As
filed with the U.S. Securities and Exchange Commission on December 15, 2022
1933
Act File No. 333-259029
1940 Act File No. 811-23384
1940 Act File No. 811-23384
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
N-2
☒
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
☒ Pre-Effective Amendment No. 1
☐ Post-Effective Amendment No.
and
☒ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
☒ Pre-Effective Amendment No. 1
☐ Post-Effective Amendment No.
and
☒ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
☒
Amendment No. 19
EAGLE
POINT INCOME COMPANY INC.
(Exact name of Registrant as specified in charter)
(Exact name of Registrant as specified in charter)
600
Steamboat Road, Suite
202
Greenwich, CT 06830
(Address of Principal Executive Offices)
Greenwich, CT 06830
(Address of Principal Executive Offices)
(203)
340-8500
(Registrant’s telephone number, including Area Code)
(Registrant’s telephone number, including Area Code)
Thomas
P. Majewski
600 Steamboat Road, Suite 202
Greenwich, CT 06830
(Name and address of agent for service)
600 Steamboat Road, Suite 202
Greenwich, CT 06830
(Name and address of agent for service)
Copies
of Communications to:
William J. Tuttle
Erin M. Lett
Kirkland & Ellis LLP
1301 Pennsylvania Ave., N.W.
Washington, DC 20004
(202) 389-5000
William J. Tuttle
Erin M. Lett
Kirkland & Ellis LLP
1301 Pennsylvania Ave., N.W.
Washington, DC 20004
(202) 389-5000
Approximate
date of proposed public offering: As
soon as practicable after the effective date of this Registration Statement.
☐
Check
box if the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans.
☒
Check
box if any securities being registered on this Form will be offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933 (“Securities Act”), other than securities offered in connection with a dividend reinvestment plan.
☒
Check
box if this Form is a registration statement pursuant to General Instruction A.2 or a post-effective amendment thereto.
☐
Check
box if this Form is a registration statement pursuant to General Instruction B or a post-effective amendment thereto that will become
effective upon filing with the Commission pursuant to Rule 462(e) under the Securities Act.
☐
Check
box if this Form is a post-effective amendment to a registration statement filed pursuant to General Instruction B to register additional
securities or additional classes of securities pursuant to Rule 413(b) under the Securities Act.
It
is proposed that this filing will become effective (check appropriate box):
☐
when
declared effective pursuant to Section 8(c) of the Securities Act.
If
appropriate, check the following box:
☐
This
[post-effective] amendment designates a new effective date for a previously filed [post-effective amendment] [registration statement].
☐
This
Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, and the Securities Act
registration statement number of the earlier effective registration statement for the same offering is:
☐
This
Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, and the Securities Act registration statement
number of the earlier effective registration statement for the same offering is:
☐
This
Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, and the Securities Act registration statement
number of the earlier effective registration statement for the same offering is:
Check
each box that appropriately characterizes the Registrant:
☒
Registered
Closed-End Fund (closed-end company that is registered under the Investment Company Act of 1940 (“Investment Company Act”)).
☐
Business
Development Company (closed-end company that intends or has elected to be regulated as a business development company under the Investment
Company Act).
☐
Interval
Fund (Registered Closed-End Fund or a Business Development Company that makes periodic repurchase offers under Rule 23c-3 under the Investment
Company Act).
☒
A.2
Qualified (qualified to register securities pursuant to General Instruction A.2 of this Form).
Well-Known
Seasoned Issuer (as defined by Rule 405 under the Securities Act).
☐
Emerging
Growth Company (as defined by Rule 12b-2 under the Securities Exchange Act of 1934 (“Exchange Act”)).
☐
If
an Emerging Growth Company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of Securities Act.
☐
New
Registrant (registered or regulated under the Investment Company Act for less than 12 calendar months preceding this filing).
The
Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said Section 8(a), may determine.
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* * * * * *
You
should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized any other person
to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it.
We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial
condition and results of operations may have changed since that date. We will notify securityholders promptly of any material change to
this prospectus during the period in which we are required to deliver the prospectus.
i
PROSPECTUS SUMMARY
The
following summary highlights some of the information contained in this prospectus. It is not complete and may not contain all the information
that is important to a decision to invest in our securities. You should read carefully the more detailed information set forth under “Risk
Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms:
•
“Company,”
“we,” “us” and “our” refer to Eagle Point Income Company Inc., a Delaware corporation, or, for periods
prior to our conversion to a corporation on October 16, 2018, EP Income Company LLC, a Delaware limited liability company;
•
“Adviser”
refers to Eagle Point Income Management LLC, a Delaware limited liability company;
•
“Administrator”
refers to Eagle Point Administration LLC, a Delaware limited liability company; and
•
“Risk-adjusted
returns” refers to the profile of expected asset returns across a range of potential macroeconomic scenarios and does not imply
that a particular strategy or investment should be considered low-risk.
Eagle
Point Income Company Inc.
We are
an externally managed, diversified closed-end management investment company that has registered as an investment company under the 1940
Act. We have elected to be treated, and intend to qualify annually, as a regulated investment company, or “RIC,” under Subchapter
M of the Internal Revenue Code of 1986, as amended, or the “Code,” beginning with our tax year ended December 31, 2018.
Our primary
investment objective is to generate high current income, with a secondary objective to generate capital appreciation. We seek to achieve
our investment objectives by investing primarily in junior debt tranches of CLOs, that are collateralized by a portfolio consisting primarily
of below investment grade U.S. senior secured loans with a large number of distinct underlying borrowers across various industry sectors.
We focus on CLO debt tranches rated “BB” (e.g., BB+, BB or BB-, or their equivalent) by Moody’s, S&P or Fitch,
and/or other applicable nationally recognized statistical rating organizations. We refer to such debt tranches in this prospectus as “BB-Rated
CLO Debt.” We may also invest in other junior debt tranches of CLOs, senior debt tranches of CLOs and other related securities and
instruments. In addition, we may invest up to 35% of our total assets (at the time of investment) in CLO equity securities. We expect
our investments in CLO equity securities to primarily reflect minority ownership positions. We may also invest in other securities and
instruments that the Adviser believes are consistent with our investment objectives such as securities issued by other securitization
vehicles, such as collateralized bond obligations, or “CBOs”. The amount that we will invest in other securities and instruments,
which may include investments in debt and other securities issued by CLOs collateralized by non-U.S. loans or securities of other collective
investment vehicles, will vary from time to time and, as such, may constitute a material part of our portfolio on any given date, all
as based on the Adviser’s assessment of prevailing market conditions. The CLO securities in which we primarily seek to invest are
rated below investment grade or, in the case of CLO equity securities, are unrated and are considered speculative with respect to timely
payment of interest and repayment of principal. Below investment grade and unrated securities are also sometimes referred to as “junk”
securities.
These
investment objectives are not fundamental policies of ours and may be changed by our board of directors without prior approval of our
stockholders. See “Business.”
We pursue
a differentiated strategy within the CLO debt market premised upon our Adviser’s strong emphasis on assessing the skill of CLO collateral
managers and analyzing the structure of a CLO.
We seek
to construct a portfolio of CLO securities that provides varied exposure across several key categories, including number and investment
style of CLO collateral managers and CLO vintage period.
We believe
that we are structured as an efficient vehicle for investors to gain exposure to the types of CLO securities and related investments historically
accessed by primarily institutional investors. We believe that our closed-end fund structure allows the Adviser to take a long-term view
from a portfolio management perspective without the uncertainty posed by redemptions in an open-end fund structure. As such, the Adviser
can focus principally on maximizing long-term risk-adjusted returns for the benefit of stockholders.
1
We believe that the
Senior Investment Team’s (as defined below) direct and often longstanding relationships with CLO collateral managers and its CLO
structural expertise and the relative scale of the Adviser and its affiliates in the CLO market are competitive advantages as we seek
to achieve our investment objectives.
Eagle
Point Income Management
The
Adviser manages our investments subject to the supervision of our board of directors pursuant to an investment advisory agreement, or
the “Investment Advisory Agreement.” An affiliate of the Adviser, Eagle Point Credit Management, provides investment professionals
and other resources under a personnel and resources agreement, or the “Personnel and Resources Agreement,” to the Adviser
as the Adviser may determine to be reasonably necessary to the conduct of its operations. An affiliate of the Adviser, the Administrator,
performs, or arranges for the performance of, our required administrative services. For a description of the fees and expenses that we
pay to the Adviser and the Administrator, see “The Adviser and the Administrator — Investment
Advisory Agreement — Management Fee”
and “The Adviser and the Administrator — The Administrator and the
Administration Agreement.”
Eagle
Point Credit Management was established in 2012 by Thomas P. Majewski and Stone Point Capital LLC, or “Stone Point,” as investment
manager of Trident V, L.P. and related investment vehicles, which we refer to collectively as the “Trident V Funds.” Stone
Point, an investment adviser registered with the SEC, is a specialized private equity firm focused on the financial services industry.
The
Adviser was established in September 2018 and is registered as an investment adviser with the SEC. The Adviser, collectively with Eagle
Point Credit Management, as of September 30, 2022, had approximately $7.3 billion of total assets under management, including capital
commitments that were undrawn as of such date. Based on Eagle Point Credit Management’s CLO equity assets under management, the
Adviser believes that, collectively with Eagle Point Credit Management, it is among the largest CLO equity investors in the market. The
Adviser is primarily owned by the Trident V Funds through intermediary holding companies. Additionally, the Senior Investment Team and
an affiliate of Enstar Group Limited, or “Enstar,” hold an indirect ownership interest in the Adviser. The Adviser is ultimately
governed through intermediary holding companies by a board of managers, or the “Adviser’s Board of Managers,” which
includes Mr. Majewski and certain principals of Stone Point. See “The
Adviser and the Administrator.”
