar UCC search
report certified by a party acceptable to the Purchaser and its assigns), dated a date
reasonably near to the Closing Date, and with respect to such requests for information or
UCC searches, listing all effective financing statements which name the Seller (under its
present name and any previous name) as debtor and which are filed in the State of Delaware,
together with copies of such financing statements (none of which shall cover any Sale
Portfolio);
(vii) all instruments in connection with the transactions contemplated by this
Agreement shall be satisfactory in form and substance to the Purchaser, each Lender Agent
and the Administrative Agent, and the Purchaser, each Lender Agent and the Administrative
Agent shall have received from the Seller copies of all documents (including, without
limitation, records of corporate proceedings, approvals and opinions) relevant to the
transactions herein contemplated as the Purchaser, each Lender Agent and the Administrative
Agent may have requested;
(viii) any necessary third party consents to the closing of the transactions
contemplated hereby, in form and substance satisfactory to the Purchaser;
(ix) the Seller shall have paid all fees then required to be paid by it on the Closing
Date; and
(x) one or more favorable Opinions of Counsel from counsel to the Seller with respect
to the perfection and enforceability of the security interest hereunder and such other
matters as the Purchaser or any assignee thereof may reasonably request.
Section 3.2. Conditions Precedent to All Purchases. The Purchase to take place on the
initial Purchase Date and each Purchase to take place on a subsequent Purchase Date hereunder shall
be subject to the further conditions precedent that:
(a) The following statements shall be true:
(i) The representations and warranties of the Seller contained in Sections 4.1
and 4.2 shall be true and correct on and as of such Purchase Date in all respects,
before and after giving effect to the Purchase to take place on such Purchase Date and to
the application of proceeds therefrom, as though made on and as of such date (other than any
representation and warranty that is made as of a specific date);
(ii) The Seller is in compliance in all respects with each of its covenants and other
agreements set forth herein;
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(iii) No Seller Termination Event (or event which, with the passage of time or the
giving of notice, or both, would constitute a Seller Termination Event) shall have occurred
or would result from such Purchase;
(iv) The Facility Maturity Date has not yet occurred; and
(v) No Applicable Law shall prohibit or enjoin, and no order, judgment or decree of any
federal, state or local court or governmental body, agency or instrumentality shall prohibit
or enjoin, the making of any such Purchase by the Purchaser in accordance with the
provisions hereof.
(b) The Purchaser shall have received a duly executed and completed Loan Assignment along with
a Schedule I that is true, accurate and complete in all respects as of the related Cut-Off
Date.
(c) The Seller shall have delivered to the Collateral Custodian on behalf of the Purchaser and
any assignee thereof each item required to be contained in the Required Loan Documents and the Loan
Asset Checklist of any of the Eligible Loan Assets or Portfolio Assets related thereto being
acquired by the Purchaser within five Business Days of the related Purchase Date.
(d) The Seller shall have taken all steps necessary under all Applicable Law in order to Sell
to the Purchaser the Sale Portfolio being Purchased on such Purchase Date and, upon the Sale of
such Sale Portfolio from the Seller to the Purchaser pursuant to the terms hereof, the Purchaser
will have acquired good and marketable title to and a valid and perfected ownership interest in
such Sale Portfolio, free and clear of any Lien, security interest, charge or encumbrance (other
than Permitted Liens); provided that if such item of Sale Portfolio contains a restriction of
transferability, the applicable Loan Agreement provides that any consents necessary for future
assignments shall not be unreasonably withheld by the applicable Obligor and/or agent, and the
rights to enforce rights and remedies in respect of the same under the applicable Loan Agreement
inure to the benefit of the holder of such Loan Asset (subject to the rights of any applicable
agent or other lenders).
(e) The Seller shall have received a copy of an Approval Notice executed by the Administrative
Agent evidencing the approval of the Administrative Agent, in its sole and absolute discretion of
the Sale to the Purchaser of the Eligible Loan Assets identified on Schedule I to the
applicable Loan Assignment on the applicable Purchase Date.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Seller. The Seller makes the
following representations and warranties, on which the Purchaser relies in acquiring the Sale
Portfolio Purchased hereunder and each of the Secured Parties relies upon in entering into the Loan
and Servicing Agreement. As of each Purchase Date and each Reporting Date (unless a specific date
is specified below), the Seller represents and warrants to the Purchaser for the benefit of the
Purchaser and each of its successors and assigns that:
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(a) Organization and Good Standing. The Seller has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of Delaware (subject to
Section 5.1(f)), with all requisite corporate power and authority to own or lease its
properties and to conduct its business as such business is presently conducted, and had at all
relevant times, and now has, all necessary power, authority and legal right to acquire and own the
Sale Portfolio and to Sell such Sale Portfolio to the Purchaser hereunder.
(b) Due Qualification. The Seller is duly qualified to do business and has obtained
all necessary licenses and approvals, in all jurisdictions in which the ownership or lease of its
property or the conduct of its business requires such qualification, licenses and/or approvals.
(c) Power and Authority; Due Authorization; Execution and Delivery. The Seller (i)
has all necessary corporate power, authority and legal right to (a) execute and deliver this
Agreement, each Loan Assignment and the other Transaction Documents to which it is a party and (b)
carry out the terms of this Agreement, each Loan Assignment and the other Transaction Documents to
which it is a party and (ii) has duly authorized by all necessary corporate action the execution,
delivery and performance of this Agreement, each Loan Assignment and the other Transaction
Documents to which it is a party and the sale and assignment of an ownership interest in the Sale
Portfolio on the terms and conditions herein provided. This Agreement, each Loan Assignment and
each other Transaction Document to which the Seller is a party have been duly executed and
delivered by the Seller.
(d) Valid Conveyance; Binding Obligations. This Agreement, each Loan Assignment and
the Transaction Documents to which the Seller is party have been and, in the case of each Loan
Assignment delivered after the Closing Date, will be, duly executed and delivered by the Seller,
and this Agreement, together with the applicable Loan Assignment in each case, shall effect valid
Sales of Sale Portfolio, enforceable against the Seller and creditors of and purchasers from the
Seller, and this Agreement, each Loan Assignment and such Transaction Documents shall constitute
legal, valid and binding obligations of the Seller enforceable against the Seller in accordance
with their respective terms, except as enforceability may be limited by Bankruptcy Laws and general
principles of equity (whether such enforceability is considered in a proceeding in equity or at
law).
(e) No Violation. The execution, delivery and performance of this Agreement, each
Loan Assignment and all other agreements and instruments executed and delivered or to be executed
and delivered by the Seller pursuant hereto or thereto in connection with the Sale of the Sale
Portfolio will not (i) conflict with, result in any breach of any of the terms and provisions of,
or constitute (with or without notice or lapse of time or both) a default under, the Sellers
certificate of incorporation or by-laws or any contractual obligation of the Seller, (ii) result in
the creation or imposition of any Lien (other than Permitted Liens) upon any of the Sellers
properties pursuant to the terms of any such contractual obligation, other than this Agreement, or
(iii) violate any Applicable Law.
(f) No Proceedings. There is no litigation, proceeding or investigation pending or,
to the knowledge of the Seller, threatened against the Seller, before any Governmental Authority
(i) asserting the invalidity of this Agreement, any Loan Assignment or
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any other Transaction Document to which the Seller is a party, (ii) seeking to prevent the
consummation of any of the transactions contemplated by this Agreement, any Loan Assignment or any
other Transaction Document to which the Seller is a party or (iii) seeking any determination or
ruling that could reasonably be expected to have a Material Adverse Effect.
(g) No Consents. The Seller is not required to obtain the consent or approval of any
other party or any consent, license, approval or authorization, or registration or declaration
with, any Governmental Authority, bureau or agency in connection with the execution, delivery,
performance, validity or enforceability of this Agreement or any Loan Assignment, except those
which have been obtained.
(h) State of Organization, Etc. Except as permitted hereunder, the Sellers legal
name is as set forth in this Agreement. Except as permitted hereunder, the Seller has not changed
its name since its incorporation; does not have tradenames, fictitious names, assumed names or
doing business as names. Except as permitted hereunder, the chief executive office of the Seller
(and the location of the Sellers records regarding the Sale Portfolio (other than those delivered
to the Collateral Custodian)) is at the address of the Seller set forth on the signature pages
hereto. The Sellers only jurisdiction of incorporation is Delaware, and, except as permitted
hereunder, the Seller has not changed its jurisdiction of incorporation.
(i) Bulk Sales. The execution, delivery and performance of this Agreement and the
transactions contemplated hereby do not require compliance with any bulk sales act or similar law
by the Seller.
(j) Solvency. The Seller is not the subject of any Bankruptcy Proceedings or
Bankruptcy Event. The Seller is Solvent and will not become insolvent after giving effect to the
transactions contemplated by this Agreement and the other Transaction Documents. The Seller after
giving effect to the transactions contemplated by this Agreement and the other Transaction
Documents, will have an adequate amount of capital to conduct its business in the foreseeable
future.
(k) Selection Procedures. No procedures believed by the Seller to be adverse to the
interests of the Purchaser were utilized by the Seller in identifying and/or selecting the Eligible
Loan Assets included in the Sale Portfolio.
(l) Compliance with Laws. The Seller has complied in all respects with all Applicable
Law to which it may be subject, and no item of Sale Portfolio contravenes any Applicable Law.
(m) Taxes. The Seller has filed or caused to be filed all tax returns that are
required to be filed by it (subject to any extensions to file properly obtained by the same). The
Seller has paid or made adequate provisions for the payment of all Taxes and all assessments made
against it or any of its property (other than any amount of Tax the validity of which is currently
being contested in good faith by appropriate proceedings and with respect to which reserves in
accordance with GAAP have been provided on the books of the Seller), and no tax lien has been filed
and, to the Sellers knowledge, no claim is being asserted, with respect to any such Tax,
assessment or other charge.
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(n) Exchange Act Compliance; Regulations T, U and X. None of the transactions
contemplated herein or in the other Transaction Documents (including, without limitation, the use
of the proceeds from the Sale of the Sale Portfolio) will violate or result in a violation of
Section 7 of the Exchange Act, or any regulations issued pursuant thereto, including, without
limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R., Chapter II. The Seller does not own or intend to carry or purchase, and no proceeds from
the Sale of the Sale Portfolio will be used to carry or purchase, any Margin Stock or to extend
purpose credit within the meaning of Regulation U.
(o) Loan Assignments. Each Loan Assignment is accurate in all respects.
(p) No Liens, Etc. The Sale Portfolio to be acquired by Purchaser hereunder is owned
by the Seller free and clear of any Lien, security interest, charge or encumbrance (subject only to
Permitted Liens), and the Seller has the full right, corporate power and lawful authority to Sell
the same and interests therein and, upon the Sale thereof hereunder, the Purchaser will have
acquired good and marketable title to and a valid and perfected ownership interest in such Sale
Portfolio, free and clear of any Lien, security interest, charge or encumbrance (subject only to
Permitted Liens); provided that if such item of Sale Portfolio contains a restriction of
transferability, the applicable Loan Agreement provides that any consents necessary for future
assignments shall not be unreasonably withheld by the applicable Obligor and/or agent, and the
rights to enforce rights and remedies in respect of the same under the applicable Loan Agreement
inure to the benefit of the holder of such Loan Asset (subject to the rights of any applicable
agent or other lenders). No effective financing statement reflecting the Seller or the Sellers
predecessor in interest, as a Debtor, or other instrument similar in effect covering all or any
part of any Sale Portfolio Purchased hereunder is on file in any recording office, except such as
may have been filed in favor of the Collateral Agent as Secured Party or Assignee, in each
case, for the benefit of the Secured Parties pursuant to the Loan and Servicing Agreement.
(q) Information True and Correct. All information heretofore furnished by or on
behalf of the Seller to the Purchaser or any assignee thereof in connection with this Agreement or
any transaction contemplated hereby is true and complete and does not omit to state a material fact
necessary to make the statements contained therein, in light of the circumstances under which they
were made, not misleading; provided that, solely with respect to written or electronic information
furnished by or on behalf of the Seller which was provided to the Seller from an Obligor with
respect to a Loan Asset, such information need only be accurate, true and correct to the knowledge
of the Seller; provided, further, that the foregoing proviso shall not apply to any information
presented in a Servicers Certificate, Servicing Report, Notice of Borrowing or Borrowing Base
Certificate.
(r) ERISA Compliance. The present value of all benefits vested under each employee
pension benefit plan, as such term is defined in Section 3 of ERISA, that is, or at any time
during the preceding six years was, maintained by the Seller or any ERISA Affiliate of the Seller,
or open to participation by employees of the Seller or of any ERISA Affiliate of the Seller, as
from time to time in effect (each, a Pension Plan) does not exceed the value of the
assets of the Pension Plan allocable to such vested benefits (based on the value of such assets as
of the last annual valuation date). No prohibited transactions, failure to meet the minimum
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funding standard set forth in Section 302(a) of ERISA and Section 412(a) of the Code (with
respect to any Pension Plan other than a Multiemployer Plan), withdrawals or reportable events have
occurred with respect to any Pension Plan that, in the aggregate, could subject the Seller to any
material Tax, penalty or other liability. No notice of intent to terminate a Pension Plan has been
filed, nor has any Pension Plan been terminated under Section 4041(f) of ERISA, nor has the Pension
Benefit Guaranty Corporation instituted proceedings to terminate, or appoint a trustee to
administer, a Pension Plan and no event has occurred or condition exists that might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Pension Plan.
(s) Investment Company Status. The Seller is an investment company that has elected
to be regulated as a business development company within the meaning of the 1940 Act. The Seller
conducts its business and other activities in compliance in all respects with the applicable
provisions of the 1940 Act and any applicable rules, regulations or orders issued by the SEC
thereunder.
(t) Intent of The Seller. The Seller has not sold, contributed, transferred, assigned
or otherwise conveyed any interest in any Sale Portfolio to the Purchaser with any intent to
hinder, delay or defraud any of the Sellers creditors.
(u) Value Given. The Seller has received reasonably equivalent value from the
Purchaser in exchange for the Sale of such Sale Portfolio Sold hereunder. No such Sale has been
made for or on account of an antecedent debt owed by the Seller and no such transfer is or may be
voidable or subject to avoidance under any section of the Bankruptcy Code.
(v) Accounting. Other than for tax and consolidated accounting purposes, the Seller
will not account for or treat (whether in financial statements or otherwise) the transactions
contemplated hereby in any manner other than as a sale of the Sale Portfolio by the Seller to the
Purchaser.
(w) No Broker-Dealers. The Seller is not a broker-dealer or subject to the Securities
Investor Protection Act of 1970, as amended.
(x) Special Purpose Entity. The Purchaser is an entity with assets and liabilities
separate and distinct from those of the Seller and any Affiliates thereof, and the Seller hereby
acknowledges that the Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent,
the Collateral Custodian and the other Secured Parties are entering into the transactions
contemplated by the Loan and Servicing Agreement in reliance upon the Purchasers identity as a
legal entity that is separate from the Seller and from each other Affiliate of the Seller.
Therefore, from and after the date of execution and delivery of this Agreement, the Seller shall
take all reasonable steps, including, without limitation, all steps that the Administrative Agent
and the Collateral Agent may from time to time request, to maintain the Purchasers identity as a
separate legal entity and to make it manifest to third parties that the Purchaser is an entity with
assets and liabilities distinct from those of the Seller and each other Affiliate thereof and not
just a division of the Seller or any such other Affiliate (other than for tax purposes). Without
limiting the generality of the foregoing and in addition to the other covenants set forth herein,
the Seller shall take all reasonable steps to ensure that the Purchaser has not and will not
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take, refrain from taking, or fail to take (as applicable) any action described in Section
9(j) of its limited liability company operating agreement and Sections 5.01(a), 5.01(b), 5.02(a)
and 5.02(b) of the Loan and Servicing Agreement.
(y) Sale Agreement. This Agreement and the Loan Assignments contemplated herein are
the only agreements or arrangements pursuant to which the Seller Sells the Sale Portfolio Sold by
it to the Purchaser.
(z) Security Interest.
(i) This Agreement creates a valid and continuing security interest (as defined in the
applicable UCC) in the Sale Portfolio in favor of the Purchaser, which security interest is
prior to all other Liens (except for Permitted Liens), and is enforceable as such against
creditors of and purchasers from the Seller;
(ii) the Loan Assets, along with the related Loan Asset Files, constitute either a
general intangible, an instrument, an account, securities entitlement, tangible
chattel paper, certificated security, uncertificated security, supporting obligation,
or insurance (each as defined in the applicable UCC), real property and/or such other
category of collateral under the applicable UCC as to which the Seller has complied with its
obligations under this Section 4.1(z).