The
“Senior Investment Team” is led by Mr. Majewski, Managing Partner of the Adviser, and is also comprised of Daniel W. Ko, Portfolio
Manager, and Daniel M. Spinner, Portfolio Manager. The Senior Investment Team is primarily responsible for our day-to-day investment management
and the implementation of our investment strategy and process.
Each
member of the Senior Investment Team is a CLO industry specialist who has been directly involved in the CLO market for the majority of
his career and has built relationships with key market participants, including CLO collateral managers, investment banks and investors.
Members of the Senior Investment Team have been involved in the CLO market as:
•
the
head of the CLO business at various investment banks;
•
a
lead CLO structurer and collateralized debt obligation, or “CDO,” workout specialist at an investment bank;
•
a
CLO equity and debt investor;
•
principal
investors in CLO collateral management firms; and
•
a
lender and mergers and acquisitions adviser to CLO collateral management firms.
We believe
that the complementary, yet highly specialized, skill set of each member of the Senior Investment Team provides the Adviser with a competitive
advantage in its CLO-focused investment strategy. See “The
Adviser and the Administrator — Portfolio Managers.”
In addition
to managing our investments, the Adviser’s affiliates and the members of the Senior Investment Team manage investment accounts for
other clients, including Eagle Point Credit Company Inc., or “Eagle Point Credit Company” or “ECC,” a publicly
traded, closed-end management investment company
2
that is registered under the 1940 Act
and for which Eagle Point Credit Management serves as investment adviser and Eagle Point Institutional Income Fund, or “Eagle Point
Institutional Income” or “EPIIF,” a non-listed, closed-end management investment company that is registered under the
1940 Act and for which Eagle Point Credit Management serves as investment adviser, privately offered pooled investment vehicles and institutional
separate accounts. Many of these accounts pursue an investment strategy that substantially or partially overlaps with the strategy that
we pursue. See “Risk Factors — Risks
Related to Our Business and Structure — There are significant actual and potential conflicts of interest which could
impact our investment returns.”
CLO Overview
The
CLOs that we primarily target are securitization vehicles that pool portfolios of primarily below investment grade U.S. senior secured
loans. Such pools of underlying assets are often referred to as CLO “collateral.” While the vast majority of the portfolio
of most CLOs consists of senior secured loans, many CLOs enable the CLO collateral manager to invest up to 10% of the portfolio in assets
that are not first lien senior secured loans, including second lien loans, unsecured loans, senior secured bonds and senior unsecured
bonds.
CLOs
are generally required to hold a portfolio of assets that is highly diversified by underlying borrower and industry and that is subject
to a variety of asset concentration limitations. Most CLOs are non-static, revolving structures that generally allow for reinvestment
over a specific period of time (the “reinvestment period”), which is typically up to five years. The terms and covenants of
a typical CLO structure are, with certain exceptions, based primarily on the cash flow generated by, and the par value (as opposed to
the market price or fair value) of, the collateral. These covenants include collateral coverage tests, interest coverage tests and collateral
quality tests.
A CLO
funds the purchase of a portfolio of primarily senior secured loans via the issuance of CLO equity and debt securities in the form of
multiple, primarily floating rate, debt tranches. The CLO debt tranches typically are rated “AAA” (or its equivalent)
at the most senior level down to “BB” or “B” (or its equivalent), which is below investment grade, at the
junior level by Moody’s, S&P and/or Fitch. The interest rate on the CLO debt tranches is the lowest at the AAA-level and generally
increases at each level down the rating scale. The CLO equity tranche is unrated and typically represents approximately 8% to 11% of a
CLO’s capital structure. Below investment grade and unrated securities are sometimes referred to as “junk” securities.
The diagram below is for illustrative purposes only and highlights a hypothetical structure intended to depict a typical CLO. A minority
of CLOs also include a B-rated debt tranche (in which we may invest), and the structure of CLOs in which we invest may otherwise vary
from this example.
CLOs
have two priority-of-payment schedules (commonly called “waterfalls”), which are detailed in a CLO’s indenture and govern
how cash generated from a CLO’s underlying collateral is distributed to the
3
CLO’s debt and equity investors.
The interest waterfall applies to interest payments received on a CLO’s underlying collateral. The principal waterfall applies to
cash generated from principal on the underlying collateral, primarily through loan repayments and the proceeds from loan sales. Through
the interest waterfall, any excess interest-related cash flow available after the required quarterly interest payments to CLO debt investors
are made and certain CLO expenses (such as administration and collateral management fees) are paid is then distributed to the CLO’s
equity investors each quarter, subject to compliance with certain tests. See “Business — CLO
Overview” for a more detailed description of a CLO’s typical structure and certain
key terms and conditions thereof.
A CLO’s
indenture typically requires that the maturity dates of a CLO’s assets, typically five to eight years from the date of issuance
of a senior secured loan, be shorter than the maturity date of the CLO’s liabilities, typically 12 to 13 years from the date of
issuance. However, CLO investors do face reinvestment risk with respect to a CLO’s underlying portfolio. In addition, in most CLO
transactions, CLO debt investors are subject to prepayment risk in that the holders of a majority of the equity tranche can direct a call
or refinancing of a CLO, which would cause the CLO’s outstanding CLO debt securities to be repaid at par. See “Risk
Factors — Risks Related to Our Investments — We and our investments are subject to reinvestment risk.”
Our Structure
The
following chart reflects our organizational structure and our relationship with the Adviser and the Administrator as of the date of this
prospectus:
Financing
and Hedging Strategy
Leverage
by the Company. We may use leverage as and to the extent permitted by the 1940 Act. We are permitted
to obtain leverage using any form of financial leverage instruments, including funds borrowed from banks or other financial institutions,
margin facilities, notes or preferred stock and leverage attributable to reverse repurchase agreements or similar transactions. Over the
long term, management expects us to operate under normal market conditions generally with leverage within a range of 25% to 35% of total
assets through borrowings under the BNP Credit Facility described below, or through the issuance of preferred stock or debt securities,
although the actual amount of our leverage will vary over time. Certain instruments that create leverage are considered to be senior securities
under the 1940 Act.
With
respect to senior securities representing indebtedness (i.e., borrowing or deemed borrowing), other than temporary borrowings as defined
under the 1940 Act, we are required under current law to have an asset coverage of at least 300%, as measured at the time of borrowing
and calculated as the ratio of our total assets (less all liabilities and indebtedness not represented by senior securities) over the
aggregate amount of our outstanding senior securities representing indebtedness. With respect to senior securities that are stocks, we
are required under current law to have an asset coverage of at least 200%, as measured at the time of the issuance of any such shares
of preferred stock and calculated as the ratio of our total assets (less all liabilities and indebtedness not represented by senior securities)
over the aggregate amount of our outstanding senior securities representing indebtedness plus the aggregate liquidation preference of
any outstanding shares of preferred stock.
On
September 24, 2021, we entered into a credit agreement with BNP Paribas, as lender, that established a revolving credit facility, or the
“BNP Credit Facility,” of up to $25,000,000. As of September 30, 2022, we had borrowings outstanding under the BNP Credit
Facility of $21,325,000.
4
As
of September 30, 2022, our leverage, which includes borrowings under the BNP Credit Facility, represented approximately 40.4% of our total
assets (less current liabilities). As of September 30, 2022, we had one series of preferred stock outstanding, our 5.00% Series A Term
Preferred Stock due 2026, or the “Series A Term Preferred Stock”. As of December 31, 2021 and September 30, 2022, our asset
coverage ratio in respect of senior securities representing indebtedness as calculated pursuant to Section 18 of the 1940 Act was 873%
and 688%, respectively, and our asset coverage ratio in respect to our senior securities that are stocks as calculated pursuant to Section
18 of the 1940 Act was 313% and 247%, respectively. In the event we fail to meet our applicable asset coverage ratio requirements, we
may not be able to incur additional debt and/or additional issue preferred stock and could be required by law or otherwise to sell a portion
of our investments to repay some debt or redeem shares of preferred stock (if any) when it is disadvantageous to do so, which could have
a material adverse effect on our operations, and we may not be able to make certain distributions or pay dividends of an amount necessary
to continue to qualify as a RIC for U.S. federal income tax purposes.
We
expect that we will, or that we may need to, raise additional capital in the future to fund our continued growth, and we may do so by
issuing additional shares of preferred stock or debt securities or through other leveraging instruments. Subject to the limitations under
the 1940 Act, we may incur additional leverage opportunistically and may choose to increase or decrease our leverage. In addition, we
may borrow for temporary, emergency or other purposes as permitted under the 1940 Act, which indebtedness would be in addition to the
asset coverage requirements described above. By leveraging our investment portfolio, we may create an opportunity for increased net income
and capital appreciation. However, the use of leverage also involves significant risks and our leverage strategy may not be successful.
For example, the more leverage is employed, the more likely a substantial change will occur in our NAV per share of our common stock.
See “Risk Factors — Risks Related
to Our Investments — We may leverage our portfolio, which would magnify the potential for gain or loss on amounts invested
and will increase the risk of investing in us.”
Derivative
Transactions. We may engage in “Derivative Transactions,” as described below, from
time to time. To the extent we engage in Derivative Transactions, we expect to do so to hedge against interest rate, credit and/or other
risks, or for other investment or risk management purposes. We may use Derivative Transactions for investment purposes to the extent consistent
with our investment objectives if the Adviser deems it appropriate to do so. We may purchase and sell a variety of derivative instruments,
including exchange-listed and over-the-counter, or “OTC,” options, futures, options on futures, swaps and similar instruments,
various interest rate transactions, such as swaps, caps, floors or collars, and credit transactions and credit default swaps. We also
may purchase and sell derivative instruments that combine features of these instruments. Collectively, we refer to these financial management
techniques as “Derivative Transactions.” Our use of Derivative Transactions, if any, will generally be deemed to create leverage
for us and involves significant risks. No assurance can be given that our strategy and use of derivatives will be successful, and our
investment performance could diminish compared with what it would have been if Derivative Transactions were not used. See “Risk
Factors — Risks Related to Our Investments — We are subject to risks associated with any hedging or
Derivative Transactions in which we participate.”
Operating
and Regulatory Structure
We are
an externally managed, diversified closed-end management investment company that has registered as an investment company under the 1940
Act. As a registered closed-end management investment company, we are required to meet certain regulatory tests. See “Regulation
as a Closed-End Management Investment Company.” In addition, we have elected to be treated,
and intend to qualify annually, as a RIC under Subchapter M of the Code, beginning with our tax year ended December 31, 2018.
Our investment
activities are managed by the Adviser and supervised by our board of directors. Under the Investment Advisory Agreement, we have agreed
to pay the Adviser a management fee based on our “Managed Assets.” “Managed Assets” means our total assets (including
assets attributable to our use of leverage) minus the sum of our accrued liabilities (other than liabilities incurred for the purpose
of creating leverage). The management fee is calculated monthly based on our Managed Assets at the end of each calendar month and is payable
quarterly in arrears. The management fee for any partial month will be pro-rated (based on the number of days actually elapsed at the
end of such partial month relative to the total number of days in such calendar month). See “The
Adviser and the Administrator — Investment Advisory Agreement — Management Fee.”
5
We have also entered
into an administration agreement, which we refer to as the “Administration Agreement,” under which we have agreed to reimburse
the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations
under the Administration Agreement. See “The Adviser
and the Administrator — The Administrator and the Administration Agreement.”
Conflicts
of Interest
Our executive
officers and directors, and the Adviser and certain of its affiliates and their officers and employees, including the Senior Investment
Team, have several conflicts of interest as a result of the other activities in which they engage. The Adviser and the Administrator are
affiliated with other entities engaged in the financial services business. In particular, the Adviser and the Administrator are affiliated
with Eagle Point Credit Management and Stone Point, and certain members of the Adviser’s Board of Managers are principals of Stone
Point. Pursuant to certain management agreements, Stone Point has received delegated authority to act as the investment manager of the
Trident V Funds. The Adviser and the Administrator are primarily owned by the Trident V Funds through intermediary holding companies.
The Trident V Funds and other private equity funds managed by Stone Point invest in financial services companies. Additionally, an affiliate
of Enstar and its other affiliates that are our stockholders indirectly own a portion of the limited liability company interests in the
Adviser. Also, under the Personnel and Resources Agreement, Eagle Point Credit Management makes available the personnel and resources,
including portfolio managers and investment personnel, to the Adviser as the Adviser may determine to be reasonably necessary to the conduct
of its operations. These relationships may cause the Adviser’s, the Administrator’s and certain of their affiliates’
interests, and the interests of their officers and employees, including the Senior Investment Team, to diverge from our interests and
may result in conflicts of interest that may not be foreseen or resolved in a manner that is always or exclusively in our best interest.
In addition,
the Adviser is under common control with Marble Point Credit Management LLC, or “Marble Point,” which is a CLO collateral
manager and manager of other investment vehicles that invest in senior secured loans, CLO securities and other related investments.
Our executive
officers and directors, as well as other current and potential future affiliated persons, officers and employees of the Adviser and certain
of its affiliates, may serve as officers, directors or principals of, or manage the accounts for, other entities, including ECC and EPIIF,
with investment strategies that substantially or partially overlap with the strategy that we pursue. Accordingly, they may have obligations
to investors in those entities, the fulfillment of which obligations may not be in the best interests of us or our stockholders. The Adviser
has entered into, and may in the future enter into additional, business arrangements with certain of our stockholders, including granting
indirect ownership in limited liability company interests in the Adviser. In such cases, such stockholders may have an incentive to vote
shares held by them in a manner that takes such arrangements into account. As a result of these relationships and separate business activities,
the Adviser has conflicts of interest in allocating management time, services and functions among us, other advisory clients and other
business activities. See “Conflicts of Interest.”
Pursuant
to the investment allocation policies and procedures of the Adviser and Eagle Point Credit Management, they seek to allocate investment
opportunities among accounts in a manner that is fair and equitable over time. In addition, an account managed by the Adviser, such as
us, is expected to be considered for the allocation of investment opportunities together with other accounts managed by certain affiliates
of the Adviser, including Eagle Point Credit Management. There is no assurance that such opportunities will be allocated to any particular
account equitably in the short-term or that any such account, including us, will be able to participate in all investment opportunities
that are suitable for it. See “Conflicts of Interest — Code
of Ethics and Compliance Procedures.”
In certain
instances, we expect to co-invest on a concurrent basis with other accounts managed by the Adviser and may do so with other accounts managed
by certain of the Adviser’s affiliates, subject to compliance with applicable regulations and regulatory guidance and the Adviser’s
written allocation procedures. We will be able to rely on the exemptive relief granted by the SEC to Eagle Point Credit Management and
certain of its affiliates to participate in certain negotiated co-investments alongside other accounts, including ECC and EPIIF, managed
by Eagle Point Credit Management, or certain of its affiliates, subject to certain conditions, including that (i) a majority of our directors
who have no financial interest in the
6
transaction and a majority of our directors
who are not interested persons, as defined in the 1940 Act, approve the co-investment and (ii) the price, terms and conditions of the
co-investment are the same for each participant.
Committed
Equity Financing
We
entered into the Purchase Agreement and a registration rights agreement, or the “Registration Rights Agreement,” with BRPC
II. Under the Purchase Agreement, upon the terms and conditions set forth therein, we, at our sole option and discretion, will have the
right to sell to BRPC II up to the lesser of (i) $20,000,000 of aggregate gross purchase price of our common stock, or the “Total
Commitment,” and (ii) the Exchange Cap (as defined herein), to the extent applicable. We paid BRPC II $500,000 as consideration
for its commitment to purchase shares of our common stock pursuant to the Purchase Agreement.
Upon
the initial satisfaction of the conditions to BRPC II’s purchase obligations set forth in the Purchase Agreement, or the “Commencement,”
we will have the right, but not the obligation, from time to time at our sole option and discretion over the 24-month period beginning
on the date the Commencement occurs, or the “Commencement Date,” to direct BRPC II to purchase certain shares of our common
stock unless the Purchase Agreement is terminated earlier. Sales of common stock by us to BRPC II under the Purchase Agreement, and the
timing of any such sales, are solely at our option, and we are under no obligation to sell any securities to BRPC II under the Purchase
Agreement.
The
per share purchase price that BRPC II is required to pay for shares of our common stock in a purchase directed by us pursuant to the Purchase
Agreement will be determined by reference to the volume weighted average price of our common stock, or “VWAP,” calculated
in accordance with the Purchase Agreement, less a fixed 3.0% discount. There is no maximum price per share that BRPC II could be obligated
to pay for our common stock we may elect to sell to it under the Purchase Agreement. However, the net proceeds to us from BRPC II per
share of our common stock sold under the Purchase Agreement, including the 3% discount, will never be less than the NAV per share of our
common stock at the time of such sale.
In
no event may we issue to BRPC II under the Purchase Agreement more than 1,398,973 shares of common stock, which number of shares is equal
to 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Purchase Agreement, or the “Exchange
Cap,” unless we obtain stockholder approval to issue shares of common stock in excess of the Exchange Cap in accordance with applicable
NYSE rules. The Exchange Cap is not applicable to issuances and sales of common stock pursuant to the Purchase Agreement to the extent
such shares of common stock are sold at a price equal to or in excess of the applicable “minimum price” (as defined
in the applicable listing rules of the NYSE) of our common stock, calculated at the time such purchases are effected by us under the Purchase
Agreement, if any.
In
accordance with our obligations under the Registration Rights Agreement, we have filed the registration statement which includes this
prospectus with the SEC to register under the Securities Act the resale by BRPC II of up to 1,398,973 shares of common stock that we may
elect, in our sole discretion, to issue and sell to BRPC II under the Purchase Agreement, from time to time after the date of this prospectus.
Shares
of our common stock sold to BRPC II pursuant to the Purchase Agreement will share voting power with our existing shares of common stock.
Accordingly, such sales will result in dilution of our current stockholders’ voting power with respect to matters on which our stockholders
are entitled to vote.
See
“Committed Equity Financing”
elsewhere in this prospectus for a more detailed description of the Purchase Agreement and Registration Rights Agreement.
Summary
Risk Factors
The
value of our assets, as well as the market price of our common stock, will fluctuate. An investment in our common stock should be considered
risky, and you may lose all or part of your investment in us. Investors should consider their financial situation and needs, other investments,
investment goals, investment experience, time horizons, liquidity needs and risk tolerance before investing in our common stock. An investment
in our common stock may be speculative in that it involves a high degree of risk and should not be considered a complete investment program.
We are designed primarily as a long-term investment vehicle, and our common stock is not an appropriate investment for a short-term trading
strategy. We can offer no assurance that returns,
7
if
any, on our investments will be commensurate with the risk of investment in us, nor can we provide any assurance that enough appropriate
investments that meet our investment criteria will be available.
The
following is a summary of certain principal risks of an investment in our common stock and us. See “Risk
Factors” for a more complete discussion of the risks of investing in us and our common
stock, including certain risks not summarized below.