(iii) the Seller owns and has good and marketable title to (or with respect to assets
securing any Loan Assets, a valid security interest in) the Sale Portfolio Sold by it to the
Purchaser hereunder on such Purchase Date, free and clear of any Lien (other than Permitted
Liens) of any Person;
(iv) the Seller has received all consents and approvals required by the terms of any
Loan Asset, to the Sale thereof and the granting of a security interest in the Loan Assets
hereunder to the Purchaser;
(v) the Seller has caused the filing of all appropriate financing statements in the
proper filing office in the appropriate jurisdictions under Applicable Law in order to
perfect the security interest in that portion of the Sale Portfolio in which a security
interest may be perfected by filing granted hereunder to the Purchaser; provided that
filings in respect of real property shall not be required;
(vi) other than (i) as expressly permitted by the terms of this Agreement and the Loan
and Servicing Agreement and (ii) the security interest granted to the Purchaser and the
Collateral Agent, on behalf of the Secured Parties, the Seller has not pledged, assigned,
sold, granted a security interest in or otherwise conveyed any of the Sale Portfolio. The
Seller has not authorized the filing of and is not aware of any financing statements against
the Seller that include a description of collateral covering the Sale Portfolio other than
any financing statement (A) relating to the security interest granted to the Purchaser under
this Agreement, or (B) that has been terminated and/or fully and validly assigned to the
Collateral Agent on or prior to the date hereof. The Seller is not aware of the filing of
any judgment or tax lien filings against the Seller;
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(vii) all original executed copies of each underlying promissory note or copies of each
Loan Asset Register, as applicable, that constitute or evidence each Loan Asset have been,
or subject to the delivery requirements contained herein, will be delivered to the
Collateral Custodian;
(viii) other than in the case of Noteless Loan Assets, the Seller has received, or
subject to the delivery requirements herein will receive, a written acknowledgment from the
Collateral Custodian that the Collateral Custodian, as the bailee of the Collateral Agent,
is holding the underlying promissory notes that constitute or evidence the Loan Assets
solely on behalf of and for the Collateral Agent, for the benefit of the Secured Parties;
provided that the acknowledgement of the Collateral Custodian set forth in Section 12.11 of
the Loan and Servicing Agreement may serve as such acknowledgement;
(ix) none of the underlying promissory notes or Loan Asset Registers, as applicable,
that constitute or evidence the Loan Assets has any marks or notations indicating that they
have been pledged, assigned or otherwise conveyed to any Person other than the Collateral
Agent, on behalf of the Secured Parties;
(x) with respect to any Sale Portfolio that constitutes a certificated security, such
certificated security has been delivered to the Collateral Custodian, on behalf of the
Secured Parties and, if in registered form, has been specifically Indorsed to the Collateral
Agent, for the benefit of the Secured Parties, or in blank by an effective Indorsement or
has been registered in the name of the Collateral Agent, for the benefit of the Secured
Parties, upon original issue or registration or transfer by the Purchaser of such
certificated security; and
(xi) with respect to any Sale Portfolio that constitutes an uncertificated security,
that the Seller shall cause the issuer of such uncertificated security to register the
Collateral Agent, on behalf of the Secured Parties, as the registered owner of such
uncertificated security.
(aa) Notice to Agents and Obligors. The Seller has directed any agent, administrative
agent or Obligor for any Loan Asset to remit all payments and collections with respect to such Loan
Asset directly to the Collection Account.
(bb) Collections. The Collection Account is the only account to which Obligors have
been instructed to send Interest Collections and Principal Collections on the Sale Portfolio Sold
by the Seller. The Seller acknowledges that all Interest Collections and Principal Collections
received by it or its Affiliates with respect to the Sale Portfolio Purchased by the Purchaser as
contemplated by this Agreement are held and shall be held in trust for the benefit of the Purchaser
(or its assignees) until deposited into the Collection Account as required by the Loan and
Servicing Agreement.
(cc) Set-Off, Etc. No Sale Portfolio has been compromised, adjusted, extended,
satisfied, subordinated, rescinded, set-off or modified by the Seller or the Obligor thereof, and
no Sale Portfolio is subject to compromise, adjustment, extension, satisfaction,
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subordination, rescission, set-off, counterclaim, defense, abatement, suspension, deferment,
deduction, reduction, termination or modification, whether arising out of transactions concerning
the Sale Portfolio or otherwise, by the Seller or the Obligor with respect thereto, except for
amendments, extensions or modifications to such Sale Portfolio otherwise permitted under Section
6.04(a) of the Loan and Servicing Agreement and in accordance with the Servicing Standard.
(dd) Full Payment. As of the related Purchase Date thereof, the Seller has no
knowledge of any fact which should lead it to expect that any Sale Portfolio will not be paid in
full.
(ee) Ownership of the Purchaser. The Seller owns, directly or indirectly, 100% of the
membership interests of the Purchaser, free and clear of any Lien (other than liens pursuant to the
Pledge Agreement). Such membership interests are validly issued, fully paid and non-assessable,
and there are no options, warrants or other rights to acquire membership interests of the
Purchaser.
(ff) Confirmation from the Seller. The Seller has provided written confirmation to
the Purchaser that the Seller will not cause the Purchaser to file a voluntary petition under the
Bankruptcy Code.
(gg) Environmental. With respect to each item of Underlying Collateral as of the
Cut-Off Date for the Loan Asset related to such Underlying Collateral, to the actual knowledge of a
Responsible Officer of the Seller (a) the related Obligors operations comply in all material
respects with all applicable Environmental Laws; (b) none of the related Obligors operations is
the subject of a Federal or state investigation evaluating whether any remedial action, involving
expenditures, is needed to respond to a release of any Hazardous Materials into the environment;
and (c) the related Obligor does not have any material contingent liability in connection with any
release of any Hazardous Materials into the environment. As of the Cut-Off Date for the Loan Asset
related to such Underlying Collateral, the Seller has not received any written or verbal notice of,
or inquiry from any Governmental Authority regarding, any violation, alleged violation,
non-compliance, liability or potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of the Underlying Collateral, nor does the Seller have
knowledge or reason to believe that any such notice will be received or is being threatened.
(hh) USA PATRIOT Act. Neither the Seller nor any Affiliate of the Seller is (i) a
country, territory, organization, person or entity named on an Office of Foreign Asset Control
(OFAC) list, (ii) a Person that resides or has a place of business in a country or territory named
on such lists or which is designated as a Non-Cooperative Jurisdiction by the Financial Action
Task Force on Money Laundering, or whose subscription funds are transferred from or through such a
jurisdiction; (iii) a Foreign Shell Bank within the meaning of the USA PATRIOT Act, i.e., a
foreign bank that does not have a physical presence in any country and that is not affiliated with
a bank that has a physical presence and an acceptable level of regulation and supervision; or (iv)
a person or entity that resides in or is organized under the laws of a jurisdiction designated by
the United States Secretary of the Treasury under Sections 311 or 312 of the USA PATRIOT Act as
warranting special measures due to money laundering concerns.
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(ii) Covenants; Seller Termination Event. All covenants, agreements and undertakings
of the Seller hereunder have been fully performed. No event has occurred which constitutes a Seller
Termination Event and no event has occurred and is continuing which, with the passage of time or
the giving of notice, or both would constitute a Seller Termination Event (other than any Seller
Termination Event which has previously been disclosed to the Administrative Agent as such).
(jj) Opinion. The statements of fact in the section heading Assumptions in the
non-consolidation and true sale opinion (the Non-Consolidation/True Sale Opinion) of
Rutan & Tucker, LLP, dated as of the date hereof are true and correct in all respects.
(kk) Accuracy of Representations and Warranties. Each representation or warranty by
the Seller contained (i) herein or (ii) in any certificate or other document furnished by the
Seller to the Purchaser or the Administrative Agent in writing pursuant hereto or in connection
herewith is, as of its date, true and correct in all respects.
(ll) Representations and Warranties for Benefit of the Purchasers Assignees. The
Seller hereby makes each representation and warranty contained in this Agreement and the other
Transaction Documents to which it is a party and that have been executed and delivered on or prior
to such Purchase Date to, and for the benefit of the Purchaser (and its assignees), the
Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the Collateral
Custodian and the other Secured Parties as if the same were set forth in full herein.
It is understood and agreed that the representations and warranties provided in this
Section 4.1 shall survive (x) the Sale of the Sale Portfolio to the Purchaser and (y) and
the grant of a first priority perfected security interest in, to and under the Sale Portfolio
pursuant to the Loan and Servicing Agreement by the Purchaser. Upon discovery by the Seller or the
Purchaser of a breach of any of the foregoing representations and warranties, the party discovering
such breach shall give prompt written notice thereof to the other and to the Administrative Agent
and each Lender Agent immediately upon obtaining knowledge of such breach.
Section 4.2. Representations and Warranties of the Seller Relating to the Agreement and
the Sale Portfolio. The Seller makes the following representations and warranties, on which
the Purchaser relies in acquiring the Sale Portfolio Purchased hereunder and each of the Secured
Parties relies upon in entering into the Loan and Servicing Agreement. As of each Purchase Date and
each Reporting Date, the Seller represents and warrants to the Purchaser for the benefit of the
Purchaser and each of its successors and assigns that:
(a) Binding Obligation, Valid Transfer and Security Interest. This Agreement,
together with the Loan Assignments, constitutes a valid transfer to the Purchaser of all right,
title and interest in, to and under all Sale Portfolio, free and clear of any Lien of any Person
claiming through or under the Seller or its Affiliates, except for Permitted Liens. If the
conveyances contemplated by this Agreement are determined to be a transfer for security, then this
Agreement constitutes a grant of a security interest in all Sale Portfolio to the Purchaser which
upon the delivery of the Required Loan Documents and the filing of the financing statements shall
be a first priority perfected security interest in all Sale Portfolio, subject only to Permitted
Liens. Neither the Seller nor any Person claiming through or under the Seller shall
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have any claim to or interest in the Controlled Accounts; provided if this Agreement
constitutes only a grant of a security interest in such property, then the Seller shall have the
rights in such property as a debtor for purposes of the UCC.
(b) Eligibility of Sale Portfolio. (i) Schedule I is an accurate and complete
listing of all the Sale Portfolio as of the related Cut-Off Date and the information contained
therein with respect to the identity of such Sale Portfolio and the amounts owing thereunder is
true and correct as of the related Cut-Off Date, (ii) each item of the Sale Portfolio Purchased by
the Purchaser hereunder is an Eligible Loan Asset, and (iii) with respect to each item of the Sale
Portfolio all consents, licenses, approvals or authorizations of or registrations or declarations
of any Governmental Authority or any Person required to be obtained, effected or given by the
Seller in connection with the transfer of an ownership interest or security interest in each item
of Sale Portfolio to the Purchaser have been duly obtained, effected or given and are in full force
and effect.
(c) No Fraud. Each Eligible Loan Asset was originated without any fraud or
misrepresentation by the Seller or, to the best of the Sellers knowledge, on the part of the
Obligor.
It is understood and agreed that the representations and warranties provided in this
Section 4.2 shall survive (x) the Sale of the Sale Portfolio to the Purchaser, (y) the
grant of a first priority perfected security interest in, to and under the Sale Portfolio pursuant
to the Loan and Servicing Agreement by the Purchaser and (z) the termination of this Agreement and
the Loan and Servicing Agreement. Upon discovery by the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties, the party discovering such breach shall give
prompt written notice thereof to the other and to the Administrative Agent and each Lender Agent
immediately upon obtaining knowledge of such breach.
Section 4.3. Representations and Warranties of the Purchaser. The Purchaser makes the
following representations and warranties, on which the Seller relies in selling the Sale Portfolio
Sold hereunder and each of the Secured Parties relies upon in entering into the Loan and Servicing
Agreement. As of each Purchase Date and each Reporting Date, the Purchaser represents and warrants
to the Seller for the benefit of the Seller and each of its successors and assigns that:
(a) Organization and Good Standing. The Purchaser has been duly organized and is
validly existing and in good standing as a limited liability company under the laws of the State of
Delaware or such other jurisdiction as permitted under the terms of the Transaction Documents, with
the power and authority to own or lease its properties and to conduct its business as such
properties are currently owned and such business is currently conducted, and had at all relevant
times, and has, all necessary power, authority and legal right to acquire and own the Sale
Portfolio.
(b) Due Qualification. The Purchaser is duly qualified to do business and has
obtained all necessary licenses and approvals in all jurisdictions in which the ownership or lease
of its property or the conduct of its business requires such qualification, licenses and/or
approvals.
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(c) Power and Authority; Due Authorization; Execution and Delivery. The Purchaser (i)
has all necessary limited liability company power, authority and legal right to (a) execute and
deliver this Agreement and the other Transaction Documents to which it is a party and (b) carry out
the terms of this Agreement and the other Transaction Documents to which it is a party and (ii) has
duly authorized by all necessary limited liability company action the execution, delivery and
performance of this Agreement and the other Transaction Documents to which it is a party and the
Purchase of the Sale Portfolio on the terms and conditions herein provided. This Agreement and
each other Transaction Document to which the Purchaser is a party have been duly executed and
delivered by the Purchaser.
(d) No Consent Required. The Purchaser is not required to obtain the consent of any
other Person, or any consent, license, approval or authorization or registration or declaration
with, any Governmental Authority, bureau or agency in connection with the execution, delivery or
performance of this Agreement, each Loan Assignment and the Transaction Documents to which it is a
party, except for such as have been obtained, effected or made.
(e) Binding Obligation. This Agreement and each other Transaction Document to which
the Purchaser is a party constitutes a legal, valid and binding obligation of the Purchaser,
enforceable against the Purchaser in accordance with its respective terms, subject, as to
enforceability, to applicable Bankruptcy Laws and general principles of equity (whether such
enforceability is considered in a proceeding in equity or at law).
(f) No Violation. The consummation of the transactions contemplated by this
Agreement, each Loan Assignment and the other Transaction Documents to which it is a party and the
fulfillment of the terms hereof and thereof will not (i) conflict with, result in any breach of any
of the terms and provisions of, or constitute (with or without notice or lapse of time or both) a
default under, the Purchasers certificate of formation, operating agreement or any contractual
obligation of the Purchaser, (ii) result in the creation or imposition of any Lien (other than
Permitted Liens) upon any of the Purchasers properties pursuant to the terms of any such
contractual obligation, other than this Agreement, or (iii) violate any Applicable Law.
(g) Value Given. The Purchaser has given reasonably equivalent value to the Seller in
exchange for the Sale of such Sale Portfolio, which amount the Purchaser hereby agrees is the fair
market value of such Sale Portfolio. No such Sale has been made for or on account of an antecedent
debt owed by the Seller and no such transfer is or may be voidable or subject to avoidance under
any section of the Bankruptcy Code.
(h) No Proceedings. There is no litigation, proceeding or investigation pending or, to
the knowledge of the Purchaser, threatened against the Purchaser, before any Governmental Authority
(i) asserting the invalidity of this Agreement, any Loan Assignment or any other Transaction
Document to which the Purchaser is a party, (ii) seeking to prevent the consummation of any of the
transactions contemplated by this Agreement, any Loan Assignment or any other Transaction Document
to which the Purchaser is a party or (iii) seeking any determination or ruling that could
reasonably be expected to have a Material Adverse Effect.
22
(i) Sale Agreement. This Agreement and the Loan Assignments contemplated herein are
the only agreements or arrangements pursuant to which the Purchaser Purchases the Sale Portfolio
Sold to it by the Seller.
(j) Investment Company Act. The Purchaser is not required to register as an
investment company under the provisions of the 1940 Act.
(k) Compliance with Law. The Purchaser has complied in all respects with all
Applicable Law to which it may be subject, and no item of Sale Portfolio contravenes any Applicable
Law.
(l) Opinions. The statements of fact in the section heading Assumptions in the
Non-Consolidation/True Sale Opinion are true and correct in all respects.
ARTICLE V.
COVENANTS OF THE SELLER
Section 5.1. Protection of Title of the Purchaser.