•
Key
Personnel Risk. We are dependent upon the key personnel of the Adviser and certain of our Adviser’s
affiliates for our future success.
•
Conflicts
of Interest Risk. Our executive officers and directors, and the Adviser and certain of its affiliates
and their officers and employees, including the Senior Investment Team, have several conflicts of interest as a result of the other activities
in which they engage.
•
Interest
Rate Risk. The price of certain of our investments may be significantly affected by changes
in interest rates, including recent increases in interest rates.
•
Prepayment
Risk. The assets underlying the CLO securities in which we invest are subject to prepayment
by the underlying corporate borrowers. In addition, the CLO securities and related investments in which we invest are subject to prepayment
risk. If we or a CLO collateral manager are unable to reinvest prepaid amounts in a new investment with an expected rate of return at
least equal to that of the investment repaid, our investment performance will be adversely impacted.
•
LIBOR
Risk. The CLO equity and debt securities in which we invest earn interest at, and CLOs in which
we invest typically obtain financing at, a floating rate based on LIBOR. To the extent that any LIBOR replacement rate utilized for senior
secured loans differs from that utilized for debt of a CLO that holds those loans, the CLO would experience an interest rate mismatch
between its assets and liabilities, which would be expected to have an adverse impact on the cash flows distributed to CLO equity investors
as well as our net investment income and portfolio returns until such mismatch is corrected or minimized, which would be expected to occur
when both the underlying senior secured loans and the CLO debt securities utilize the same LIBOR replacement rate. While certain senior
secured loans have already transitioned to utilizing the Secured Overnight Financing Rate, “SOFR,” based interest rates and
newly issued CLO debt securities have begun to transition to such replacement rate.
•
Liquidity
Risk. Generally, there is no public market for the CLO investments we target. As such, we may
not be able to sell such investments quickly, or at all. If we are able to sell such investments, the prices we receive may not reflect
our assessment of their fair value or the amount paid for such investments by us.
•
Management
Fee Risk. Our management fee structure may incentivize the Adviser to use leverage in a manner
that adversely impacts our performance.
•
Subordinated
Securities. CLO junior debt and equity securities that we may acquire are subordinated to more
senior tranches of CLO debt. CLO junior debt and equity securities are subject to increased risks of default relative to the holders of
superior priority interests in the same CLO. In addition, at the time of issuance, CLO equity securities are under-collateralized in that
the face amount of the CLO debt and CLO equity of a CLO at inception exceed its total assets. We will typically be in a subordinated or
first loss position with respect to realized losses on the underlying assets held by the CLOs in which we are invested.
•
High-Yield
Investment Risk. The CLO junior debt and equity securities that we acquire are typically rated
below investment grade or, in the case of equity securities, unrated and are therefore considered “higher-yield” or “junk”
securities and are considered speculative with respect to timely payment of interest and repayment of principal. The senior secured loans
and other credit-related assets underlying CLOs are also typically higher-yield investments. Investing in CLO junior debt and equity securities
and other high-yield investments involves greater credit and liquidity risk than investment grade obligations, which may adversely impact
our performance.
•
Risks
of Investing in CLOs and Other Structured Debt Securities. CLOs and other structured finance
securities are generally backed by a pool of credit-related assets that serve as collateral. Accordingly,
8
CLO and structured
finance securities present risks similar to those of other types of credit investments, including default (credit), interest rate and
prepayment risks. In addition, CLOs and other structured finance securities are often governed by a complex series of legal documents
and contracts, which increases the risk of dispute over the interpretation and enforceability of such documents relative to other types
of investments.
•
Leverage
Risk. The use of leverage, whether directly or indirectly through investments such as CLO junior
debt and equity securities that inherently involve leverage, may magnify our risk of loss. CLO junior debt and equity securities are very
highly leveraged (with CLO equity securities typically being leveraged ten times), and therefore the CLO securities in which we invest
are subject to a higher degree of loss since the use of leverage magnifies losses.
•
Credit
Risk. If (1) a CLO in which we invest, (2) an underlying asset of any such CLO or (3) any other
type of credit investment in our portfolio declines in price or fails to pay interest or principal when due because the issuer or debtor,
as the case may be, experiences a decline in its financial status, our income, NAV and/or market price would be adversely impacted.
•
Limited
Investment Opportunities Risk. The market for CLO securities is more limited than the market
for other credit related investments. We can offer no assurances that sufficient investment opportunities for our capital will be available.
•
Market
Risk. Political, regulatory, economic and social developments, and developments that impact
specific economic sectors, industries or segments of the market, can affect the value of our investments. A disruption or downturn in
the capital markets and the credit markets could impair our ability to raise capital, reduce the availability of suitable investment opportunities
for us, or adversely and materially affect the value of our investments, any of which would negatively affect our business. These risks
may be magnified if certain events or developments adversely interrupt the global supply chain, and could affect companies worldwide.
•
Currency
Risk. Although we primarily make investments denominated in U.S. dollars, we may make investments
denominated in other currencies. Our investments denominated in currencies other than U.S. dollars will be subject to the risk that the
value of such currency will decrease in relation to the U.S. dollar.
•
Hedging
Risk. Hedging transactions seeking to reduce risks may result in poorer overall performance
than if we had not engaged in such hedging transactions, and they may also not properly hedge our risks.
•
Reinvestment
Risk. CLOs will typically generate cash from asset repayments and sales that may be reinvested
in substitute assets, subject to compliance with applicable investment tests. If the CLO collateral manager causes the CLO to purchase
substitute assets at a lower yield than those initially acquired or sale proceeds are maintained temporarily in cash, it would reduce
the excess interest- related cash flow, thereby having a negative effect on the fair value of our assets and the market value of our securities.
In addition, the reinvestment period for a CLO may terminate early, which would cause the holders of the CLO’s securities to receive
principal payments earlier than anticipated. There can be no assurance that we will be able to reinvest such amounts in an alternative
investment that provides a comparable return relative to the credit risk assumed.
•
Refinancing
Risk. If we incur debt financing and subsequently refinance such debt, the replacement debt
may be at a higher cost and on less favorable terms and conditions. If we fail to extend, refinance or replace such debt financings prior
to their maturity on commercially reasonable terms, our liquidity will be lower than it would have been with the benefit of such financings,
which would limit our ability to grow.
•
Tax
Risk. If we fail to qualify for tax treatment as a RIC under Subchapter M of the Code for any
reason, or become subject to corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount
of income available for distributions, and the amount of such distributions, to our common stockholders and for payments to the holders
of our other obligations.
•
Derivatives
Risk. Derivative instruments in which we may invest may be volatile and involve various risks
different from, and in certain cases greater than, the risks presented by other instruments. The
9
primary risks related
to Derivative Transactions include counterparty, correlation, liquidity, leverage, volatility, and OTC trading risks. In addition, a small
investment in derivatives could have a large potential impact on our performance, effecting a form of investment leverage on our portfolio.
In certain types of Derivative Transactions, we could lose the entire amount of our investment; in other types of Derivative Transactions
the potential loss is theoretically unlimited.
•
Counterparty
Risk. We may be exposed to counterparty risk, which could make it difficult for us or the CLOs
in which we invest to collect on obligations, thereby resulting in potentially significant losses.
•
Global
Economy Risk. Global economies and financial markets are highly interconnected, and conditions
and events in one country, region or financial market may adversely impact issuers in a different country, region or financial market.
•
Committed
Equity Financing Risk. It is not possible to predict the actual number of shares we will sell
under the Purchase Agreement to BRPC II, or the actual gross proceeds resulting from those sales.
•
Stock
Price Risk. The sale of the shares of common stock acquired by BRPC II (or issued pursuant to
other offerings, including our “at-the-market” program), or the perception that such sales may occur, could cause the price
of our common stock to fall.
•
Price
Risk. Investors who buy shares at different times will likely pay different prices.
Updated
Financial Information
Management’s
unaudited estimate of the range of the net asset value per share of our common stock as of November 30, 2022 was between $13.18 and $13.28.
Our
Corporate Information
Our
offices are located at 600 Steamboat Road, Suite 202, Greenwich, CT 06830, and our telephone number is (844) 810-6501.
10
THE OFFERING
Common Stock Offered by BRPC II
1,398,973
shares of common stock.
Use of Proceeds
We
will not receive any proceeds from the resale of shares of common stock included in this prospectus by BRPC II. However, we may receive
up to $20,000,000 in aggregate gross proceeds under the Purchase Agreement from sales of common stock that we may elect to make to BRPC
II pursuant to the Purchase Agreement, if any, from time to time in our sole discretion, from and after the Commencement Date.
Listing
Our
common stock is traded on the NYSE under the symbol “EIC”.
Leverage
We
may use leverage as and to the extent permitted by the 1940 Act. We are permitted to obtain leverage using any form of financial leverage
instruments, including funds borrowed from banks or other financial institutions, margin facilities, notes or preferred stock and leverage
attributable to reverse repurchase agreements or similar transactions. We expect that we will, or that we may need to, raise additional
capital in the future to fund our continued growth and may do so by further increasing our leverage through entry into a credit facility,
issuance of additional shares of preferred stock or debt securities or other leveraging instruments.
Certain
instruments that create leverage are considered to be senior securities under the 1940 Act. With respect to senior securities that are
stocks (i.e., shares of preferred stock), we are required to have an asset coverage of at least 200%, as measured at the time of the issuance
of any such shares of preferred stock and calculated as the ratio of our total assets (less all liabilities and indebtedness not represented
by senior securities) over the aggregate amount of our outstanding senior securities representing indebtedness plus the aggregate liquidation
preference of any outstanding shares of preferred stock.
With
respect to senior securities representing indebtedness (i.e., borrowing or deemed borrowing), other than temporary borrowings as defined
under the 1940 Act, we are required to have an asset coverage of at least 300%, as measured at the time of borrowing and calculated as
the ratio of our total assets (less all liabilities and indebtedness not represented by senior securities) over the aggregate amount of
our outstanding senior securities representing indebtedness.
U.S. Federal Income Taxes
We
have elected to be treated, and intend to qualify annually, as a RIC under Subchapter M of the Code. Prospective investors are urged to
consult their own tax advisors regarding the tax implications associated with acquiring holding and disposing of an investment in our
securities in light of their personal investment circumstances.
Risk Factors
Investing
in our common stock involves risks. You should carefully consider the information set forth under the caption “Risk
Factors” before deciding to invest in our common stock.
11
Additional
Information
We
file annual and semi-annual reports, proxy statements and other information with the SEC. This information is available on the SEC’s
website at www.sec.gov. This information
is also available free of charge by contacting us at Eagle Point Income Company Inc., Attention: Investor Relations, by telephone at (844)
810-6501, or on our website at www.eaglepointincome.com.
12
RISK FACTORS
Investing
in our securities involves a number of significant risks. In addition to the other information contained in this prospectus, 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 and the value of our common stock. If any of the following events occur, our business, financial condition
and results of operations could be materially adversely affected, and the value of our common stock may be impaired. In such case, the
price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Investments
Investing
in senior secured loans indirectly through CLO securities involves particular risks.
We obtain
exposure to underlying senior secured loans through our investments in CLOs and may obtain such exposure directly or indirectly through
other means from time to time. Such loans may become nonperforming or impaired for a variety of reasons. Nonperforming or impaired loans
may require substantial workout negotiations or restructuring that may entail a substantial reduction in the interest rate and/or a substantial
write-down of the principal of the loan. In addition, because of the unique and customized nature of a loan agreement and the private
syndication of a loan, certain loans may not be purchased or sold as easily as publicly traded securities, and, historically, the trading
volume in the loan market has been small relative to other markets. Loans may encounter trading delays due to their unique and customized
nature, and transfers may require the consent of an agent bank and/or borrower. Risks associated with senior secured loans include the
fact that prepayments generally may occur at any time without premium or penalty.
In addition,
the portfolios of certain CLOs in which we invest may contain middle market loans. Loans to middle market companies may carry more inherent
risks than loans to larger, publicly traded entities. These companies generally have more limited access to capital and higher funding
costs, may be in a weaker financial position, may need more capital to expand or compete, and may be unable to obtain financing from public
capital markets or from traditional sources, such as commercial banks. Middle market companies typically have narrower product lines and
smaller market shares than large companies. Therefore, they tend to be more vulnerable to competitors’ actions and market conditions,
as well as general economic downturns. These companies may also experience substantial variations in operating results. The success of
a middle market business may also depend on the management talents and efforts of one or two persons or a small group of persons. The
death, disability or resignation of one or more of these persons could have a material adverse impact on the obligor. Accordingly, loans
made to middle market companies may involve higher risks than loans made to companies that have greater financial resources or are otherwise
able to access traditional credit sources. Middle market loans are less liquid and have a smaller trading market than the market for broadly
syndicated loans and may have default rates or recovery rates that differ (and may be better or worse) than has been the case for broadly
syndicated loans or investment grade securities. There can be no assurance as to the levels of defaults and/or recoveries that may be
experienced with respect to middle market loans in any CLO in which we may invest. As a consequence of the forgoing factors, the securities
issued by CLOs that primarily invest in middle market loans (or hold significant portions thereof) are generally considered to be a riskier
investment than securities issued by CLOs that primarily invest in broadly syndicated loans.
Covenant-lite
loans may comprise a significant portion of the senior secured loans underlying the CLOs in which we invest. Over the past decade, the
senior secured loan market has evolved from one in which covenant-lite loans represented a minority of the market to one in which such
loans represent a significant majority of the market. Generally, covenant-lite loans provide borrower companies more freedom to negatively
impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative
action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent that the
CLOs that we invest in hold covenant-lite loans, our CLOs may have fewer rights against a borrower and may have a greater risk of loss
on such investments as compared to investments in or exposure to loans with financial maintenance covenants.
Our
investments in CLO securities and other structured finance securities involve certain risks.
Our
investments consist primarily of CLO securities, and we may invest in other related structured finance securities. CLOs and structured
finance securities are generally backed by an asset or a pool of assets (typically
senior secured loans and other credit-related
assets in the case of a CLO) that serve as collateral. We and other investors in CLO and related structured finance securities ultimately
bear the credit risk of the underlying collateral. In most CLOs, the structured finance securities are issued in multiple tranches, offering
investors various maturity and credit risk characteristics, often categorized as senior, mezzanine and subordinated/equity
according to their degree of risk. If there are defaults or the relevant collateral otherwise underperforms, scheduled payments to senior
tranches of such securities take precedence over those of junior tranches which are the focus of our investment strategy, and scheduled
payments to junior tranches have a priority in right of payment to subordinated/equity tranches.
CLO
and other structured finance securities may present risks similar to those of the other types of debt obligations and, in fact, such risks
may be of greater significance in the case of CLO and other structured finance securities. For example, investments in structured vehicles,
including CBOs, junior debt and equity securities issued by CLOs, involve risks, including credit risk and market risk. Changes in interest
rates and credit quality may cause significant price fluctuations. A CBO is a trust which is often backed by a diversified pool of high
risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities, such
as high yield debt, residential privately issued mortgage-related securities, commercial privately issued mortgage related securities,
trust preferred securities and emerging market debt. The pool of high yield securities underlying CBOs is typically separated into tranches
representing different degrees of credit quality. The higher quality tranches have greater degrees of protection and pay lower interest
rates, whereas the lower tranches, with greater risk, pay higher interest rates.
In addition
to the general risks associated with investing in debt securities, CLO securities carry additional risks, including: (1) the possibility
that distributions from collateral assets will not be adequate to make interest or other payments; (2) the quality of the collateral may
decline in value or default; (3) our investments in CLO junior debt and equity tranches will likely be subordinate in right of payment
to other senior classes of CLO debt; and (4) the complex structure of a particular security may not be fully understood at the time of
investment and may produce disputes with the issuer or unexpected investment results. Changes in the collateral held by a CLO may cause
payments on the instruments we hold to be reduced, either temporarily or permanently. Structured investments, particularly the subordinated
interests in which we invest, are less liquid than many other types of securities and may be more volatile than the assets underlying
the CLOs we may target. In addition, CLO and other structured finance securities may be subject to prepayment risk. Further, the performance
of a CLO or other structured finance security may be adversely affected by a variety of factors, including the security’s priority
in the capital structure of the issuer thereof, the availability of any credit enhancement, the level and timing of payments and recoveries
on and the characteristics of the underlying receivables, loans or other assets that are being securitized, remoteness of those assets
from the originator or transferor, the adequacy of and ability to realize upon any related collateral and the capability of the servicer
of the securitized assets. There are also the risks that the trustee of a CLO does not properly carry out its duties to the CLO, potentially
resulting in loss to the CLO. In addition, the complex structure of the security may produce unexpected investment results, especially
during times of market stress or volatility. Investments in structured finance securities may also be subject to liquidity risk.
Our
investments in the primary CLO market involve certain additional risks.
Between
the pricing date and the effective date of a CLO, the CLO collateral manager will generally expect to purchase additional collateral obligations
for the CLO. During this period, the price and availability of these collateral obligations may be adversely affected by a number of market
factors, including price volatility and availability of investments suitable for the CLO, which could hamper the ability of the collateral
manager to acquire a portfolio of collateral obligations that will satisfy specified concentration limitations and allow the CLO to reach
the target initial par amount of collateral prior to the effective date. An inability or delay in reaching the target initial par amount
of collateral may adversely affect the timing and amount of interest or principal payments received by the holders of the CLO debt securities
and distributions on the CLO equity securities and could result in early redemptions which may cause CLO debt and equity investors to
receive less than face value of their investment.
We
may have concentrated investments, which may subject us to a risk of significant loss if one or more of these CLO securities experience
a high level of defaults on collateral.
Our
portfolio may consist of investments in a limited number of CLO securities. Beyond the asset diversification requirements associated with
our qualification as a RIC under the Code, we do not have fixed
guidelines for portfolio concentration
and we do not have any limitations on the ability to invest in any one CLO. As our portfolio may be more concentrated than the portfolios
of some larger funds, we are more susceptible to risk of loss if one or more of the CLOs in which we are invested experiences a high level
of defaults on its collateral. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of
investments perform poorly or if we need to write down the value of any one investment. We may also invest in multiple CLOs managed by
the same CLO collateral manager, thereby increasing our risk of loss in the event the CLO collateral manager were to fail, experience
the loss of key portfolio management employees or sell its business.
Failure
to maintain a broad range of underlying obligors across the CLOs in which we invest would make us more vulnerable to defaults.
We may
be subject to concentration risk since CLO portfolios tend to have a certain amount of overlap across underlying obligors. This trend
is generally exacerbated when demand for bank loans by CLO issuers outpaces supply. Market analysts have noted that the overlap of obligor
names among CLO issuers has increased recently and is particularly evident across CLOs of the same year of origination, as well as with
CLOs managed by the same asset manager. To the extent we invest in CLOs which have a high percentage of overlap, this may increase the
likelihood of defaults on our CLO investments occurring together.
Our
portfolio is focused on CLO securities, and the CLO securities in which we invest may hold loans that are concentrated in a limited number
of industries.