(a) On or prior to the Closing Date, the Seller shall have filed or caused to be filed UCC-1
financing statements, naming the Seller as Debtor/Seller, naming the Purchaser as Secured
Party/Buyer, and naming the Collateral Agent, for the benefit of the Secured Parties, as Total
Assignee, and describing the Sale Portfolio to be acquired by the Purchaser, with the office of
the Secretary of State of the state of the jurisdiction of organization of the Seller. From time
to time thereafter, the Seller shall file such financing statements and cause to be filed such
continuation statements, all in such manner and in such places as may be required by law (or deemed
desirable by the Purchaser or any assignee thereof) to fully perfect, preserve, maintain and
protect the ownership interest of the Purchaser under this Agreement and the security interest of
the Collateral Agent for the benefit of the Secured Parties under the Loan and Servicing Agreement,
in the Sale Portfolio acquired by the Purchaser hereunder, as the case may be, and in the proceeds
thereof. The Seller shall deliver (or cause to be delivered) to the Purchaser, the Collateral
Agent, the Collateral Custodian, the Servicer, the Lenders, the Lender Agents and the
Administrative Agent file-stamped copies of, or filing receipts for, any document filed as provided
above, as soon as available following such filing. The Seller agrees that it will from time to
time, at its expense, take all actions, that the Purchaser, the Collateral Agent or the
Administrative Agent may reasonably request in order to perfect, protect or more fully evidence the
Purchases hereunder and the security and/or interest granted in the Sale Portfolio, or to enable
the Purchaser, the Collateral Agent, the Administrative Agent or the Secured Parties to exercise
and enforce their rights and remedies hereunder or under any Transaction Document.
(b) On or prior to each Purchase Date hereunder, the Seller shall take all steps necessary
under all Applicable Law in order to Sell to the Purchaser the Sale Portfolio being acquired by the
Purchaser on such Purchase Date to the Purchaser so that, upon the Sale of such Sale Portfolio from
the Seller to the Purchaser pursuant to the terms hereof on such Purchase Date, the Purchaser will
have acquired good and marketable title to and a valid and perfected ownership interest in such
Sale Portfolio, free and clear of any Lien, security interest, charge or
23
encumbrance or restrictions on transferability (subject only to Permitted Liens). On or prior
to each Purchase Date hereunder, the Seller shall take all steps required under Applicable Law in
order for the Purchaser to grant to the Collateral Agent, for the benefit of the Secured Parties, a
first priority perfected security interest (subject only to Permitted Liens) in the Sale Portfolio
being Purchased by the Purchaser on such Purchase Date and, from time to time thereafter, the
Seller shall take all such actions as may be required by Applicable Law to fully preserve, maintain
and protect the Purchasers ownership interest in, and the Collateral Agents first priority
perfected security interest in (subject only to Permitted Liens), the Sale Portfolio which have
been acquired by the Purchaser hereunder.
(c) The Seller shall direct any agent or administrative agent for any Sale Portfolio
originated or acquired by the Seller to remit all payments and collections with respect to such
Sale Portfolio and direct the Obligor with respect to such Sale Portfolio to remit all such
payments and collections directly to the Collection Account. The Seller will not make any change,
or permit the Servicer to make any change, in its instructions to Obligors regarding payments to be
made to the Seller or the Servicer or payments to be made to the Collection Account, unless the
Purchaser and the Administrative Agent have consented to such change. The Seller shall ensure that
only funds constituting payments and collections relating to Sale Portfolio shall be deposited into
the Collection Account. In the event any payments relating to any Sale Portfolio are remitted
directly to the Seller or any Affiliate of the Seller, the Seller will remit (or will cause all
such payments to be remitted) directly to the Collection Account within one Business Day following
receipt thereof, and, at all times prior to such remittance, the Seller will itself hold or, if
applicable, will cause such payments to be held in trust for the exclusive benefit of the Purchaser
and its assignees. Until so deposited, all such Interest Collections and Principal Collections
shall be held in trust for the Purchaser or its assignees by the Seller.
(d) At any time after the occurrence an Event of Default, the Purchaser, the Collateral Agent
or the Administrative Agent may direct the Seller or the Servicer to notify the Obligors, at
Sellers expense, of the Purchasers (or its assigns) or the Secured Parties interest in the Sale
Portfolio under this Agreement and may direct that payments of all amounts due or that become due
under any or all of the Sale Portfolio be made directly to the Purchaser (or its assigns), the
Collateral Agent or the Administrative Agent.
(e) The Seller shall, not earlier than six months and not later than three months prior to the
fifth anniversary of the date of filing of the financing statement referred to in Section
3.1 or any other financing statement filed pursuant to this Agreement or in connection with any
Purchase hereunder, unless the Collection Date shall have occurred:
(i) file or cause to be filed an appropriate continuation statement with respect to
such financing statement; and
(ii) deliver or cause to be delivered to the Purchaser, the Collateral Agent, the
Administrative Agent and each Lender Agent an opinion of the counsel for Seller, in form and
substance reasonably satisfactory to the Purchaser, the Collateral Agent and the
Administrative Agent, confirming and updating the opinion delivered pursuant to Section
3.1 with respect to perfection and otherwise to the effect that the security interest
hereunder continues to be an enforceable and perfected security interest,
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subject to no other Liens of record except as provided herein or otherwise permitted
hereunder, which opinion may contain usual and customary assumptions, limitations and
exceptions.
(f) The Seller shall not (x) make any change to its corporate name or use any tradenames,
fictitious names, assumed names, doing business as names or other names, move the location of its
principal place of business and chief executive office, change the offices where it keeps records
concerning the Sale Portfolio from the address set forth under its name on the signature pages
hereto, or change the jurisdiction of its incorporation, or (y) move, or consent to the Collateral
Custodian moving, the Required Loan Documents and Loan Asset Files from the location required under
the Transaction Documents, unless, in each case, the Seller shall provide the Administrative Agent
with such Opinions of Counsel and other documents and instruments as the Administrative Agent may
request in connection therewith and has taken all actions required under the UCC of each relevant
jurisdiction in order to continue the first priority perfected security interest of the Purchaser
in the Sale Portfolio.
(g) The Seller shall at all times maintain each office from which it services Sale Portfolio
and its principal executive office within the United States of America.
(h) The Seller shall mark its master data processing records so that, from and after the time
of Sale under this Agreement of Sale Portfolio to the Purchaser and the grant of a security
interest in such Sale Portfolio by the Purchaser to the Collateral Agent for the benefit of the
Secured Parties under the Loan and Servicing Agreement, the Sellers master data processing records
(including archives) that refer to such Sale Portfolio shall indicate clearly that such Sale
Portfolio has been Purchased by the Purchaser hereunder and Pledged by the Purchaser to the
Collateral Agent, on behalf of the Secured Parties, under the Loan and Servicing Agreement.
Indication of the Collateral Agents security interest for the benefit of the Secured Parties in
the Sale Portfolio shall be deleted from or modified on the Sellers computer systems when, and
only when, such Sale Portfolio shall be (i) paid off by the related Obligor, (ii) purchased or
substituted by the Seller in accordance with Section 6.1 or 6.2 hereof or (iii)
released by the Collateral Agent pursuant to Section 2.16 of the Loan and Servicing Agreement.
(i) If the Seller fails to perform any of its obligations hereunder, the Purchaser, the
Collateral Agent or the Administrative Agent may (but shall not be required to) perform, or cause
performance of, such obligation; and the Purchasers, the Collateral Agents or the Administrative
Agents costs and expenses incurred in connection therewith shall be payable by the Seller as
provided in Section 9.1. The Seller irrevocably authorizes the Purchaser, the Collateral
Agent or the Administrative Agent at any time and from time to time at the Purchasers, the
Collateral Agents or the Administrative Agents sole discretion and appoints the Purchaser, the
Collateral Agent and the Administrative Agent as its attorney-in-fact pursuant to a Power of
Attorney substantially in the form of Exhibit C to act on behalf of the Seller (i) to file
financing statements on behalf of the Seller, as debtor, necessary or desirable in the Purchasers,
the Collateral Agents or the Administrative Agents sole discretion to perfect and to maintain the
perfection and priority of the interest of the Purchaser or the Collateral Agent in the Sale
Portfolio and (ii) to file a carbon, photographic or other reproduction of this Agreement or any
financing statement with respect to the Sale Portfolio as a financing statement in such offices as
the Purchaser, the Collateral Agent or the Administrative Agent in their sole discretion
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deem necessary or desirable to perfect and to maintain the perfection and priority of the
interests of the Purchaser or the Collateral Agent in the Sale Portfolio. This appointment is
coupled with an interest and is irrevocable.
Section 5.2. Affirmative Covenants of the Seller.
From the date hereof until the Collection Date:
(a) Compliance with Law. The Seller will comply in all respects with all Applicable
Law, including those applicable to the Seller as a result of its interest in the Sale Portfolio or
any part thereof.
(b) Preservation of Company Existence. The Seller will preserve and maintain its
corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation,
and qualify and remain qualified in good standing as a corporation in each jurisdiction where the
failure to preserve and maintain such existence, rights, franchises, privileges and qualification
could reasonably be expected to have a Material Adverse Effect.
(c) Performance and Compliance with Sale Portfolio. The Seller will, at its expense,
timely and fully perform and comply in all respects with all provisions, covenants and other
promises required to be observed by it under the Sale Portfolio and all other agreements related to
such Sale Portfolio.
(d) Keeping of Records and Books of Account. The Seller will maintain and implement
administrative and operating procedures (including, without limitation, an ability to recreate
records evidencing the Sale Portfolio in the event of the destruction of the originals thereof),
and keep and maintain all documents, books, records and other information reasonably necessary or
advisable for the collection of all or any portion of the Sale Portfolio.
(e) Separate Identity. The Seller acknowledges that the Administrative Agent, the
Collateral Agent, the Collateral Custodian, the Lenders, the Lender Agents and the other Secured
Parties are entering into the transactions contemplated by this Agreement, the Loan and Servicing
Agreement and the other Transaction Documents in reliance upon the Purchasers identity as a legal
entity that is separate from the Seller and each other Affiliate of the Seller. Therefore, from and
after the date of execution and delivery of this Agreement, the Seller will take all reasonable
steps including, without limitation, all steps that the Administrative Agent or the Collateral
Agent may from time to time request to maintain the Purchasers identity as a legal entity that is
separate from the Seller and each other Affiliate of the Seller and to make it manifest to third
parties that the Purchaser is an entity with assets and liabilities distinct from those of the
Seller and each other Affiliate thereof (other than for tax purposes) and not just a division of
the Seller or any such other Affiliate. Without limiting the generality of the foregoing and in
addition to the other covenants set forth herein, the Seller agrees that:
(i) the Seller will take all other actions necessary on its part to ensure that the
Purchaser is at all times in compliance with the criteria and the restrictions set forth in
Section 9(j) of the limited liability company operating agreement of the
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Purchaser and Sections 5.01(a), 5.01(b), 5.02(a) and 5.02(b) of the Loan and Servicing
Agreement;
(ii) the Seller shall maintain corporate records and books of account separate from
those of the Purchaser;
(iii) the annual financial statements of the Seller shall disclose the effects of the
Sellers transactions in accordance with GAAP and the annual financial statements of the
Seller shall not reflect in any way that the assets of the Purchaser, including, without
limitation, the Sale Portfolio, could be available to pay creditors of the Seller or any
other Affiliate of the Seller;
(iv) the resolutions, agreements and other instruments underlying the transactions
described in this Agreement shall be continuously maintained by the Seller as official
records;
(v) the Seller shall maintain an arms-length relationship with the Purchaser and will
not hold itself out as being liable for the debts of the Purchaser;
(vi) the Seller shall keep its assets and its liabilities wholly separate from those of
the Purchaser;
(vii) the Seller will avoid the appearance, and promptly correct any known
misperception of any of the Sellers creditors, that the assets of the Purchaser are
available to pay the obligations and debts of the Seller; and
(viii) to the extent that the Seller services the Loan Assets and performs other
services on the Purchasers behalf, the Seller will clearly identify itself as an agent of
the Purchaser in the performance of such duties.
(f) Taxes. The Seller will file or cause to be filed its tax returns and pay any and
all Taxes imposed on it or its property as required by the Transaction Documents (except as
contemplated in Section 4.1(m)).
(g) Cooperation with Requests for Information or Documents. The Seller will cooperate
fully with all reasonable requests of the Purchaser and its assigns regarding the provision of any
information or documents, necessary or desirable, including the provision of such information or
documents in electronic or machine-readable format, to allow each of the Purchaser and its
assignees to carry out their responsibilities under the Transaction Documents.
(h) Payment, Performance and Discharge of Obligations. The Seller will pay, perform
and discharge all of its obligations and liabilities, including, without limitation, all Taxes,
assessments and governmental charges upon its income and properties, when due, unless and only to
the extent that such obligations, liabilities, Taxes, assessments and governmental charges shall be
contested in good faith and by appropriate proceedings and that, to the extent required by GAAP,
proper and adequate book reserves relating thereto are established by the Seller and then only to
the extent that a bond is filed in cases where the filing of a bond is necessary to avoid the
creation of a Lien against any of its properties.
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(i) Notices.
(i) Income Tax Liability. The Seller will furnish telephonic or facsimile
notice to the Purchaser, the Collateral Agent, the Administrative Agent and each Lender
Agent within 10 Business Days (confirmed in writing within five Business Days thereafter) of
the receipt of revenue agent reports or other written proposals, determinations or
assessments of the Internal Revenue Service or any other taxing authority which propose,
determine or otherwise set forth positive adjustments (i) to the Tax liability of the Seller
or any affiliated group (within the meaning of Section 1504(a)(l) of the Code) of which
the Seller is a member in an amount equal to or greater than $1,000,000 in the aggregate, or
(ii) to the Tax liability of the Purchaser in an amount equal to or greater than $500,000 in
the aggregate. Any such notice shall specify the nature of the items giving rise to such
adjustments and the amounts thereof.
(ii) Auditors Management Letters. Promptly after the receipt thereof, the
Seller will provide the Purchaser, the Collateral Agent, the Administrative Agent and each
Lender Agent with any auditors management letters that are received by the Seller or by its
accountants.
(iii) Representations and Covenants. Promptly, upon receipt of notice or
discovery thereof, the Seller will furnish notice to the Purchaser, the Collateral Agent,
the Administrative Agent and each Lender Agent (i) if any representation or warranty set
forth in Section 4.1 or Section 4.2 was incorrect at the time it was given
or deemed to have been given or (ii) of the breach of any covenant under Section
5.1, Section 5.2 or Section 5.3 and at the same time deliver to the
Purchaser, the Collateral Agent, the Administrative Agent and each Lender Agent a written
notice setting forth in reasonable detail the nature of such facts and circumstances. In
particular, but without limiting the foregoing, the Seller shall notify the Purchaser, the
Collateral Agent, the Administrative Agent and each Lender Agent in the manner set forth in
the preceding sentence before any Purchase Date of any facts or circumstances within the
knowledge of the Seller which would render any of the said representations and warranties
untrue at the date when such representations and warranties were made or deemed to have been
made.
(iv) ERISA. Promptly after receiving notice of any reportable event (as
defined in Title IV of ERISA, other than an event for which the reporting requirements have
been waived by regulations) with respect to the Seller (or any ERISA Affiliate thereof), the
Seller will provide a copy of such notice to the Purchaser, the Collateral Agent, the
Administrative Agent and each Lender Agent.
(v) Proceedings. As soon as possible and in any event within three Business
Days, after the Seller receives notice or obtains knowledge thereof, the Seller will provide
the Purchaser, the Collateral Agent, the Administrative Agent and each Lender Agent with
notice of any settlement of, material judgment (including a material judgment with respect
to the liability phase of a bifurcated trial) in or commencement of any material labor
controversy, material litigation, material action, material suit or material proceeding
before any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, affecting the Sale Portfolio, the
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Transaction Documents, the Collateral Agents, for the benefit of the Secured Parties,
interest in the Sale Portfolio, or the Purchaser, the Servicer, the Seller or the Transferor
or any of their Affiliates. For purposes of this Section 5.2(i), (i) any settlement,
judgment, labor controversy, litigation, action, suit or proceeding affecting the Sale
Portfolio, the Transaction Documents, the Collateral Agents, for the benefit of the Secured
Parties, interest in the Sale Portfolio, or the Purchaser in excess of $500,000 shall be
deemed to be material and (ii) any settlement, judgment, labor controversy, litigation,
action, suit or proceeding affecting the Seller or any of its Affiliates (other than the
Purchaser) in excess of $1,000,000 shall be deemed to be material.