Our
portfolio is focused on securities issued by CLOs and related investments, and the CLOs in which we invest may hold loans that are concentrated
in a limited number of industries. As a result, a downturn in the CLO industry or in any particular industry that the CLOs in which we
invest are concentrated could significantly impact the aggregate returns we realize.
Failure
by a CLO in which we are invested to satisfy certain tests will harm our operating results.
The
failure by a CLO in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest
coverage tests, would lead to a reduction in its payments to us. In the event that a CLO fails certain tests, holders of CLO senior debt
would be entitled to additional payments that would, in turn, reduce the payments we, as holder of junior debt or equity tranches, would
otherwise be entitled to receive. Separately, 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 CLO or any other investment we may make. If
any of these occur, it could materially and adversely affect our operating results and cash flows.
Negative
loan ratings migration may also place pressure on the performance of certain of our investments.
Per
the terms of a CLO’s indenture, assets rated “CCC+” or lower or their equivalent in excess of applicable limits typically
do not receive full par credit for purposes of calculation of the CLO’s overcollateralization tests. As a result, negative rating
migration could cause a CLO to be out of compliance with its overcollateralization tests. This could cause a diversion of cash flows away
from the CLO junior debt and equity tranches in favor of the more senior CLO debt tranches until the relevant overcollateralization test
breaches are cured. This could have a negative impact on our NAV and cash flows.
Our
investments in CLOs and other investment vehicles result in additional expenses to us.
We invest
in CLO securities and may invest, to the extent permitted by law, in the securities and other instruments of other investment companies,
including private funds, and, to the extent we so invest, will bear our ratable share of a CLO’s or any such investment vehicle’s
expenses, including management and performance fees. In addition to the management and performance fees borne by our investments in CLOs,
we also remain obligated to pay management fees to the Adviser with respect to the assets invested in the securities and other instruments
of other investment vehicles, including CLOs. With respect to each of these investments, each holder of our common stock bears his or
her share of the management fee of the Adviser as well as indirectly bearing the management and performance fees charged by the underlying
advisor and other expenses of any investment vehicles in which we invest.
Our
investments in CLO securities may be less transparent to us and our stockholders than direct investments in the collateral.
We invest
primarily in junior debt tranches of CLOs and other related investments. Generally, there may be less information available to us regarding
the collateral held by such CLOs than if we had invested directly in the debt of the underlying obligors. As a result, our stockholders
do not know the details of the collateral of the CLOs in which we invest or receive the reports issued with respect to such CLO. In addition,
none of the information contained in certain monthly reports nor any other financial information furnished to us as a noteholder in a
CLO is audited and reported upon, nor is an opinion expressed, by an independent public accountant. Our CLO investments are also subject
to the risk of leverage associated with the debt issued by such CLOs and the repayment priority of senior debt holders in such CLOs.
CLO
investments involve complex documentation and accounting considerations.
CLOs
and other structured finance securities in which we invest are often governed by a complex series of legal documents and contracts. As
a result, the risk of dispute over interpretation or enforceability of the documentation may be higher relative to other types of investments.
The
accounting and tax implications of the CLO investments that we make are complicated. In particular, reported earnings from CLO equity
securities are recorded under U.S. generally accepted accounting principles, or “GAAP,” based upon an effective yield calculation.
Current taxable earnings on certain of these investments, however, will generally not be determinable until after the end of the fiscal
year of each individual CLO that ends within our fiscal year, even though the investments are generating cash flow throughout the fiscal
year. The tax treatment of certain of these investments may result in higher distributable earnings in the early years and a capital loss
at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.
We
are dependent on the collateral managers of the CLOs in which we invest, and those CLOs are generally not registered under the 1940 Act.
We rely
on CLO collateral managers to administer and review the portfolios of collateral they manage. The actions of the CLO collateral managers
may significantly affect the return on our investments; however, we, as investors of the CLO, typically do not have any direct contractual
relationship with the collateral managers of the CLOs in which we invest. The ability of each CLO collateral manager to identify and report
on issues affecting its securitization portfolio on a timely basis could also affect the return on our investments, as we may not be provided
with information on a timely basis in order to take appropriate measures to manage our risks. We will also rely on CLO collateral managers
to act in the best interests of a CLO it manages; however, such CLO collateral managers are subject to fiduciary duties owed to other
classes of notes besides those in which we invest; therefore, there can be no assurance that the collateral managers will always act in
the best interest of the class or classes of notes in which we are invested. If any CLO collateral manager were to act in a manner that
was not in the best interest of the CLOs (e.g., gross negligence, with reckless disregard or in bad faith), this could adversely impact
the overall performance of our investments. Furthermore, since the underlying CLO issuer often provides an indemnity to its CLO collateral
manager, we may not be incentivized to pursue actions against the collateral manager since any such action, if successful, may ultimately
be borne by the underlying CLO issuer and payable from its assets, which could create losses to us as investors in the CLO. In addition,
to the extent we invest in CLO equity, liabilities incurred by the CLO manger to third parties may be borne by us to the extent the CLO
is required to indemnify its collateral manager for such liabilities.
In addition,
the CLOs in which we invest are generally not registered as investment companies under the 1940 Act. As investors in these CLOs, we are
not afforded the protections that stockholders in an investment company registered under the 1940 Act would have.
The
collateral managers of the CLOs in which we invest may not continue to manage such CLOs.
Given
that we invest in CLO securities issued by CLOs which are managed by unaffiliated collateral managers, we are dependent on the skill and
expertise of such managers. We believe our Adviser’s ability to analyze and diligence potential CLO managers differentiates our
approach to investing in CLO securities.
However, we cannot assure you that,
for any CLO we invest in, the collateral manager in place when we invest in such CLO securities will continue to manage such CLO through
the life of our investment. Collateral managers are subject to removal or replacement by other holders of CLO securities without our consent,
and may also voluntarily resign as collateral manager or assign their role as collateral manager to another entity. There can be no assurance
that any removal, replacement, resignation or assignment of any particular CLO manager’s role will not adversely affect the returns
on the CLO securities in which we invest.
Our
investments in CLO securities may be subject to special anti-deferral provisions that could result in us incurring tax or recognizing
income prior to receiving cash distributions related to such income.
Some
of the CLOs in which we invest may constitute “passive foreign investment companies,” or “PFICs.” If we acquire
interests treated as equity for U.S. federal income tax purposes in PFICs (including equity tranche investments and certain debt tranche
investments in CLOs that are PFICs), we may be subject to federal income tax on a portion of any “excess distribution” or
gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Certain elections
may be available to mitigate or eliminate such tax on excess distributions, but such elections (if available) will generally require us
to recognize our share of the PFIC’s income for each tax year regardless of whether we receive any distributions from such PFIC.
We must nonetheless distribute such income to maintain our status as a RIC. In 2019, the IRS issued final regulations that generally treat
our income inclusion with respect to a PFIC with respect to which we have made a qualified electing fund, or “QEF,” election,
as qualifying income for purposes of determining our ability to be subject to tax as a RIC if (i) there is a current distribution out
of the earnings and profits of the PFIC that are attributable to such income inclusion or (ii) such inclusion is derived with respect
to our business of investing in stock, securities, or currencies. As such, we may be restricted in our ability to make QEF elections with
respect to our holdings in issuers that could be treated as PFICs in order to ensure our continued qualification as a RIC and/or maximize
our after-tax return from these investments.
If we
hold 10% or more of the interests treated as equity (by vote or value) for U.S. federal income tax purposes in a foreign corporation that
is treated as a controlled foreign corporation, or “CFC” (including equity tranche investments and certain debt tranche
investments in a CLO treated as a CFC), we may be treated as receiving a deemed distribution (taxable as ordinary income) each tax year
from such foreign corporation in an amount equal to our pro rata share of the corporation’s income for the tax year (including both
ordinary earnings and capital gains). If we are required to include such deemed distributions from a CFC in our income, we will be required
to distribute such income to maintain our RIC status regardless of whether or not the CFC makes an actual distribution during such tax
year. In 2019, the IRS issued final regulations that generally treat our income inclusion with respect to a CFC as qualifying income for
purposes of determining our ability to be subject to tax as a RIC either if (i) there is a distribution out of the earnings and profits
of the CFC that are attributable to such income inclusion or (ii) such inclusion is derived with respect to our business of investing
in stock, securities, or currencies. As such, we may limit and/or manage our holdings in issuers that could be treated as CFCs in order
to ensure our continued qualification as a RIC and/ or maximize our after-tax return from these investments.
If we
are required to include amounts from CLO securities in income prior to receiving the cash distributions representing such income, 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 qualify for
RIC tax treatment and thus become subject to corporate-level income tax.
If
a CLO in which we invest fails to comply with certain U.S. tax disclosure requirements, such CLO may be subject to withholding requirements
that could materially and adversely affect our operating results and cash flows.
The U.S.
Foreign Account Tax Compliance Act provisions of the Code, or “FATCA,” imposes a withholding tax of 30% on U.S. source periodic
payments, including interest and dividends to certain non-U.S. entities, including certain non-U.S. financial institutions and investment
funds, unless such non-U.S. entity complies with certain reporting requirements regarding its U.S. account holders and its U.S. owners.
Most CLOs in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to comply
with these reporting requirements to avoid the 30% withholding. If a CLO in which we
invest fails to properly comply with
these reporting requirements, it could reduce the amount available to distribute to junior debt and equity holders in such CLO, which
could materially and adversely affect the fair value of the CLO’s securities, our operating results and cash flows.
Increased
competition in the market or a decrease in new CLO issuances may result in increased price volatility or a shortage of investment opportunities.