(vi) Material Events. The Seller will, promptly upon becoming aware thereof,
notify the Purchaser, the Collateral Agent, the Administrative Agent and each Lender Agent
of any event or other circumstance that is reasonably likely to have a Material Adverse
Effect.
(vii) Events of Default. The Seller will provide the Purchaser, the Collateral
Agent, the Administrative Agent and each Lender Agent with immediate written notice of the
occurrence of each Event of Default and each Unmatured Event of Default of which the Seller
has knowledge or has received notice. In addition, no later than two Business Days
following the Sellers knowledge or notice of the occurrence of any Event of Default or
Unmatured Event of Default, the Seller will provide to the Purchaser, the Collateral Agent,
the Administrative Agent and each Lender Agent a written statement of a Responsible Officer
of the Seller setting forth the details of such event and the action that the Seller
proposes to take with respect thereto.
(viii) Seller Termination Event and Seller Purchase Event. The Seller will
provide the Purchaser, the Collateral Agent, the Administrative Agent and each Lender Agent
with immediate written notice of the occurrence of each Seller Termination Event and each
Seller Purchase Event of which the Seller has knowledge or has received notice.
(j) Other. The Seller will furnish to the Purchaser, the Collateral Agent, the
Administrative Agent and each Lender Agent promptly, from time to time such other information,
documents, records or reports respecting the Sale Portfolio or the condition or operations,
financial or otherwise, of the Seller as the Purchaser, the Collateral Agent, the Administrative
Agent and each Lender Agent may from time to time reasonably request in order to protect the
interests of the Purchaser, the Administrative Agent, the Collateral Agent, the Lenders, the Lender
Agents or the Secured Parties under or as contemplated by this Agreement and the other Transaction
Documents.
(k) Costs and Expenses. The Seller shall pay all reasonable, documented costs and
disbursements in connection with the performance of its obligations hereunder.
(l) Annual Certificates. On each anniversary of the Closing Date, the Seller shall
deliver an Officers Certificate, in form and substance acceptable to the Purchaser, the
Administrative Agent and each Lender Agent, providing (i) a certification, based upon a review and
summary of UCC search results reasonably satisfactory to the Purchaser and the
29
Administrative Agent, that there is no other interest in the Sale Portfolio perfected by
filing of a UCC financing statement other than in favor of the Purchaser and the Collateral Agent
pursuant to the terms of the Transaction Documents and (ii) a certification, based upon a review
and summary of tax and judgment lien searches satisfactory to the Purchaser and the Administrative
Agent, that there is no other interest in the Sale Portfolio based on any tax or judgment lien.
(m) Opinion. The Seller will comply in all respects with any requirements for future
action set forth in the section heading Assumptions in the Non-Consolidation/True Sale Opinion,
with respect to the Transaction Documents.
(n) Copies of Other Information. The Seller will deliver to the Purchaser, the
Collateral Agent, the Administrative Agent and each Lender Agent:
(i) promptly, but in any event within ten Business Days after the filing thereof, a
copy of (a) each report or other filing made by the Seller or any of its Affiliates with the
Securities and Exchange Commission (the SEC) and required by the SEC to be
delivered to the shareholders of the Seller or any such Affiliate, and (b) each report and
final registration statement of the Seller or any Affiliate filed with the SEC; and
(ii) promptly, from time to time, such other information, documents, records or reports
respecting the Sale Portfolio or the conditions or operations, financial or otherwise, of
the Seller (including, without limitation, reports and notices relating to the Sellers
actions under and compliance with ERISA and the 1940 Act) as the Purchaser, the Collateral
Agent, the Administrative Agent or each Lender Agent may from time to time request in order
to perform their obligations hereunder or under any other Transaction Document or to protect
the interests of the Purchaser under or as contemplated by this Agreement and the other
Transaction Documents.
(o) Disregarded Entity. The Seller shall cause the Purchaser to be disregarded as an
entity separate from its owner pursuant to Treasury Regulation Section 301.7701-3(b) and shall
cause that neither the Purchaser nor any other Person on its behalf shall make an election to be
treated as other than an entity disregarded from its owner under Treasury Regulation Section
301.7701-3(c).
Section 5.3. Negative Covenants of the Seller.
From the date hereof until the Collection Date:
(a) Sale Portfolio Not to be Evidenced by Instruments. The Seller will take no action
to cause any Sale Portfolio that is not, as of the related Purchase Date, as the case may be,
evidenced by an instrument, to be so evidenced except in connection with the enforcement or
collection of such Sale Portfolio.
(b) Security Interests. Except as otherwise permitted herein and in the Loan and
Servicing Agreement, the Seller will not sell, pledge, assign or transfer to any other Person, or
grant, create, incur, assume or suffer to exist any Lien on any Sale Portfolio Sold by the Seller
to the Purchaser hereunder, whether now existing or hereafter transferred hereunder, or any
interest, therein, and the Seller will not sell, pledge, assign or suffer to exist any Lien (except
for
30
Permitted Liens) on its interest in the Sale Portfolio Sold by the Seller to the Purchaser
hereunder. The Seller will promptly notify the Purchaser, the Collateral Agent, each Lender Agent
and the Administrative Agent of the existence of any Lien on any Sale Portfolio and the Seller
shall defend the right, title and interest of the Purchaser and the Collateral Agent, on behalf of
the Secured Parties, in, to and under the Sale Portfolio against all claims of third parties;
provided, that nothing in this Section 5.3(b) shall prevent or be deemed to prohibit the
Seller from suffering to exist Permitted Liens upon any of the Sale Portfolio.
(c) Mergers, Acquisitions, Sales, Etc. The Seller will not consolidate with or merge
into any other Person or convey or transfer its properties and assets substantially as an entirety
to any Person, or sell or assign with or without recourse any Sale Portfolio or any interest
therein (other than in the ordinary course of business or as permitted pursuant to this Agreement
or the Transaction Documents).
(d) Transfer of Purchaser Membership Interests. The Seller shall not transfer, pledge,
participate or otherwise encumber its membership interests in the Purchaser without the prior
written consent of the Administrative Agent and the delivery of an acceptable (in the
Administrative Agents reasonable discretion) non-consolidation opinion (except pursuant to the
terms of the Pledge Agreement).
(e) Restricted Payments. The Seller shall not cause or permit the Purchaser to make
any Purchaser Restricted Junior Payment except that, so long as no Event of Default has occurred or
would result therefrom and no Unmatured Event of Default has occurred and is continuing or would
result therefrom, the Purchaser may declare and make distributions to its member on its membership
interests.
(f) Accounting of Purchases. Other than for tax and consolidated accounting purposes,
the Seller will not account for or treat (whether in financial statements or otherwise) the
transactions contemplated hereby in any manner other than as a sale of the Loan Assets to the
Purchaser.
(g) ERISA Matters. The Seller will not (a) engage, and will exercise its best efforts
not to permit any ERISA Affiliate to engage, in any prohibited transaction (within the meaning of
ERISA Section 406(a) or (b) or Code Section 4975) for which an exemption is not available or has
not previously been obtained from the United States Department of Labor, (b) fail to meet the
minimum funding standard set forth in Section 302(a) of ERISA and Section 412(a) of the Code with
respect to any Pension Plan other than a Multiemployer Plan, (c) fail to make any payments to a
Multiemployer Plan that the Seller or any ERISA Affiliate may be required to make under the
agreement relating to such Multiemployer Plan or any law pertaining thereto, (d) terminate any
Pension Plan so as to result, directly or indirectly, in any liability to the Seller, or (e) permit
to exist any occurrence of any reportable event described in Title IV of ERISA with respect to any
Pension Plan other than an event for which the reporting requirements have been waived by
regulations.
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(h) Extension or Amendment of Sale Portfolio. The Seller will not, except as
otherwise permitted in Section 6.04(a) of the Loan and Servicing Agreement, extend, amend or
otherwise modify, or permit the Servicer to extend, amend or otherwise modify, the terms of any
Sale Portfolio.
(i) Limitation on Financing Activities. The Seller shall not, directly or indirectly,
advance or loan to the Purchaser any funds pursuant to any financial accommodation. For the
avoidance of doubt, this clause (i) shall not prohibit the Seller from contributing Loan Assets to
the Purchaser as contemplated herein or providing cash equity contributions to the Purchaser.
(j) Organizational Documents. The Seller will not cause or permit the Purchaser to
amend, modify, waive or terminate any provision of the Purchasers operating agreement without the
prior written consent of the Administrative Agent.
ARTICLE VI.
REPURCHASES AND SUBSTITUTION BY THE SELLER
Section 6.1. Repurchase of Loan Assets. In the event of the occurrence of a Seller
Purchase Event, the Seller will within 10 Business Days of the discovery by or notice (from any
Person) to the Seller of the Seller Purchase Event, (i) purchase each Loan Asset hereunder which is
affected by or related to such Seller Purchase Event from the Purchaser, and the Seller shall pay
to the Purchaser (by means of a deposit to the Collection Account) the Repurchase Price of such
Loan Asset as of the date of the purchase thereof from the Purchaser or (ii) with the consent of
the Administrative Agent and subject to the satisfaction of the conditions in Section 6.2,
substitute for such Loan Asset, a Substitute Eligible Loan Asset. It is understood and agreed that
the obligation of the Seller to purchase the Loan Assets or substitute a Substitute Eligible Loan
Asset for the Loan Assets which are affected by or related to such Seller Purchase Event is not
intended to, and shall not, constitute a guaranty of the collectability or payment of any Loan
Asset which is not collected, not paid or uncollectible on account of the insolvency, bankruptcy or
financial inability to pay of the related Obligor. Upon deposit in the Collection Account of the
Repurchase Price for any Loan Asset purchased by the Seller, the Purchaser shall, automatically and
without further action be deemed to transfer, assign and set over to the Seller, without recourse,
representation or warranty of any kind, except as to the absence of Liens, charges or encumbrances
created by or arising solely as a result of actions of the Purchaser or the Collateral Agent, all
the right, title and interest of the Purchaser, in, to and under such Loan Asset and all future
monies due or to become due with respect thereto, the Underlying Collateral, all Proceeds of such
Loan Asset and Recoveries and Insurance Proceeds relating thereto, all rights to security for such
Loan Asset and all Proceeds and products of the foregoing. The Purchaser shall (and shall request
the Collateral Agent to), at the sole expense of the Seller, execute such documents and instruments
of transfer as may be prepared by the Seller and take such other actions as may be reasonably
requested by the Seller in order to effect the transfer of such Loan Asset pursuant to this
Section 6.1. Such Sale shall be a sale outright, and not for security.
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Section 6.2. Substitution of Loan Assets.
(a) The Seller shall have the right, but not the obligation, subject to the prior written
consent of the Administrative Agent and the Purchaser, in their sole discretion, to substitute one
or more Eligible Loan Assets (Substitute Eligible Loan Asset) for a Loan Asset (each such
act, a Substitution).
(b) The Substitution shall not occur unless the following conditions are satisfied as of the
date of such Substitution:
(i) the Seller has recommended to the Purchaser and the Administrative Agent (with a
copy to the Collateral Agent and the Collateral Custodian) in writing that the Loan Asset to
be replaced should be replaced (each, a Replaced Loan Asset);
(ii) no event has occurred, or would result from such Substitution, which constitutes
an Event of Default and no event has occurred and is continuing, or would result from such
Substitution, which constitutes an Unmatured Event of Default or a Borrowing Base
Deficiency;
(iii) each Substitute Eligible Loan Asset is an Eligible Loan Asset on the date of
Substitution;
(iv) solely in the case of Substitutions pursuant to this Section 6.2
undertaken because a Seller Purchase Event has occurred, the sum of the Advance Date
Assigned Value multiplied by the Outstanding Balances of such Substitute Eligible Loan
Assets shall be equal or greater than the sum of the Advance Date Assigned Value of the
Replaced Loan Assets multiplied by the Outstanding Balance thereof;
(v) all representations and warranties contained in Sections 4.1 and
4.2 shall be true and correct in all respects as of the date of Substitution (other
than any representation and warranty that is made as of a specific date);
(vi) no selection procedures adverse to the interests of the Purchaser, the
Administrative Agent, the Lenders, the Lender Agents or the other Secured Parties were
utilized by the Seller in the selection of the Loan Asset to be replaced by the Substitute
Eligible Loan Asset;
(vii) the Outstanding Balance of all Loan Assets (other than Warranty Loan Assets),
sold pursuant to Section 2.07(b) of the Loan and Servicing Agreement, substituted pursuant
to this Section 6.2 or released pursuant to Section 2.07(g) of the Loan and
Servicing Agreement for dividend from the Purchaser to the Seller during the 12-month period
(or such lesser number of months as shall have elapsed as of such date) immediately
preceding the proposed date of Substitution does not exceed 10% of the highest aggregate
Outstanding Balance of any month during such 12-month period (or such lesser number of
months as shall have elapsed as of such date);
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(viii) each Loan Asset that is replaced pursuant to the terms of this Section
6.2 shall be substituted only with another Eligible Loan Asset that meets the foregoing
conditions;
(ix) all terms, provisions, representations, warranties and covenants hereunder with
respect to Loan Assets that have been Sold by the Seller to the Purchaser hereunder shall
apply equally to Substitute Eligible Loan Assets; and
(x) the Seller shall deliver to the Purchaser on the date of such Substitution a
certificate of a Responsible Officer certifying that each of the foregoing is true and
correct as of such date.
(c) In addition, in connection with such Substitution, the Seller shall deliver or cause to be
delivered to the Collateral Custodian the related Required Loan Documents. On the date any such
Substitution is completed, the Purchaser shall, automatically and without further action, release
and shall transfer to the Seller, free and clear of any Lien created pursuant to this Agreement,
all of the right, title and interest of the Purchaser in, to and under such Replaced Loan Asset,
and the Purchaser shall be deemed to represent and warrant that it has the company authority and
has taken all necessary company action to accomplish such transfer, but without any other
representation and warranty, express or implied.
Section 6.3. Repurchase Limitations. The Seller and the Purchaser agree that the
Seller and any Affiliate of the Seller may repurchase any Sale Portfolio only from the Purchaser in
the case of a repurchase or Substitution of any Sale Portfolio pursuant to Sections 6.1 or
6.2.
ARTICLE VII.
ADDITIONAL RIGHTS AND OBLIGATIONS IN
RESPECT OF THE SALE PORTFOLIO
Section 7.1. Rights of the Purchaser.
(a) After the occurrence or declaration of the Facility Maturity Date, the Seller hereby
authorizes the Purchaser, the Servicer, the Collateral Agent and the Administrative Agent and/or
their respective designees or assignees to take any and all steps in Sellers name and on behalf of
the Seller that the Purchaser, the Servicer, the Collateral Agent or the Administrative Agent
and/or their respective designees or assignees determine are necessary or appropriate to collect
all amounts due under any and all Sale Portfolio and to enforce or protect the Purchasers, the
Collateral Agents and the Administrative Agents rights under this Agreement, including endorsing
the name of the Seller on checks and other instruments representing Interest Collections and
Principal Collections and enforcing such Sale Portfolio.
(b) Except as set forth in Sections 6.1 and 6.2 with respect to the repurchase
or Substitution of certain Loan Assets, the Purchaser shall have no obligation to account for,
replace, substitute or return any Sale Portfolio to the Seller. The Purchaser shall have no
obligation to account for or to return Interest Collections or Principal Collections, or any
interest or other finance charge collected pursuant thereto, to the Seller, irrespective of whether
such
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Interest Collections and Principal Collections and charges are in excess of the Purchase Price
for such Sale Portfolio.
(c) The Purchaser shall have the right to further assign, transfer, deliver, hypothecate,
subdivide or otherwise deal with the Sale Portfolio and all of the Purchasers right, title and
interest in, to and under this Agreement, pursuant to the Loan and Servicing Agreement.
(d) The Purchaser shall have the sole right to retain any gains or profits created by buying,
selling or holding the Sale Portfolio and shall have the sole risk of and responsibility for losses
or damages created by such buying, selling or holding.
Section 7.2. Rights With Respect to Loan Asset Files.
At any time when a Servicer other than Fifth Street Finance Corp. has been designated pursuant
to Article VI of the Loan and Servicing Agreement, the Seller shall, at the Purchasers, the
Collateral Agents, the Collateral Custodians or the Administrative Agents request, assemble all
of the Loan Asset Files which evidence the Sale Portfolio originated by the Seller, or which are
otherwise necessary or desirable to collect such Sale Portfolio, and make the same available to the
Purchaser, the Collateral Agent, the Collateral Custodian or the Administrative Agent at a place
selected by the Purchaser, the Collateral Agent, the Collateral Custodian, the Administrative Agent
or their designee.