In recent
years there has been a marked increase in the number of, and flow of capital into, investment vehicles established to pursue investments
in CLO securities whereas the size of this market is relatively limited. While we cannot determine the precise effect of such competition,
such increase may result in greater competition for investment opportunities, which may result in an increase in the price of such investments
relative to the risk taken on by holders of such investments. Such competition may also result under certain circumstances in increased
price volatility or decreased liquidity with respect to certain positions.
In addition,
the volume of new CLO issuances and CLO refinancings varies over time as a result of a variety of factors including new regulations, changes
in interest rates, and other market forces. As a result of increased competition and uncertainty regarding the volume of new CLO issuances
and CLO refinancings, we can offer no assurances that we will deploy all of our capital in a timely manner or at all. Prospective investors
should understand that we may compete with other investment vehicles, as well as investment and commercial banking firms, which have substantially
greater resources, in terms of financial wherewithal and research staffs, than may be available to us.
We
will be subject to risks associated with any wholly-owned subsidiaries.
We may
in the future invest indirectly through one or more wholly-owned subsidiaries. Such wholly-owned subsidiaries are not separately registered
under the 1940 Act and are not subject to all the investor protections of the 1940 Act. In addition, changes in the laws of the jurisdiction
of formation of any future wholly-owned subsidiary could result in the inability of such subsidiary to operate as anticipated.
We
and our investments are subject to interest rate risk.
Since
we have entered into the BNP Credit Facility and can borrow amounts thereunder and issued Series A Term Preferred Stock, and since we
may incur additional leverage (including through preferred stock and/or debt securities) to make investments, our net investment income
depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds.
Because
of inflationary pressure, the U.S. government has recently increased interest rates. Interest rates are expected to continue to rise,
rather than fall, in the future. In a rising interest rate environment, any leverage that we incur may bear a higher interest rate that
our current leverage. There may not, however, be a corresponding increase in our investment income. Any reduction in the level of rate
of return on new investments relative to the rate of return on our current investments, and any reduction in the rate of return on our
current investments, could adversely impact our net investment income, reducing our ability to service the interest obligations on, and
to repay the principal of, our indebtedness, as well as our capacity to pay distributions to our stockholders.
The fair
value of certain of our investments may be significantly affected by changes in interest rates. Although senior secured loans are generally
floating rate instruments, our investments in senior secured loans through investments in junior debt and equity tranches of CLOs are
sensitive to interest rate levels and volatility. For example, because CLO debt securities are floating rate securities, a reduction in
interest rates would generally result in a reduction in the coupon payment and cash flow we receive on our CLO debt investments. Further,
there may be some difference between the timing of interest rate resets on the assets and liabilities of a CLO.
Such a
mismatch in timing could have a negative effect on the amount of funds distributed to CLO equity investors. In addition, CLOs may not
be able to enter into hedge agreements, even if it may otherwise be in the best interests of the CLO to hedge such interest rate risk.
Furthermore, in the event of a significant rising interest rate environment and/or economic downturn, loan defaults may increase and result
in credit losses that may adversely affect our cash flow, fair value of our assets and operating results. In the event that our
interest expense were to increase relative
to income, or sufficient financing became unavailable, our return on investments and cash available for distribution to stockholders or
to make other payments on our securities would be reduced. In addition, future investments in different types of instruments may carry
a greater exposure to interest rate risk.
LIBOR
Floor Risk. Because CLOs generally issue debt on a floating rate basis, an increase in LIBOR
will increase the financing costs of CLOs. Many of the senior secured loans held by these CLOs have LIBOR floors such that, when LIBOR
is below the stated LIBOR floor, the stated LIBOR floor (rather than LIBOR itself) is used to determine the interest payable under the
loans. Therefore, if LIBOR increases but stays below the applicable LIBOR floor rate of the senior secured loans held by a CLO, there
would not be a corresponding increase in the investment income of such CLOs. The combination of increased financing costs without a corresponding
increase in investment income in such a scenario could result in the CLO not having adequate cash to make interest or other payments on
the securities which we hold.
LIBOR
Risk. The CLO equity and debt securities in which we invest earn interest at, and CLOs in which
we typically invest obtain financing at, a floating rate based on LIBOR.
In July
2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021.
However, in March 2021, the FCA announced that most U.S. dollar LIBOR would continue to be published through June 30, 2023 effectively
extending the LIBOR transition period to June 30, 2023. However, the FCA has indicated it will not compel panel banks to continue to contribute
to LIBOR after the end of 2021 and the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance
Corporation have encouraged banks to cease entering into new contracts that use U.S. dollar LIBOR as a reference rate no later than December
31, 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large
U.S. financial institutions, supports replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated
by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling
Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference
rates will attain market acceptance as replacements for LIBOR. Any transition away from LIBOR to alternative reference rates is complex
and could have a material adverse effect on our business, financial condition and results of operations, including as a result of any
changes in the pricing of our investments, changes to the documentation for certain of our investments and the pace of such changes, disputes
and other actions regarding the interpretation of current and prospective loan documentation or modifications to processes and systems.
In anticipation
of the cessation of LIBOR, the CLOs in which we invest may need to renegotiate underlying portfolio company credit agreements extending
beyond June 30, 2023 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate or rely on certain fallback
provisions that could cause interest rates to shift to a base rate plus a margin.
Potential
Effects of Alternative Reference Rates. At this time, it is not possible to predict the effect
of the FCA announcement or other regulatory changes or announcements, the establishment of SOFR, SONIA or any other alternative reference
rates or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States or elsewhere. If no replacement conventions
develop, it is uncertain what effect broadly divergent interest rate calculation methodologies in the markets will have on the price and
liquidity of CLO securities and the ability of the collateral manager to effectively mitigate interest rate risks. As such, the potential
effect of any such event on our net investment income cannot yet be determined.
Any significant
change to the setting of LIBOR, including its potential elimination as a benchmark rate, could have a material adverse effect on the value
of, and the amount payable under, (i) any underlying asset of the CLO which pay interest linked to a LIBOR rate and (ii) the CLO securities
in which we invest.
In addition,
the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear.
To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans,
the CLO would experience an interest rate mismatch between its assets and liabilities, which could have an adverse impact on our net investment
income and portfolio returns.
LIBOR
Mismatch. Many underlying corporate borrowers can elect to pay interest based on 1-month LIBOR,
3-month LIBOR and/or other rates in respect of the loans held by CLOs in which we are invested, in each case plus an applicable spread,
whereas CLOs generally pay interest to holders of the CLO’s debt tranches based on 3-month LIBOR plus a spread. The 3-month LIBOR
currently exceeds the 1-month LIBOR, which may result in many underlying corporate borrowers electing to pay interest based on 1-month
LIBOR. This mismatch in the rate at which CLOs earn interest and the rate at which they pay interest on their debt tranches negatively
impacts the cash flows on a CLO’s equity tranche, which may in turn adversely affect our cash flows and results of operations. Unless
spreads are adjusted to account for such increases, these negative impacts may worsen as the amount by which the 3-month LIBOR exceeds
the 1-month LIBOR increases.
Rising
Interest Rate Environment. As of the date of this prospectus the U.S. Federal Reserve has increased
certain interest rates as part of its efforts to combat rising inflation. The senior secured loans underlying the CLOs in which we invest
typically have floating interest rates. A rising interest rate environment may increase loan defaults, resulting in losses for the CLOs
in which we invest. In addition, increasing interest rates may lead to higher prepayment rates, as corporate borrowers look to avoid escalating
interest payments or refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of the
CLOs. However, since many of the senior secured loans within these CLOs have LIBOR floors, if LIBOR is below the applicable LIBOR floor,
there may not be corresponding increases in investment income which could result in the CLO not having adequate cash to make interest
or other payments on the securities which we hold.
Our
investments are subject to credit risk.
If a CLO
in which we invest, an underlying asset of any such CLO or any other type of credit investment in our portfolio declines in price or fails
to pay interest or principal when due because the issuer or debtor, as the case may be, experiences a decline in its financial status
either or both our income and NAV may be adversely impacted. Non-payment would result in a reduction of our income, a reduction in the
value of the applicable CLO security or other credit investment experiencing non-payment and, potentially, a decrease in our NAV. With
respect to our investments in CLO securities and credit investments that are secured, there can be no assurance that liquidation of collateral
would satisfy the issuer’s obligation in the event of non-payment of scheduled dividend, interest or principal or that such collateral
could be readily liquidated. In the event of bankruptcy of an issuer, we could experience delays or limitations with respect to its ability
to realize the benefits of any collateral securing a CLO security or credit investment. To the extent that the credit rating assigned
to a security in our portfolio is downgraded, the market price and liquidity of such security may be adversely affected. In addition,
if a CLO in which we invest triggers an event of default as a result of failing to make payments when due or for other reasons, the CLO
would be subject to the possibility of liquidation, which could result in full loss of value to the CLO junior debt and equity investors.
CLO equity tranches are the most likely tranche to suffer a loss of all of their value in these circumstances.
Our
investments are subject to prepayment risk.
Although
the Adviser’s valuations and projections take into account certain expected levels of prepayments, the collateral of a CLO may be
prepaid more quickly than expected. Prepayment rates are influenced by changes in interest rates and a variety of factors beyond our control
and consequently cannot be accurately predicted. Early prepayments give rise to increased reinvestment risk, as a CLO collateral manager
might realize excess cash from prepayments earlier than expected. If a CLO collateral manager is unable to reinvest such cash in a new
investment with an expected rate of return at least equal to that of the investment repaid, this may reduce our net income and the fair
value of that asset.