Section 7.3. Notice to Collateral Agent, Administrative Agent and each Lender Agent.
The Seller agrees that, concurrently with its delivery to the Purchaser, copies of all
notices, reports, documents and other information required to be delivered by the Seller to the
Purchaser hereunder shall be delivered by the Seller to the Collateral Agent, the Administrative
Agent and each Lender Agent.
ARTICLE VIII.
SELLER TERMINATION EVENTS
Section 8.1. Seller Termination Events.
(a) If any of the following events (each a Seller Termination Event) shall have
occurred:
(i) the Seller shall fail to pay (A) any amount due pursuant to Section 6.1 in
accordance with the provisions thereof or (B) any other amount required to be paid by the
Seller hereunder within two Business Days of the date when due; or
(ii) the Seller shall fail to observe or perform any covenant or agreement in any
material respect applicable to it contained herein (other than as specified in paragraph
(i) of this Section 8.1); and such failure shall continue unremedied for a
period of 30 days (if such failure can be remedied) after the earlier to occur of (i) the
date on which written notice of such failure requiring the same to be remedied shall have
been given to the Seller by the Administrative Agent, the Collateral Agent (at the
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direction of the Administrative Agent) or the Purchaser and (ii) the date on which the
Seller acquires knowledge thereof; or
(iii) any representation, warranty or certification made by the Seller in this
Agreement or in any statement, record, certificate, financial statement or other document
delivered pursuant to this Agreement shall prove to have been incorrect when made or deemed
made in any material respect and shall not have been corrected within 30 Days after the
earlier to occur of (i) the date on which written notice of such incorrectness requiring the
same to be remedied shall have been given to the Seller by the Administrative Agent, the
Collateral Agent (at the direction of the Administrative Agent) or the Purchaser and (ii)
the date on which a Responsible Officer of the Seller acquires knowledge thereof; provided
that a Seller Termination Event shall not be deemed to have occurred under this
paragraph (iii) based upon a Seller Purchase Event if the Seller shall have complied
with the provisions of Section 6.1 in respect thereof; or
(iv) (A) a court having jurisdiction in the premises shall enter a decree or order for
relief in respect of the Seller in an involuntary case under the Bankruptcy Code or any
other Bankruptcy Laws, which decree or order is not stayed or any other similar relief shall
be granted under any applicable federal or state law now or hereafter in effect and shall
not be stayed; (B) (1) any involuntary case is commenced against the Seller under any
Bankruptcy Law now or hereafter in effect, a decree or order of a court having jurisdiction
in the premises for the appointment of a receiver, liquidator, sequestrator, trustee,
custodian or other officer having similar powers over the Seller, or over all or a
substantial part of the property of the Seller, shall have been entered, an interim
receiver, trustee or other custodian of the Seller for all or a substantial part of the
property of the Seller is involuntarily appointed, a warrant of attachment, execution or
similar process is issued against any substantial part of the property of the Seller, and
(2) any event referred to in clause (B)(1) above continues for 60 days unless
dismissed, bonded or disclosed; (C) the Seller shall at its request have a decree or an
order for relief entered with respect to it or commence a voluntary case under any
Bankruptcy Law now or hereafter in effect, or shall consent to the entry of a decree or an
order for relief in an involuntary case, or to the conversion of an involuntary case to a
voluntary case, under any such Bankruptcy Law, consent to the appointment of or taking
possession by a receiver, trustee or other custodian for all or a substantial part of its
property; (D) the making by the Seller of any general assignment for the benefit of
creditors; (E) the inability or failure of the Seller generally to pay its debts as such
debts become due; or (F) the board of directors of the Seller authorizes action to approve
any of the foregoing; or
(v) the occurrence of (A) an Event of Default set forth in Section 7.01 of the Loan and
Servicing Agreement (past any applicable notice or cure period provided in the definition
thereof) or (B) the Facility Maturity Date; or
(vi) the Seller has been terminated as Servicer following a Servicer Termination Event
with respect to the Servicer under the Loan and Servicing Agreement; or
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(vii) a notice of Lien shall have been filed by the Pension Benefit Guaranty
Corporation against the Seller under Section 430(k) of the Code or Section 303(k) of ERISA
for a failure to make a required installment or other payment to a plan to which Section
430(k) of the Code or Section 303(k) of ERISA applies unless there shall have been delivered
to the Administrative Agent and each Lender Agent proof of release of such Lien; or
(viii) any Lien in an amount equal to or greater than $1,000,000 has been asserted
against or imposed on, any real or personal property of the Seller pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. § 9607(1),
or any equivalent or comparable state law, relating to or arising from the costs of,
response to, or investigation, remediation or monitoring of, any environmental contamination
resulting from the current or past operations of the Seller; or
(ix) a Federal tax notice of Lien, in an amount equal to or greater than $1,000,000,
shall have been filed against the Seller unless there shall have been delivered to the
Administrative Agent and each Lender Agent proof of release of such Lien;
then, (A) in the case of any Seller Termination Event described in paragraph (iv),
(v)(A), (vi), (vii), (viii) or (ix) above, the obligation
of the Purchaser to Purchase Sale Portfolio from the Seller shall thereupon automatically terminate
without further notice of any kind, which is hereby waived by the Seller, (B) in the case of any
Seller Termination Event described in paragraph (v)(B) above, the obligation of the
Purchaser to Purchase Sale Portfolio from the Seller shall thereupon terminate without notice of
any kind, which is hereby waived by the Seller unless both the Purchaser and the Seller agree in
writing that such event shall not trigger an Early Termination (as hereinafter defined) hereunder,
and (C) in the case of any other Seller Termination Event, so long as such Seller Termination Event
shall be continuing, the Purchaser or the Administrative Agent may terminate its obligation to
Purchase Sale Portfolio from the Seller by written notice to the Seller (any termination pursuant
to clause (A), (B) or (C) of this Article VIII is herein called an
Early Termination); provided, that, in the event of any involuntary petition or
proceeding as described in paragraphs (iv)(A) and (iv)(B) above, the Purchaser
shall not Purchase Sale Portfolio from the Seller unless such involuntary petition or proceeding is
dismissed, bonded or discharged within 60 days of the filing of such petition or the commencement
of such proceeding.
Section 8.2. Survival of Certain Provisions.
Notwithstanding any provision contained herein to the contrary, the Sellers and the
Purchasers representations, covenants and obligations set forth in Articles IV, V,
VI, and VII, as applicable, create and constitute the continuing obligation of the
parties hereto in accordance with its terms, and shall remain in full force and effect until the
Collection Date; provided, that the rights and remedies with respect to any breach of any
representation and warranty made or deemed made by the Seller pursuant to Articles III and
IV and the provisions of Sections 6.1 and 6.2, the rights and obligations
under Article VII, the indemnification provisions of Article IX and the provisions
of Sections 5.1, 10.2, 10.8, 10.9, 10.10, 10.12,
10.13, 10.14 and 10.17 shall be continuing and shall survive any
termination of this Agreement.
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ARTICLE IX.
INDEMNIFICATION.
Section 9.1. Indemnification by the Seller.
(a) Without limiting any other rights which the Purchaser, any assignee of the Purchaser or
any such Persons respective shareholders, officers, employees, agents, or Affiliates (each, an
Indemnified Party) may have hereunder or under Applicable Law, the Seller hereby agrees
to indemnify any Indemnified Party from and against any and all costs, expenses, losses, damages,
claims, and liabilities, including attorneys fees and disbursements (all of the foregoing, being
collectively referred to as, Indemnified Amounts), awarded against or incurred by such
Indemnified Party or other non-monetary damages of any such Indemnified Party or any of them
arising out of or as a result of this Agreement excluding, however, (a) any such amounts resulting
solely from any gross negligence, bad faith or willful misconduct on the part of the applicable
Indemnified Party or (b) Loan Assets that are uncollectible due to the Obligors financial
inability to pay. Without limiting the foregoing, the Seller shall indemnify each Indemnified Party
for Indemnified Amounts relating to or resulting from any of the following (to the extent not
resulting from the conditions set forth in (a) or (b) above):
(i) any Persons use, ownership or operation of any Underlying Collateral to the extent
that such use, ownership or operation took place prior to the Purchase Date with respect to
the related Sale Portfolio;
(ii) any action taken by the Seller, other than in accordance with this Agreement, in
respect of any portion of the Sale Portfolio;
(iii) any Taxes (other than Taxes based upon the net or gross income of an Indemnified
Party and Taxes that would constitute Excluded Amounts) that may at any time be asserted
against any Indemnified Party with respect to the transactions contemplated in this
Agreement, including, without limitation, any sales, gross receipts, general corporation,
tangible or intangible personal property, privilege, stamp or license Taxes and costs and
expenses in defending against the same, arising by reason of the acts to be performed by the
Seller under this Agreement and imposed against such Indemnified Party. Without limiting
the foregoing, in the event that the Purchaser, the Collateral Agent, the Collateral
Custodian, the Account Bank, the Servicer, any Lender, any Lender Agent or the
Administrative Agent receives actual notice of any Transfer Taxes arising out of the Sale of
any Sale Portfolio from the Seller to the Purchaser under this Agreement, on written demand
by such party, or upon the Seller otherwise being given notice thereof, the Seller shall
pay, and otherwise indemnify and hold the Purchaser, the Collateral Agent, the Collateral
Custodian, the Account Bank, the Servicer, each Lender, each Lender Agent and the
Administrative Agent harmless, on an after-tax basis, from and against any and all such
Transfer Taxes (it being understood that the Purchaser, the Collateral Agent, the Collateral
Custodian, the Account Bank, the Servicer, the Lenders, the Lender Agents and the
Administrative Agent shall have no contractual obligation to pay such Transfer Taxes);
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(iv) the failure by the Seller to pay when due any Taxes due by the Seller for which
the Seller is liable, including without limitation, sales, excise or personal property Taxes
payable in connection with the Sale Portfolio;
(v) the gross negligence, willful misconduct or bad faith of the Seller in the
performance of its duties under this Agreement or by reason of reckless disregard of the
Sellers obligations and duties under this Agreement;
(vi) any failure of the Seller to perform its duties or obligations in accordance with
the provisions of this Agreement or any of the other Transaction Documents to which it is a
party or any failure by the Seller or any Affiliate thereof to perform its respective duties
under any Sale Portfolio;
(vii) the failure of any Sale Portfolio to comply with all requirements of Applicable
Law as of its Purchase Date;
(viii) the failure by the Seller to comply with all requirements of Section 6.1
hereof;
(ix) the failure by the Seller to comply with any term, provision or covenant contained
in this Agreement or any agreement executed in connection with this Agreement, any
Transaction Document or with any Applicable Law;
(x) any representation or warranty made or deemed made by the Seller, or any of its
officers, under or in connection with this Agreement or any other Transaction Document,
which shall have been false, incorrect or misleading in any respect when made or deemed made
or delivered;
(xi) the failure to vest and maintain vested in the Purchaser an undivided ownership
interest in the Sale Portfolio, together with all Interest Collections and Principal
Collections, free and clear of any Lien (other than Permitted Liens) whether existing at the
time of any Purchase or at any time thereafter;
(xii) the failure to file, or any delay in filing, financing statements, continuation
statements or other similar instruments or documents under the UCC of any applicable
jurisdiction or other Applicable Law with respect to any Sale Portfolio, whether at the time
of any Purchase or at any subsequent time;
(xiii) any dispute, claim, offset or defense (other than the discharge in bankruptcy of
the Obligor) of the Obligor to the payment with respect to any Sale Portfolio (including,
without limitation, a defense based on the Sale Portfolio not being a legal, valid and
binding obligation of such Obligor enforceable against it in accordance with its terms);
(xiv) any inability to obtain any judgment in, or utilize the court or other
adjudication system of, any state in which an Obligor may be located as a result of the
failure of the Seller to qualify to do business or file any notice or business activity
report or any similar report;
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(xv) any action taken by the Seller in the enforcement or collection of any Sale
Portfolio which results in any claim, suit or action of any kind pertaining to the Sale
Portfolio or which reduces or impairs the rights of the Purchaser with respect to any Loan
Asset or the value of any such Loan Asset;
(xvi) any claim, suit or action of any kind arising out of or in connection with
Environmental Laws relating to the Seller or the Sale Portfolio including any vicarious
liability;
(xvii) the commingling of Interest Collections and Principal Collections on the Sale
Portfolio at any time with other funds of the Seller;
(xviii) any investigation, litigation or proceeding related to this Agreement or the
use of proceeds by the Seller or the security interest in the Sale Portfolio granted
hereunder;
(xix) any failure by the Purchaser to give reasonably equivalent value to the Seller in
consideration for the transfer by the Seller to the Purchaser of any item of the Sale
Portfolio or any attempt by any Person to void or otherwise avoid any such transfer under
any statutory provision or common law or equitable action, including, without limitation,
any provision of the Bankruptcy Code;
(xx) the failure of the Seller or any of its agents or representatives to remit to the
Purchaser Interest Collections and Principal Collections on the Sale Portfolio remitted to
the Seller or any such agent or representative as provided in this Agreement; or
(xxi) failure or delay in assisting a successor Servicer in assuming each and all of
the Servicers obligations to service and administer the Collateral Portfolio in accordance
with the Loan and Servicing Agreement, or failure or delay in complying with instructions
from the Administrative Agent with respect thereto.
(b) Any amounts subject to the indemnification provisions of this Section 9.1 shall be
paid by the Seller to the Indemnified Party within two Business Days following such Persons demand
therefor.
(c) If for any reason the indemnification provided above in this Section 9.1 is
unavailable to the Indemnified Party or is insufficient to hold an Indemnified Party harmless, then
the Seller shall contribute to the amount paid or payable by such Indemnified Party as a result of
such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the
relative benefits received by such Indemnified Party, on the one hand, and the Seller as the case
may be, on the other hand, but also the relative fault of such Indemnified Party as well as any
other relevant equitable considerations.
(d) Indemnification under this Section 9.1 shall be in an amount necessary to make the
Indemnified Party whole after taking into account any tax consequences to the Indemnified Party of
the receipt of the indemnity provided hereunder, including the effect of
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such Tax or refund on the amount of Tax measured by net income or profits that is or was
payable by the Indemnified Party.
(e) The obligations of the Seller under this Section 9.1 shall survive the termination
of this Agreement.
Section 9.2. Assignment of Indemnities.
The Seller acknowledges that, pursuant to the Loan and Servicing Agreement, the Purchaser
shall assign its rights of indemnity hereunder to the Collateral Agent, on behalf of the Secured
Parties. Upon such assignment, (a) the Collateral Agent, on behalf of the Secured Parties, shall
have all rights of the Purchaser hereunder and may in turn assign such rights, and (b) the
obligations of the Seller under this Article IX shall inure to the Collateral Agent, on
behalf of the Secured Parties. The Seller agrees that, upon such assignment, the Collateral Agent,
on behalf of the Secured Parties, may enforce directly, without joinder of the Purchaser, the
indemnities set forth in this Article IX.
ARTICLE X.
MISCELLANEOUS
Section 10.1. Liability of the Seller. The Seller shall be liable in accordance
herewith only to the extent of the obligations in this Agreement specifically undertaken by the
Seller and with respect to its representations and warranties expressly set forth hereunder.
Section 10.2. Limitation on Liability. Except with respect to any claim arising
solely out of the willful misconduct or gross negligence of the Lenders, the Lender Agents, the
Collateral Agent, the Collateral Custodian, the Administrative Agent or any other Secured Party, no
claim may be made by the Seller or any other Person against the Lenders, the Lender Agents, the
Collateral Agent, the Collateral Custodian, the Administrative Agent or any other Secured Party or
their respective Affiliates, directors, officers, employees, attorneys or agents for any special,
indirect, consequential or punitive damages in respect of any claim for breach of contract or any
other theory of liability arising out of or related to the transactions contemplated by this
Agreement, or any act, omission or event occurring in connection therewith; and the Seller hereby
waives, releases and agrees not to sue upon any claim for any such damages, whether or not accrued
and whether or not known or suspected to exist in its favor.
Section 10.3. Amendments; Limited Agency. Except as provided in this Section
10.3, no amendment, waiver or other modification of any provision of this Agreement shall be
effective unless signed by the Purchaser and the Seller and consented to in writing by the
Administrative Agent, the Collateral Agent and the Required Lenders. The Purchaser shall provide
not less than ten Business Days prior written notice of any such amendment to the Administrative
Agent, the Collateral Agent, each Lender and each Lender Agent.
Section 10.4. Waivers; Cumulative Remedies. No failure or delay on the part of the
Purchaser (or any assignee thereof) or the Seller, in exercising any power, right, privilege or
remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right, privilege or remedy preclude any other or future exercise
41
thereof or the exercise of any other power, right, privilege or remedy. The powers, rights,
privileges and remedies herein provided are cumulative and not exhaustive of any powers, rights,
privileges and remedies provided by law. Any waiver of this Agreement shall be effective only in
the specific instance and for the specific purpose for which it is given.
Section 10.5. Notices. All demands, notices and other communications hereunder shall,
unless otherwise stated herein, be in writing (which shall include facsimile communication and
communication by e-mail in portable document format (.pdf)) and faxed, e-mailed or delivered, to
each party hereto, at its address set forth under its name on the signature pages hereto or at such
other address as shall be designated by such party in a written notice to the other parties hereto.
Notices and communications by facsimile and e-mail shall be effective when sent (and shall be
followed by hard copy sent by regular mail), and notices and communications sent by other means
shall be effective when received.
Section 10.6. Merger and Integration. Except as specifically stated otherwise herein,
this Agreement, the Loan and Servicing Agreement and the other Transaction Documents set forth the
entire understanding of the parties relating to the subject matter hereof, and all prior
understandings, written or oral, are superseded by this Agreement, the Loan and Servicing Agreement
and the Transaction Documents. This Agreement may not be modified, amended, waived or supplemented
except as provided herein.
Section 10.7. Severability of Provisions. If any one or more of the covenants,
provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such
covenants, provisions or terms shall be deemed severable from the remaining covenants, provisions
or terms of this Agreement and shall in no way affect the validity or enforceability of the other
provisions of this Agreement.
Section 10.8. GOVERNING LAW; JURY WAIVER. THIS AGREEMENT SHALL, IN ACCORDANCE WITH
SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF
THE STATE OF NEW YORK. EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR
INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS
CONTEMPLATED HEREUNDER.
Section 10.9. Consent to Jurisdiction; Service of Process.
(a) Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of any New
York State or Federal court sitting in New York City in any action or proceeding arising out of or
relating to this Agreement, and each party hereto hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such New York State court or,
to the extent permitted by law, in such Federal court. The parties hereto hereby irrevocably waive,
to the fullest extent they may effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding. The parties hereto agree that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law.
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(b) Each of the Seller and the Purchaser agrees that service of process may be effected by
mailing a copy thereof by registered or certified mail, postage prepaid, to the Seller or the
Purchaser, as applicable, at its address specified in Section 10.5. Nothing in this
Section 10.9 shall affect the right of the Seller or the Purchaser to serve legal process
in any other manner permitted by law.
Section 10.10. Costs, Expenses and Taxes.
(a) In addition to the rights of indemnification granted to the Purchaser and its Affiliates
and officers, directors, employees and agents thereof under Article IX hereof, the Seller
agrees to pay on demand all out-of-pocket costs and expenses of the Purchaser or its assignees
incurred in connection with the preparation, execution, delivery, enforcement, administration
(including periodic auditing), renewal, amendment or modification of, any waiver or consent issued
in connection with, this Agreement and the other documents to be delivered hereunder or in
connection herewith, including, without limitation, the fees and out-of-pocket expenses of
counsel with respect thereto and with respect to advising the Purchaser or its assignees as to its
rights and remedies under this Agreement and the other documents to be delivered hereunder or in
connection herewith, and all out-of-pocket costs and expenses, if any (including counsel fees and
expenses), incurred by the Purchaser or its assignees in connection with the enforcement of this
Agreement and the other documents to be delivered hereunder or in connection herewith.
(b) The Seller shall pay on demand any and all stamp, sales, excise and other Taxes and fees
payable or determined to be payable to any Governmental Authority in connection with the execution,
delivery, filing and recording of this Agreement and the other documents to be delivered hereunder.
(c) The Seller shall pay on demand all other out-of-pocket costs, expenses and Taxes
(excluding Taxes imposed on or measured by net income) incurred by the Purchaser or its assignees
in connection with the execution, delivery, filing and recording of this Agreement and the other
documents to be delivered hereunder, including, without limitation, all costs and expenses incurred
by the Purchaser or its assignees in connection with periodic audits of the Sellers books and
records.
Section 10.11. Counterparts. For the purpose of facilitating the execution of this
Agreement and for other purposes, this Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be an original, and all of which
counterparts shall constitute but one and the same instrument. Delivery of an executed counterpart
of a signature page to this Agreement by facsimile or e-mail in portable document format (.pdf)
shall be effective as delivery of a manually executed counterpart of this Agreement.
Section 10.12. Bankruptcy Non-Petition and Limited Recourse; Claims. The Seller hereby
agrees that it will not institute against, or join any other Person in instituting against, the
Purchaser any Bankruptcy Proceeding so long as there shall not have elapsed one year and one day
(or such longer preference period as shall then be in effect) since the Collection Date. The Seller
hereby acknowledges that (i) the Purchaser has no assets other than the Sale Portfolio, (ii) the
Purchaser shall, immediately upon Purchase hereunder, grant a security interest in the Sale
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Portfolio to the Collateral Agent, on behalf of the Secured Parties, pursuant to the Loan and
Servicing Agreement, and (iii) Available Collections generated by the Sale Portfolio will be
applied to payment of the Purchasers obligations under the Loan and Servicing Agreement. In
addition, the Seller shall have no recourse for any amounts payable or any other obligations
arising under this Agreement against any officer, member, director, employee, partner, Affiliate or
security holder of the Purchaser or any of its successors or assigns.
Section 10.13. Binding Effect; Assignability.
(a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
(b) Notwithstanding anything to the contrary contained herein, this Agreement may not be
assigned by the Purchaser or the Seller except as permitted by this Section 10.13 or the
Loan and Servicing Agreement. Simultaneously with the execution and delivery of this Agreement,
the Purchaser will assign all of its right, title and interest in this Agreement to the Collateral
Agent, for the benefit of the Secured Parties, to which assignment the Seller hereby expressly
consents. Upon assignment, the Seller agrees to perform its obligations hereunder for the benefit
of the Collateral Agent, for the benefit of the Secured Parties, under the Loan and Servicing
Agreement and the Collateral Agent, in such capacity, shall be a third party beneficiary hereof.
Upon such assignment, the Collateral Agent, for the benefit of the Secured Parties, under the Loan
and Servicing Agreement may enforce the provisions of this Agreement, exercise the rights of the
Purchaser and enforce the obligations of the Seller hereunder without joinder of the Purchaser.
(c) The Administrative Agent, each Lender Agent, each Lender, the Collateral Custodian, the
Collateral Agent and the other Secured Parties shall be third-party beneficiaries of this
Agreement.
Section 10.14. Waiver of Setoff.
(a) The Sellers obligations under this Agreement shall not be affected by any right of
setoff, counterclaim, recoupment, defense or other right the Seller might have against the
Purchaser, the Administrative Agent, the Lenders, the Lender Agents, the Collateral Agent, the
Collateral Custodian, the other Secured Parties or any assignee of such Persons, all of which
rights are hereby waived by the Seller.
(b) The
Purchaser shall have the right to set-off against the Seller any amounts to which the
Seller may be entitled hereunder and to apply such amounts to any claims the Purchaser may have
against the Seller from time to time under this Agreement. Upon any such set-off, the Purchaser
shall give notice of the amount thereof and the reasons therefor to the Seller.
Section 10.15. Headings and Exhibits. The headings herein are for purposes of
references only and shall not otherwise affect the meaning or interpretation of any provision
hereof. The schedules and exhibits attached hereto and referred to herein shall constitute a part
of this Agreement and are incorporated into this Agreement for all purposes.
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Section 10.16. Rights of Inspection. The Purchaser, the Administrative Agent, each
Lender Agent and their respective representatives and assigns may conduct at any reasonable time,
with reasonable notice, and from time to time, and the Seller will fully cooperate with, a
reasonable number of field examinations and audits of the inventory, the Loan Assets and business
affairs of the Seller each calendar year. Each such inspection shall be at the sole expense of the
Seller. The Purchaser and its representatives and successors and assigns acknowledge that in
exercising the rights and privileges conferred in this Section 10.16, it or its
representatives or assigns may, from time to time, obtain knowledge of information, practices,
books, correspondence and records of a confidential nature and in which the Seller has a
proprietary interest. The Purchaser and its representatives and successors and assigns each agree
that (i) it shall retain in strict confidence and shall use its reasonable efforts to ensure that
its representatives retain in strict confidence and will not disclose without the prior written
consent of the Seller any or all of such information, practices, books, correspondence and records
furnished to them and (ii) that it will not, and will use its reasonable efforts to ensure that its
representatives and assigns will not, make any use whatsoever (other than for the purposes
contemplated by this Agreement) of any of such information, practices, books, correspondence and
records without the prior written consent of the Seller, unless such information is generally
available to the public or is required by law to be disclosed.
Section 10.17. Subordination. After giving effect to any payment relating to any
indebtedness, obligation or claim the Seller may from time to time hold or otherwise have against
the Purchaser or any assets or properties of the Purchaser, whether arising hereunder or otherwise
existing, the Borrowing Base at such time must exceed the Obligations owed by the Purchaser to the
Secured Parties under the Loan and Servicing Agreement. The Seller hereby agrees that at any time
during which the condition set forth in the preceding sentence shall not be satisfied, the Seller
shall be subordinate in right of payment to the prior payment of any indebtedness or obligation of
the Purchaser owing to each Lender, each Lender Agent, the Collateral Agent, the Collateral
Custodian, the Administrative Agent or any other Secured Party under the Loan and Servicing
Agreement.
Section 10.18. Confidentiality. Each of the parties hereto hereby agrees with the
confidentiality provisions set forth in Sections 11.13 and 11.14 of the Loan and Servicing
Agreement.
[Signature pages to follow.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their
respective officers as of the day and year first above written.
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FIFTH STREET FUNDING, LLC,
as the Purchaser
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By: |
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Name: |
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Title: |
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Fifth Street Funding, LLC
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
Fifth Street Funding, LLC
Purchase and Sale Agreement
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FIFTH STREET FINANCE CORP.,
as the Seller
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By: |
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Name: |
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Title: |
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Fifth Street Finance Corp.
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
Fifth Street Funding, LLC
Purchase and Sale Agreement
exv10w8
Exhibit 10.8
EXECUTION COPY
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of November 16, 2009 (this Agreement), by and between
FIFTH STREET FINANCE CORP., a Delaware corporation (the Pledgor) and WELLS FARGO BANK,
NATIONAL ASSOCIATION (Wells Fargo), as collateral agent (in such capacity, the
Collateral Agent), on behalf of the Secured Parties.
WHEREAS, Fifth Street Funding, LLC, a Delaware limited liability company, as borrower (the
Borrower), Fifth Street Finance Corp., as servicer (in such capacity, the
Servicer) and transferor, Wells Fargo Securities, LLC, as the administrative agent (in
such capacity, the Administrative Agent), each of the Conduit Lenders and Institutional
Lenders from time to time party thereto (the Lenders), each of the Lender Agents from
time to time party thereto, Wells Fargo as the Collateral Agent, as the Account Bank and as the
Collateral Custodian, are parties to that certain Loan and Servicing Agreement dated as of November
16, 2009 (as the same may be amended, supplemented, restated or otherwise modified from time to
time in accordance with the terms hereof, the Loan and Servicing Agreement). Capitalized
terms used herein and not otherwise defined herein shall have the meanings attributed thereto in
the Loan and Servicing Agreement.
WHEREAS, the Lenders have agreed to make Advances and certain other financial accommodations
to the Borrower pursuant to, and subject to the terms and conditions of, the Loan and Servicing
Agreement. The obligation of the Lenders to make Advances and certain other financial
accommodations under the Loan and Servicing Agreement is conditioned on the execution and delivery
by the Pledgor of this Agreement securing the full and punctual payment and performance of (a) the
principal of and interest on the Advances, when and as due, whether at maturity, by acceleration,
or otherwise (including, without limitation, all interest thereon, whether accruing prior or
subsequent to the commencement of a bankruptcy or similar proceeding involving the Pledgor as a
debtor and whether or not such interest is an allowed claim in any such proceeding) and (b) all
other Obligations of the Borrower (the foregoing collectively being herein referred to as the
Secured Obligations).
WHEREAS, the Pledgor is the owner of all of the membership interests of the Borrower and will
receive substantial benefits from the Advances and other financial accommodations made available to
the Borrower under the Loan and Servicing Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Pledge and Collateral Assignment. As collateral security for the prompt and
complete payment, performance and observance of all present and future Secured Obligations, the
Pledgor hereby pledges and collaterally assigns to the Collateral Agent for the benefit of the
Secured Parties, and grants to the Collateral Agent for the benefit of the Secured Parties, a lien
on and security interest in the collateral of the Pledgor described in Section 2 hereof
(collectively, the Pledged Collateral).
2. Description of Pledged Collateral. (a) The Pledged Collateral is described as
follows and on any separate schedules at any time furnished by the Pledgor to the Collateral Agent
(which schedules are hereby deemed part of this Agreement):
(i) all right, title and interest of the Pledgor, whether now existing or hereafter
acquired, in (a) the membership interests of the Borrower (the Membership
Interests) as set forth on Schedule I and (b) the Limited Liability Company
Agreement of the Borrower (as the same may be amended, supplemented, restated or otherwise
modified from time to time in accordance with the terms hereof, the LLC Agreement)
under which the Membership Interests exist;
(ii) all right, title and interest of the Pledgor in and to all present and future
payments, proceeds, dividends, distributions, instruments, compensation, property, assets,
interests and rights in connection with or related to the Membership Interests or the LLC
Agreement and all monies due or to become due and payable to the Pledgor in connection with
or related to any of the foregoing or otherwise paid, issued or distributed from time to
time in respect of or in exchange therefor, and any certificate, instrument or other
document evidencing or representing the same (including, without limitation, all proceeds of
dissolution or liquidation); and
(iii) all proceeds (as defined in the UCC as in effect from time to time in the State
of New York (the NY UCC)) of every kind and nature, including proceeds of
proceeds, of any and all of the foregoing (including, without limitation, proceeds which
constitute property of the type described above and to the extent not otherwise included,
all cash proceeds thereof).
(b) The Pledgor and the Borrower each acknowledge that, in conjunction with the exercise of
its remedies following the occurrence of an Event of Default, the Collateral Agent (acting at the
direction of the Administrative Agent) may exercise all rights granted to the Pledgor under the LLC
Agreement without the consent of the Pledgor subject to and in accordance with the terms of
Sections 7 and 9 hereof.
3. Delivery of Certificates, Instruments, Etc.; Pledgor Remains Liable.
(a) The Pledgor shall deliver to the Collateral Agent:
(i) any and all original certificates, instruments and other documents at any time
evidencing or representing the Pledged Collateral to the extent available; and
(ii) any and all original certificates, instruments or other documents at any time
evidencing or representing the Pledged Collateral not delivered on the date hereof within
two Business Days after the Pledgors receipt thereof. Each delivery of Pledged Collateral
shall be accompanied by a schedule showing a description of the collateral theretofor and
then being pledged hereunder, which schedule shall be attached hereto as
Schedule I and made a part hereof. Each schedule so delivered shall supersede
any prior schedules so delivered.
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(b) The Pledgor represents and warrants that none of the Membership Interests constitute a
security within the meaning of the NY UCC and covenants that it will not suffer or permit any
Membership Interest to constitute a security within the meaning of the NY UCC.
(c) Notwithstanding the foregoing, if any of the Pledged Collateral at any time constitutes a
certificated security or instrument (in each case as defined in the NY UCC), such item shall be
in bearer form or, if in registered form, shall be issued in the name of the Collateral Agent or
endorsed to the Collateral Agent or accompanied by undated blank interest powers, note powers,
endorsements or other necessary instruments of transfer, registration or assignment, duly executed
in blank and in form and substance satisfactory to the Collateral Agent.
(d) Notwithstanding the foregoing, if any of the Pledged Collateral at any time constitutes
uncertificated securities within the meaning of the NY UCC, the Pledgor will promptly notify the
Collateral Agent, the Borrower and the Servicer thereof and the Pledgor will promptly take and
cause to be taken, and will cause the issuer to take, all actions required under Articles 8 and 9
of the NY UCC and any other applicable law, to enable the Collateral Agent to acquire control
(within the meaning of such term under Section 8-106 (or its successor provision) of the NY UCC) of
such uncertificated securities and as may be otherwise necessary or deemed appropriate by the
Administrative Agent to perfect the security interest of the Collateral Agent therein.
(e) Anything herein to the contrary notwithstanding, (i) the Pledgor shall remain liable under
the contracts and agreements included in the Pledged Collateral to the extent set forth therein to
perform all of its duties and obligations thereunder to the same extent as if this Agreement had
not been executed, (ii) the exercise by the Collateral Agent of any of the rights hereunder shall
not release the Pledgor from any of its duties or obligations under the contracts and agreements
included in the Pledged Collateral, except to the extent that such duties and obligations may have
been terminated by reason of a sale, transfer or other disposition of such Pledged Collateral as
provided in Section 13 hereof and (iii) the Collateral Agent shall not have any obligation or
liability under the contracts and agreements included in the Pledged Collateral by reason of this
Agreement, nor shall the Collateral Agent be obligated to perform any of the obligations or duties
of the Pledgor thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.
4. Additional Collateral. Subject to Sections 7 and 8 hereof, in case any
distribution payable in additional Pledged Collateral shall be declared with respect to any of the
Pledged Collateral, or any fractions thereof shall be issued pursuant to any transaction involving
any of the Pledged Collateral, or any interests or obligations shall be distributed upon or with
respect to any of the Pledged Collateral, in each case pursuant to a recapitalization or
reclassification of the Membership Interests, or pursuant to the dissolution, liquidation (in whole
or in part), bankruptcy or reorganization of the Borrower, or to the merger or consolidation of
such entity with or into another entity, the interests or obligations so distributed shall be
delivered to the Collateral Agent promptly, and in any event within three Business Days after
receipt thereof, to be held by the
Collateral Agent as additional collateral hereunder subject to the terms of this Agreement,
and all of the same shall constitute Pledged Collateral for all purposes hereof.
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5. Representations, Warranties and Covenants of the Pledgor. The Pledgor hereby
represents, warrants and covenants that:
(a) Pledged Collateral. Set forth on Schedule I hereto is a list and
description of all of the Pledged Collateral complete and accurate as of the date hereof and as of
each date such Schedule I is supplemental or otherwise updated pursuant to the terms
hereof, and the Pledgor is the sole holder of record and the sole beneficial owner of such Pledged
Collateral free and clear of any Lien thereon, except Permitted Liens.
(b) Chief Executive Office; Records; Etc. As of the date hereof, the address of the
chief executive office and principal place of business of the Pledgor, and the location of the
books and records relating to the Pledged Collateral, are set forth below its signature hereto, and
the Pledgor will not change said address or location, other than in accordance with the provisions
of the Transaction Documents, or change its name or its jurisdiction of incorporation, formation or
organization, as applicable, unless it has provided the Collateral Agent with such Opinions of
Counsel and other documents and instruments as the Collateral Agent or the Administrative Agent may
request in connection therewith.
(c) Sale or Other Disposition of Pledged Collateral. Except as otherwise expressly
permitted under Section 8 hereof, the Pledgor will not assign (by operation of law or otherwise),
sell, lease, transfer, pledge or grant a security interest in or otherwise dispose of or abandon,
nor will it suffer or permit any of the same to occur with respect to any Pledged Collateral. The
inclusion of proceeds of the Pledged Collateral under the security interest granted herein shall
not be deemed a consent by the Collateral Agent to any sale or other disposition of any Pledged
Collateral.
(d) Percentage of Outstanding Equity. The Membership Interests constitute, and until
the indefeasible payment and performance in full of the Secured Obligations (other than Obligations
that survive the termination of the Loan and Servicing Agreement) will continue to constitute, 100%
of the membership interests of the Borrower.
(e) No Options or Similar Rights. None of the Membership Interests or other Pledged
Collateral is subject to any options to purchase or similar rights of any Person.
(f) Required Consents. Except as may be required in connection with any disposition
of any portion of the Pledged Collateral by laws affecting the offering and sale of securities
generally, no consent of any Person and no license, permit, approval or authorization of, exemption
by, notice or report to, or registration, filing (other than the filing of financing statements
under the UCC in order to perfect a security interest in that portion of the Pledged Collateral
constituting general intangibles) or declaration with any governmental instrumentality is required
in connection with (i) the execution, delivery or performance by, or enforceability against, the
Pledgor of this Agreement, (ii) the perfection or maintenance of the security interest
created hereby (including the first priority nature of such security interest) or (iii) the
exercise by the Collateral Agent of the voting or other rights provided for in this Agreement.
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(g) Nature of Security Interest. Upon the delivery of control agreements to the
Collateral Agent, with respect to any Pledged Collateral that constitutes deposit accounts,
electronic chattel paper, investment property or letter-of-credit rights, the Collateral Agent on
behalf of the Secured Parties shall have control as defined in Sections 9-104, 9-105, 9-106, or
9-107 of the UCC. With respect to all Pledged Collateral not covered by the preceding sentence,
upon the filing of appropriate financing statements in the office of the Secretary of State of the
State of Delaware by the Pledgor, the Collateral Agent shall have a valid and perfected first
priority, security interest in such Pledged Collateral in favor of the Collateral Agent, on behalf
of the Secured Parties, securing the prompt and complete payment, performance and observance of the
Secured Obligations.
(h) No Modification of Certain Agreements; Certain Notices. The Pledgor will not,
without the prior written consent of the Administrative Agent (a copy of such consent shall be
provided to the Collateral Agent), (i) modify, amend or alter in any respect the terms and
conditions of any agreement included in the Pledged Collateral (including, without limitation, the
LLC Agreement) nor forgive any indebtedness evidenced by any Pledged Collateral, or (ii) execute
any document or instrument or, without limitation of Section 7 hereof, take any other action of any
kind which may, in the reasonable judgment of the Administrative Agent, result in impairing the
value of the Pledged Collateral.
(i) Further Assurances. The Pledgor will, at its sole cost and expense, perform all
acts and execute all documents requested by the Administrative Agent from time to time to evidence,
perfect, maintain or enforce the Collateral Agents first priority security interest granted herein
or otherwise in furtherance of the provisions of this Agreement. The Pledgor authorizes the
Collateral Agent (acting at the direction of the Administrative Agent) to execute any documents in
the Pledgors name as necessary to evidence, perfect, maintain or enforce the Collateral Agents
first priority security interest granted herein or otherwise in furtherance of the provisions of
this Agreement. The Pledgor, to the extent not properly filed by the Pledgor, authorizes the
Collateral Agent (acting at the direction of the Administrative Agent) to file such financing
statements in any appropriate filing office to evidence, perfect, maintain or enforce the
Collateral Agents first priority security interest granted herein or otherwise in furtherance of
the provisions of this Agreement. Nothing herein shall be construed to imply an obligation or duty
on the Collateral Agent to monitor or maintain the perfection or priority of such security
interest.
6. Agreement of the Borrower. The Borrower hereby agrees to be bound by the terms of
this Agreement relating to the Pledged Collateral issued by it and will comply with such terms
insofar as such terms are applicable to it. The Borrower hereby consents (to the extent required
by the LLC Agreement) to the pledge by the Pledgor pursuant to the terms of this Agreement of the
Membership Interests and, subject in each case to compliance with the terms of this Agreement, to
any transfer of Membership Interests pursuant to the terms of this Agreement and in conjunction
with the exercise of its remedies following the occurrence of an Event of Default, to the
substitution of the Collateral Agent or its nominee as a substituted member of the Borrower with
all the rights, powers and duties of a member of the Borrower.
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7. Voting Rights Prior to Default. Except as otherwise provided in Section 9 hereof,
the Pledgor shall be entitled to exercise in a manner consistent with the terms of this Agreement,
the voting, consent and similar rights with respect to the Membership Interests, and for that
purpose the Collateral Agent shall (if any Membership Interests shall be registered in the name of
the Collateral Agent or its nominee) execute or cause to be executed from time to time, at the
expense of the Pledgor, such proxies or other instruments in favor of the Pledgor or its nominee,
in such form and for such purposes as shall be reasonably required by the Pledgor and shall be
specified in a written request therefor, to enable it to exercise such voting power with respect to
such Membership Interests; provided, that no vote shall be cast, consent given, rights exercised or
other action taken by the Pledgor that, in the Administrative Agents judgment, would reasonably be
expected to have an adverse effect on any of the Membership Interests or result in a breach of this
Agreement or the Transaction Documents.
8. Distributions. So long as no Event of Default has occurred, subject to Section
5.02(n) of the Loan and Servicing Agreement, the Pledgor shall be entitled to receive, retain for
its own account and transfer any and all payments, proceeds, dividends, distributions, monies,
compensation, property, assets, instruments or rights paid, issued or distributed from time to time
in respect of the Pledged Collateral free and clear of the liens pursuant to this Agreement. All
payments, proceeds, dividends, distributions, monies, property, assets, instruments or rights which
are received by the Pledgor in violation of the preceding sentence shall be forthwith paid over to
the Collateral Agent, on behalf of the Secured Parties in the same form as so received (with any
necessary endorsement) and the Pledgor shall provide written notification to the Administrative
Agent of such violation and payment.
9. Voting Rights After an Event of Default. Upon the occurrence of an Event of
Default and notice by the Collateral Agent (acting as directed by the Administrative Agent) to the
Pledgor (which notice shall not be required in the event of an Event of Default due to a Bankruptcy
Event of the Pledgor) all rights of the Pledgor to exercise or refrain from exercising the voting,
managerial and other consensual rights which it would otherwise be entitled to exercise pursuant to
Section 7 hereof shall cease, and thereupon the Collateral Agent (acting as directed by the
Administrative Agent) shall be entitled to exercise all voting power and other rights, powers and
privileges with respect to the Membership Interests.
10. Application of Cash Received. Any cash received by the Collateral Agent pursuant
to the provisions of this Agreement shall be applied to the payment of the Secured Obligations as
provided in Section 14 hereof. Nothing contained herein shall be construed as requiring the
Collateral Agent to take any action in connection with the sale or other disposition of any Pledged
Collateral at any time.
11. Expenses. The Pledgor will, upon demand, pay the Collateral Agent and the
Administrative Agent, as applicable, for any and all reasonable out-of-pocket costs, sums, and
expenses which the Collateral Agent or the Administrative Agent, as applicable, may pay or incur
pursuant to the provisions of this Agreement or in enforcing the Secured Obligations or the
security interest granted hereunder, including, but not limited to, all filing or recording fees,
court costs, collection charges, travel expenses, computer fees, telephone fees, duplicating fees
and reasonable attorneys fees and expenses. Such expenses shall include, without limitation,
any such costs paid or incurred by the Collateral Agent or the Administrative Agent, as
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applicable,
in connection with any waivers, amendments, modifications, extensions, renewals or renegotiations.
12. Events of Default. Each of the following events shall constitute an Event of
Default under this Agreement:
(a) the Pledgor fails to make any payment when due hereunder and such failure continues
unremedied for two Business Days; or
(b) the Pledgor fails to make any payment when due in one or more agreements for borrowed
money (other than as specified in clause (a) of this Section 12) in an aggregate
principal amount in excess of $1,000,000 and such failure continues unremedied for two Business
Days and such default is not cured within the applicable cure period, if any, provided for under
such agreement; or
(c) the Pledgor fails to observe or perform in any material respect any covenants or
agreements set forth in this Agreement, and, if such failure is susceptible to cure and is not a
failure with respect to a covenant or agreement to which an express cure period is already
applicable, such failure continues unremedied for a period of 30 days after the Pledgor has actual
knowledge thereof or receives written notice of such failure from the Administrative Agent, the
Collateral Agent (at the direction of the Administrative Agent) or any other Person;
(d) any representation, warranty or certification made by the Pledgor in this Agreement shall
prove to have been incorrect when made in any material respect and, to the extent susceptible to
cure, continues unremedied for a period of 30 days after the Pledgor has knowledge thereof or
receives written notice of such failure from the Administrative Agent, the Collateral Agent (at the
direction of the Administrative Agent) or any other Person; or
(e) the occurrence of any Bankruptcy Event in respect of the Pledgor or the Borrower; or
(f) either (i) any provision of this Agreement or any security interest created hereunder
shall terminate in whole or in part or cease to be effective or the legally valid, binding and
enforceable obligation of the Pledgor, or (ii) the Pledgor or the Borrower contests such
effectiveness; or
(g) the Collateral Agent, on behalf of the Secured Parties, ceases to have a valid, perfected
first priority security interest in all of the Pledged Collateral except as otherwise permitted to
be released in accordance with this Agreement; or
(h) an Event of Default (past any applicable notice or cure period provided in the
definition thereof) under and as defined in the Loan and Servicing Agreement shall have occurred.
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13. Remedies.
(a) Following the occurrence of an Event of Default or, in any case, the declaration of the
Facility Maturity Date, the Collateral Agent (acting as directed by the Administrative Agent) or
the Administrative Agent may exercise in respect of any of the Pledged Collateral, in addition to
other rights and remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party on default under the NY UCC at that time (whether or not applicable to
the affected Pledged Collateral) and may also, without obligation to resort to other security, at
any time and from time to time sell, resell, assign and deliver, in its sole discretion, all or any
of the Pledged Collateral, in one or more parcels at the same or different times, and all right,
title and interest, claim and demand therein and right of redemption thereof, on any securities
exchange on which any Pledged Collateral may be listed, or at public or private sale, for cash,
upon credit or for future delivery, and in connection therewith the Collateral Agent (acting as
directed by the Administrative Agent) or the Administrative Agent may grant options. To the fullest
extent permitted by applicable law, the Pledgor hereby waives and releases any and all equity and
right of redemption with respect to the Pledged Collateral.
(b) If any of the Pledged Collateral is sold by the Collateral Agent (acting at the direction
of the Administrative Agent) or the Administrative Agent upon credit or for future delivery, the
Collateral Agent and the Administrative Agent, as applicable, shall not be liable for the failure
of the purchaser to purchase or pay for the same and, in the event of any such failure, the
Collateral Agent (acting at the direction of the Administrative Agent) or the Administrative Agent
may resell such Pledged Collateral. In no event shall the Pledgor be credited with any part of the
proceeds of sale of any Pledged Collateral until cash payment thereof has actually been received by
the Collateral Agent.
(c) The Collateral Agent (acting at the direction of the Administrative Agent) or the
Administrative Agent may purchase any Pledged Collateral at any public sale and, if any Pledged
Collateral is of a type customarily sold in a recognized market or is of the type which is the
subject of widely distributed standard price quotations, the Collateral Agent (acting at the
direction of the Administrative Agent) or the Administrative Agent may purchase such Pledged
Collateral at a private sale, free from any right of redemption, which is hereby waived and
released to the extent permitted by applicable law, and in each case may make payment therefor by
any means, including, without limitation, by release or discharge of Secured Obligations in lieu of
cash payment.
(d) No demand, advertisement or notice, all of which are hereby expressly waived, shall be
required in connection with any sale or other disposition of any part of the Pledged Collateral
which threatens to decline rapidly in value or which is of a type customarily sold on a recognized
market; otherwise the Collateral Agent (acting at the direction of the Administrative Agent) or the
Administrative Agent shall give the Pledgor at least 10 days prior notice of the time and place of
any public sale and of the time after which any private sale or other disposition is to be made,
which notice the Pledgor agrees is reasonable, all other demands, advertisements and notices being
hereby waived.
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(e) The Collateral Agent (acting at the direction of the Administrative Agent) and the
Administrative Agent shall not be obligated to make any sale of Pledged Collateral if either party
shall determine not to do so, regardless of the fact that notice of sale may have been given. The
Collateral Agent (acting at the direction of the Administrative Agent) or the Administrative Agent
may, without notice or publication, adjourn any public or private sale or cause the same to be
adjourned from time to time by announcement at the time and place fixed for sale, and such sale
may, without further notice, be made at the time and place to which the same was so adjourned.
(f) The remedies provided herein in favor of the Collateral Agent and the Administrative Agent
shall not be deemed to be exclusive, but shall be cumulative, and shall be in addition to all other
remedies in favor of the Collateral Agent and the Administrative Agent existing at law or in
equity.
14. Application of Proceeds of Sale. After the occurrence of an Event of Default, all
proceeds of any sale of Pledged Collateral, as well as all Pledged Collateral consisting of cash,
shall be applied by the Collateral Agent as follows:
FIRST, to the Collateral Agent, on behalf of the Secured Parties, for the payment of all
unpaid reasonable costs and expenses incurred by the Administrative Agent or the Collateral Agent
in connection with such collection or sale or otherwise in connection with this Agreement or with
respect to any of the Secured Obligations, including, but not limited to, all court costs and the
reasonable fees and expenses of its agents and legal counsel and any other reasonable costs or
expenses incurred in connection with the exercise of any right or remedy hereunder or with respect
to any of the Secured Obligations;
SECOND, to the Collateral Agent, on behalf of the Secured Parties, for the payment in full of
all remaining Secured Obligations, which shall be distributed pursuant to Section 2.04(d) of the
Loan and Servicing Agreement (provided that such amounts shall not be duplicative of the amounts
previously paid to the Collateral Agent and the Administrative Agent in accordance with the
preceding clause of this Section 14); and
THIRD, to the Pledgor, its successors and assigns, or as a court of competent jurisdiction may
otherwise direct.
15. Collateral Agent Appointed Attorney-in-Fact.
(a) To effectuate the terms and provisions hereof, the Pledgor hereby appoints (effective upon
the occurrence of any Event of Default) the Collateral Agent as its attorney-in-fact for the
purpose of carrying out the provisions of this Agreement and taking any action and executing any
instrument which the Collateral Agent may deem necessary or advisable to accomplish the purposes
hereof. Without limiting the generality of the foregoing, the Collateral Agent shall, following
the occurrence of an Event of Default, have the right and power to:
(i) receive, endorse and collect all checks and other orders for the payment of money
made payable to the Pledgor representing any interest or other distribution or amount
payable in respect of the Pledged Collateral or any part thereof and to give full discharge
for the same; and
9
(ii) execute endorsements, assignments or other instruments of conveyance or transfer
with respect to all or any of the Pledged Collateral and to exercise all rights and
privileges of (or on behalf of) the owner of any Pledged Collateral, including, without
limitation, all voting rights with respect to the Membership Interests.
(b) All acts done under the foregoing authorization are hereby ratified and approved by the
Pledgor, and neither the Collateral Agent nor any designee or agent thereof shall be liable for any
acts of commission or omission, for any error of judgment or for any mistake of fact or law, absent
willful misconduct or gross negligence as determined in a final judgment by a court of competent
jurisdiction.
(c) This power of attorney, being coupled with an interest, is irrevocable until the
indefeasible payment and performance in full of the Secured Obligations (other than Obligations
that survive the termination of the Loan and Servicing Agreement).
16. Collateral Agents Duties.
(a) Except for treatment of the Pledged Collateral in its possession and the accounting for
moneys actually received by it hereunder, in each case pursuant to the terms hereof, the Collateral
Agent and the Administrative Agent, as applicable, shall have no duty as to any Pledged Collateral
or as to the taking of any necessary steps to preserve rights against prior parties or any other
rights pertaining to the Pledged Collateral. The Collateral Agent and the Administrative Agent, as
applicable, shall not be liable to the Pledgor (i) for any loss or damage sustained by the Pledgor,
or (ii) for any loss, damage, depreciation or other diminution in the value of any of the Pledged
Collateral that may occur as a result of or in connection with or that is in any way related to any
exercise by the Collateral Agent (acting at the direction of the Administrative Agent) or the
Administrative Agent of any right or remedy under this Agreement, any failure to demand, collect or
realize upon any of the Pledged Collateral or any delay in doing so, or any other act or failure to
act on the part of the Collateral Agent (acting at the direction of the Administrative Agent) or
the Administrative Agent, except to the extent that the same is caused by its own gross negligence
or willful misconduct (as determined in a final judgment by a court of competent jurisdiction).
(b) The Pledgor hereby releases the Collateral Agent (in its capacity as Collateral Agent
hereunder) and the Administrative Agent from any claims, causes of action and demands at any time
arising out of or with respect to this Agreement, the Pledged Collateral and/or any actions taken
or omitted to be taken by the Collateral Agent (acting at the direction of the Administrative
Agent) or the Administrative Agent with respect thereto (except such claims, causes of action and
demands arising from the gross negligence or willful misconduct of the Collateral Agent or the
Administrative Agent as determined in a final judgment by a court of competent jurisdiction) and
the Pledgor hereby agrees to hold the Collateral Agent and the Administrative Agent harmless from
and with respect to any and all such claims, causes of action and demands (except such claims,
causes of action and demands arising from the gross negligence or willful misconduct of the
Collateral Agent or the Administrative Agent, as applicable, as determined in a final judgment by a
court of competent jurisdiction).
10
17. Rights and Remedies Not Waived. The Collateral Agents prior recourse to any
Pledged Collateral shall not constitute a condition of any demand, suit or proceeding for payment
or collection of the Secured Obligations. No act, omission or delay by the Collateral Agent shall
constitute a waiver of its rights and remedies hereunder or otherwise. No single or partial waiver
by the Collateral Agent of any default hereunder or right or remedy which it may have shall operate
as a waiver of any other default, right or remedy or of the same default, right or remedy on a
future occasion.
18. Collateral Agent May Perform. If the Pledgor fails to perform any agreement
contained herein, the Collateral Agent (acting at the direction of the Administrative Agent) may
itself perform, or cause performance of, such agreement, and the expenses of the Collateral Agent
incurred in connection therewith shall be payable by the Pledgor pursuant to the terms of Section
11 hereof.
19. Consent to Jurisdiction; Service of Process; Setoff.
(a) Each party hereto hereby irrevocably submits to the non-exclusive jurisdiction of any New
York State or Federal court sitting in New York City in any action or proceeding arising out of or
relating to this Agreement, and each party hereto hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in such New York State court or,
to the extent permitted by law, in such Federal court. The parties hereto hereby irrevocably waive,
to the fullest extent they may effectively do so, the defense of an inconvenient forum to the
maintenance of such action or proceeding. The parties hereto agree that a final judgment in any
such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on
the judgment or in any other manner provided by law. Each of the parties hereto agrees that service
of process may be effected by mailing a copy thereof by registered or certified mail, postage
prepaid, to the Pledgor or the Collateral Agent, as applicable, at its address specified in Section
21 or at such other address as the Collateral Agent shall have been notified in accordance
herewith. Nothing in this Section 19 shall affect the right of the Pledgor or the Collateral Agent
to serve legal process in any other manner permitted by law.
(b) Notwithstanding any contrary provision set forth herein, no claim may be made by the
Pledgor or any other Person against the Collateral Agent or the Administrative Agent or their
respective Affiliates, directors, officers, employees, attorneys or agents for any special,
indirect, consequential or punitive damages in respect to any claim for breach of contract or any
other theory of liability arising out of or related to the transactions contemplated by this
Agreement, or any act, omission or event occurring in connection therewith; and the Pledgor hereby
waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued
and whether or not known or suspected.
(c) The Pledgor agrees that this Paragraph 19 is a specific and material aspect of this
Agreement and acknowledges that the Collateral Agent and the Administrative Agent would not enter
into the Loan and Servicing Agreement if this Paragraph 19 was not part of this Agreement.
11
20. Admissibility of Agreement. The Pledgor agrees that any copy of this Agreement
signed by the Pledgor and transmitted by telecopier or by electronic mail in portable document
format (.pdf) for delivery to the Collateral Agent shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original is in existence.
21. Address for Notices. All notices and other communications hereunder, unless
otherwise stated herein, shall be in writing (which shall include facsimile communication and
communication by e-mail in portable document format (.pdf)) and faxed, e-mailed or delivered, to
each party hereto, at its address set forth under its name on the signature pages hereto or at such
other address as shall be designated by such party in a written notice to the other parties hereto.
Notices and communications by facsimile and e-mail shall be effective when sent (and shall be
followed by hard copy sent by regular mail), and notices and communications sent by other means
shall be effective when received.
22. Terms. All terms defined in the NY UCC and used herein shall have the meanings as
defined in the NY UCC, unless otherwise defined herein or in the Loan and Servicing Agreement or
the context otherwise requires.
23. Amendments and Waivers. No provision hereof shall be modified, altered, waived or
limited except by written instrument expressly referring to this Agreement and to such provision,
and executed by the party to be charged.
24. Continuing Security Interest; Assignments. This Agreement shall create a
continuing security interest in the Pledged Collateral and shall (a) remain in full force and
effect until the indefeasible payment and performance in full of the Secured Obligations (other
than Obligations that survive the termination of the Loan and Servicing Agreement), (b) be binding
upon and inure to the benefit of, and be enforceable by, the Pledgor and its successors and assigns
and (c) be binding upon and inure to the benefit of, and be enforceable by, the Collateral Agent
and its successors, transferees and assigns. Upon the occurrence of an event described in clause
(a) of the preceding sentence, the security interest granted hereby shall terminate and all rights
to the Pledged Collateral shall revert to the Pledgor. Upon any such termination, the Collateral
Agent will, at Pledgors expense, execute and deliver to the Pledgor such documents as the Pledgor
shall reasonably request to evidence such termination and will assign, transfer and deliver to the
Pledgor, without recourse and without representation or warranty, such of the Pledged Collateral as
may then be in possession of the Collateral Agent.
25. Counterparts. This Agreement may be executed by the parties hereto individually
or in any combination, in one or more counterparts; which counterparts may be in the form of
facsimile or electronic imaging, each of which shall be an original and all of which shall together
constitute one and the same agreement.
26. Captions; Separability. The captions of the various sections and paragraphs of
this Agreement have been inserted only for the purposes of convenience; such captions are not a
part of this Agreement and shall not be deemed in any manner to modify, explain, enlarge or
restrict any of the provisions of this Agreement.
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27. Security Interest Absolute. All rights of the Collateral Agent and security
interests hereunder, and all of the obligations of the Pledgor hereunder, shall be absolute and
unconditional, irrespective of:
(i) any lack of validity or enforceability of any Secured Obligation or any agreement
or instrument relating thereto;
(ii) any change in the time, manner or place of payment of, or in any other term of,
all or any of the Secured Obligations, or any other amendment or waiver of or any consent to
any departure from any agreement or instrument relating thereto;
(iii) any exchange, release or non-perfection of any other collateral, or any release
or amendment or waiver of or consent to departure from any guaranty, relating to any of the
Secured Obligations; or
(iv) any other circumstance which might otherwise constitute a defense available to, or
a discharge of, the Pledgor or a third party grantor of a security interest, lien or other
encumbrance.
28. GOVERNING LAW; JURY WAIVER. THIS AGREEMENT SHALL, IN ACCORDANCE WITH SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK, BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK. EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY
OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREUNDER.
29. Schedules. The Collateral Agent is authorized to annex hereto any schedules
referred to herein.
30. Severability. The illegality or unenforceability of any provision of this
Agreement, any Secured Obligation, any agreement or instrument relating thereto or any instrument
or agreement required hereunder shall not in any way affect or impair the legality or
enforceability of the remaining provisions of this Agreement, the Secured Obligations, any
agreement or instrument relating thereto or any instrument or agreement required hereunder.
31. Acknowledgment of Receipt. The Pledgor acknowledges receipt of a copy of this
Agreement.
32. Tax Characterization. The Pledgor shall cause the Borrower not to elect to be
treated as a corporation for U.S. federal income tax purposes and to take all reasonable steps
necessary to avoid being treated as a corporation for U.S. federal income tax purposes. The
Pledgor shall, and shall cause the Borrower to, treat the Advances advanced under the Loan and
Servicing Agreement as indebtedness of the Borrower (or, so long as the Borrower is treated as a
disregarded entity for U.S. federal income tax purposes, as indebtedness of the entity of which it
is considered to be a part) for U.S. federal income tax purposes and to file or cause to be filed
any and all tax forms in a manner consistent therewith.
13
33. Confidentiality. Each party hereto agrees to maintain, and to cause each of its
Affiliates to maintain, the confidentiality of the terms and conditions of the Transaction
Documents and the transactions contemplated hereby and thereby and the identity of the parties
thereto and any other Persons otherwise participating in such transactions, except as may be
requested or required by law, rule, regulation, regulatory authority or self-regulatory authority
or pursuant to other legal process or to officers, directors, employees, agents and advisors of
such party, or to legal counsel to such party and any of their Affiliates and except as otherwise
permitted under Section 11.13 of the Loan and Servicing Agreement.
[Remainder of page intentionally left blank]
14
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and
year first above written.
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FIFTH STREET FINANCE CORP., as Pledgor
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By: |
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Name: |
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Title: |
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Address:
Fifth Street Finance Corp.
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
Fifth Street Funding, LLC
Pledge Agreement
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WELLS FARGO BANK, NATIONAL ASSOCIATION, as Collateral
Agent
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By: |
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Name: |
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Title: |
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Address:
Wells Fargo Bank, National Association
9062 Old Annapolis Rd.
Columbia, Maryland 21045
Attn: CDO Trust ServicesFifth Street Funding, LLC
Facsimile: (281) 667-3933
Phone: (410) 884-2000
Fifth Street Funding, LLC
Pledge Agreement
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Agreed and accepted as of the date first written
above:
FIFTH STREET FUNDING, LLC, as Borrower
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By: |
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Name: |
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Title: |
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Fifth Street Funding, LLC
10 Bank Street, 12th Floor
White Plains, NY 10606
Attention: Bernard D. Berman
Facsimile: (914) 328-4214
Phone: (914) 286-6800
Fifth Street Funding, LLC
Pledge Agreement
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Agreed and accepted as of the date first written
above:
WELLS FARGO SECURITIES, LLC,
as Administrative Agent
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By: |
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Name: |
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Title: |
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Address:
Wells Fargo Securities, LLC
One Wachovia Center, Mail Code: NC0600
Charlotte, North Carolina 28289
Attention: Kevin Sunday
Facsimile No: (704) 715-0067
Confirmation No.: (704) 374-6230
Fifth Street Funding, LLC
Pledge Agreement
SCHEDULE I
to Pledge Agreement
Pledged Collateral
PLEDGOR: FIFTH STREET FINANCE CORP.
Description of Membership Interests
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Membership Interest Issuer |
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Type of Interests |
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Percentage of Outstanding Interests |
FIFTH STREET FUNDING, LLC
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Membership
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100 |
% |
exv31w1
Exhibit 31.1
CERTIFICATION
PURSUANT TO
RULE 13a-14(a)
and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
I, Leonard M. Tannenbaum, Chief Executive Officer of Fifth
Street Finance Corp., certify that:
1. I have reviewed this annual report on
Form 10-K
for the year ended September 30, 2009 of Fifth Street
Finance Corp.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles.
(c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
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By:
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/s/ Leonard
M. Tannenbaum
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Leonard M. Tannenbaum
Chairman, President and Chief Executive Officer
Dated this 9th day of December, 2009.
exv31w2
Exhibit 31.2
CERTIFICATION
PURSUANT TO
RULE 13a-14(a)
and 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
I, William H. Craig, Chief Financial Officer of Fifth Street
Finance Corp., certify that:
1. I have reviewed this annual report on
Form 10-K
for the year ended September 30, 2009 of Fifth Street
Finance Corp.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles.
(c) Evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of the registrants board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
William H. Craig
Chief Financial Officer
Dated this 9th day of December, 2009.
exv32w1
Exhibit 32.1
Certification
of Chief Executive Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
In connection with the annual report on
Form 10-K
for the year ended September 30, 2009 (the
Report) of Fifth Street Finance Corp. (the
Registrant), as filed with the Securities and
Exchange Commission on the date hereof, I, Leonard M.
Tannenbaum, the Chief Executive Officer of the Registrant,
hereby certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Registrant.
/s/ Leonard
M. Tannenbaum
Name: Leonard M. Tannenbaum
Date: December 9, 2009
exv32w2
Exhibit 32.2
Certification
of Chief Financial Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. 1350)
In connection with the annual report on
Form 10-K
for the year ended September 30, 2009 (the
Report) of Fifth Street Finance Corp. (the
Registrant), as filed with the Securities and
Exchange Commission on the date hereof, I, William H.
Craig, the Chief Financial Officer of the Registrant, hereby
certify, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Registrant.
Name: William H. Craig
Date: December 9, 2009