In addition,
in most CLO transactions, CLO debt investors, such as us, are subject to prepayment risk in that the holders of a majority of the equity
tranche can direct a call or refinancing of a CLO, which would cause such CLO’s outstanding CLO debt securities to be repaid at
par. Such prepayments of CLO debt securities held by us also give rise to reinvestment risk if we are unable to reinvest such cash in
a new investment with an expected rate of return at least equal to that of the investment repaid.
We
may leverage our portfolio, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing
in us.
We have
incurred leverage through indebtedness for borrowed money. We may incur additional leverage, directly or indirectly, through one or more
special purpose vehicles, indebtedness for borrowed money, as well as leverage in the form of Derivative Transactions, preferred stock,
debt securities and other structures and instruments, in significant amounts and on terms that the Adviser and our board of directors
deem appropriate, subject to applicable limitations under the 1940 Act. Such leverage may be used for the acquisition and financing of
our investments, to pay fees and expenses and for other purposes. Such leverage may be secured and/or unsecured. Any such leverage does
not include leverage embedded or inherent in the CLO structures in which we invest or in derivative instruments in which we may invest.
Accordingly, there is a layering of leverage in our overall structure.
The more
leverage we employ, the more likely a substantial change will occur in our NAV. Accordingly, any event that adversely affects the value
of an investment would be magnified to the extent leverage is utilized. For instance, any decrease in our income would cause net income
to decline more sharply than it would have had we not borrowed. Such a decline could also negatively affect our ability to make distributions
and other payments to our securityholders. Leverage is generally considered a speculative investment technique. Our ability to service
any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive
pressures. The cumulative effect of the use of leverage with respect to any investments in a market that moves adversely to such investments
could result in a substantial loss that would be greater than if our investments were not leveraged.
As a registered
closed-end management investment company, we are generally required to meet certain asset coverage requirements, as defined under the
1940 Act, with respect to any senior securities. With respect to senior securities representing indebtedness (i.e., borrowings or deemed
borrowings), other than temporary borrowings as defined under the 1940 Act, we are required under current law to have an asset coverage
of at least 300%, as measured at the time of borrowing and calculated as the ratio of our total assets (less all liabilities and indebtedness
not represented by senior securities) over the aggregate amount of our outstanding senior securities representing indebtedness. With respect
to senior securities that are stocks (i.e., shares of preferred stock), we are required under current law to have an asset coverage of
at least 200%, as measured at the time of the issuance of any such shares of preferred stock and calculated as the ratio of our total
assets (less all liabilities and indebtedness not represented by senior securities) over the aggregate amount of our outstanding senior
securities representing indebtedness plus the aggregate liquidation preference of any outstanding shares of preferred stock. If legislation
were passed that modifies this section of the 1940 Act and increases the amount of senior securities that we may incur, we may increase
our leverage to the extent then permitted by the 1940 Act and the risks associated with an investment in us may increase.
If our
asset coverage declines below 300% (or 200%, as applicable), we would not be able to incur additional debt or issue additional preferred
stock, and could be required by law to sell a portion of our investments to repay some debt or redeem shares of preferred stock when it
is disadvantageous to do so, which could have a material adverse effect on our operations, and we may not be able to make certain distributions
or pay dividends of an amount necessary to continue to be subject to tax as a RIC. The amount of leverage that we employ will depend on
the Adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We
cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
In addition,
our BNP Credit Facility imposes and any debt facility into which we may enter would likely impose financial and operating covenants that
restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to
make the distributions required to maintain our ability to be subject to tax as a RIC under Subchapter M of the Code.
The
following table is furnished in response to the requirements of the SEC and illustrates the effect of leverage on returns from an investment
in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual
returns may be higher or lower than those appearing in the table below.
|
Assumed Return on Our Portfolio (net of expenses) |
| |
(10.0)% |
|
(5.0)% |
| |
0.0% |
|
5.0% |
|
10.0% |
| ||||||||||||||||||
|
Corresponding net return to common stockholder(1)
|
| (19.78 | ) | % | | | (11.69 | ) | % | | | | (3.59 | ) | % | | | 4.50 | % | | | | | 12.59 | % | | |||||
(1)
Assumes
$147.8 million in total assets, $38.0 million of outstanding Series A Term Preferred Stock and $21.3 million borrowings under the BNP
Credit Facility.
Based
on our assumed leverage described above, our investment portfolio would have been required to experience an annual return of at least
2.2%
to cover interest payments on our assumed indebtedness.
Our
investments may be highly subordinated and subject to leveraged securities risk.
Our
portfolio includes junior debt and equity investments in CLOs, which involve a number of significant risks. CLOs are typically very highly
levered (with CLO equity securities being leveraged ten times), and therefore the junior debt and equity tranches in which we are currently
invested and in which we seek to invest will be subject to a higher degree of risk of total loss. In particular, investors in CLO securities
indirectly bear risks of the collateral held by such CLOs. We generally have the right to receive payments only from the CLOs, and generally
not have direct rights against the underlying borrowers or the entity that sponsored the CLO. While the CLOs we target generally enable
an equity investor therein to acquire interests in a pool of senior secured loans without the expenses associated with directly holding
the same investments, we generally pay a proportionate share of the CLOs’ administrative, management and other expenses if we make
a CLO equity investment. In addition, we may have the option in certain CLOs to contribute additional amounts to the CLO issuer for purposes
of acquiring additional assets or curing coverage tests, thereby increasing our overall exposure and capital at risk to such CLO. Although
it is difficult to predict whether the prices of assets underlying CLOs will rise or fall, these prices (and, therefore, the prices of
the CLOs’ securities) are influenced by the same types of political and economic events that affect issuers of securities and capital
markets generally. The interests we acquire in CLOs generally are thinly traded or have only a limited trading market. CLO securities
are typically privately offered and sold, even in the secondary market. As a result, investments in CLO securities are illiquid.
We
and our investments are subject to risks associated with investing in high-yield and unrated, or “junk,” securities.
We invest
primarily in securities that are rated below investment grade or, in the case of CLO equity securities, are not rated by a nationally
recognized statistical rating organization. The primary assets underlying our CLO security investments are senior secured loans, although
these transactions may allow for limited exposure to other asset classes including unsecured loans, high yield bonds, emerging market
loans or bonds and structured finance securities with underlying exposure to CBO and CDO tranches, residential mortgage backed securities,
commercial mortgage backed securities, trust preferred securities and other types of securitizations. CLOs generally invest in lower-rated
debt securities that are typically rated below Baa/BBB by Moody’s, S&P or Fitch. In addition, we may obtain direct exposure
to such financial assets/instruments. Securities that are not rated or are rated lower than Baa by Moody’s or lower than BBB by
S&P or Fitch are sometimes referred to as “high yield” or “junk.” High-yield debt securities have greater
credit and liquidity risk than investment grade obligations. High-yield debt securities are generally unsecured and may be subordinated
to certain other obligations of the issuer thereof. The lower rating of high-yield debt securities and below investment grade loans reflects
a greater possibility that adverse changes in the financial condition of an issuer or in general economic conditions or both may impair
the ability of the issuer thereof to make payments of principal or interest.
Risks
of high-yield debt securities may include:
•
limited
liquidity and secondary market support;
•
substantial
marketplace volatility resulting from changes in prevailing interest rates;
•
subordination
to the prior claims of banks and other senior lenders;
•
the
operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the CLO
issuer to reinvest premature redemption proceeds in lower-yielding debt obligations;
•
the possibility that earnings of
the high-yield debt security issuer may be insufficient to meet its debt service;
•
the
declining creditworthiness and potential for insolvency of the issuer of such high-yield debt securities during periods of rising interest
rates and/or economic downturn; and
•
greater
susceptibility to losses and real or perceived adverse economic and competitive industry conditions than higher grade securities.
An economic
downturn or an increase in interest rates could severely disrupt the market for high-yield debt securities and adversely affect the value
of outstanding high-yield debt securities and the ability of the issuers thereof to repay principal and interest.
Issuers
of high-yield debt securities may be highly leveraged and may not have available to them more traditional methods of financing. The risk
associated with acquiring (directly or indirectly) the securities of such issuers generally is greater than is the case with highly rated
securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high-yield debt securities
may be more likely to experience financial stress, especially if such issuers are highly leveraged. During such periods, timely service
of debt obligations also may be adversely affected by specific issuer developments, or the issuer’s inability to meet specific projected
business forecasts or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater
for the holders of high-yield debt securities because such securities may be unsecured and may be subordinated to obligations owed to
other creditors of the issuer of such securities. In addition, the CLO issuer may incur additional expenses to the extent it (or any investment
manager) is required to seek recovery upon a default on a high yield bond (or any other debt obligation) or participate in the restructuring
of such obligation.
A portion
of the loans held by CLOs in which we invest may consist of second lien loans. Second lien loans are secured by liens on the collateral
securing the loan that are subordinated to the liens of at least one other class of obligations of the related obligor, and thus, the
ability of the CLO issuer to exercise remedies after a second lien loan becomes a defaulted obligation is subordinated to, and limited
by, the rights of the senior creditors holding such other classes of obligations. In many circumstances, the CLO issuer may be prevented
from foreclosing on the collateral securing a second lien loan until the related first lien loan is paid in full. Moreover, any amounts
that might be realized as a result of collection efforts or in connection with a bankruptcy or insolvency proceeding involving a second
lien loan must generally be turned over to the first lien secured lender until the first lien secured lender has realized the full value
of its own claims. In addition, certain of the second lien loans contain provisions requiring the CLO issuer’s interest in the collateral
to be released in certain circumstances. These lien and payment obligation subordination provisions may materially and adversely affect
the ability of the CLO issuer to realize value from second lien loans and adversely affect the fair value of and income from our investment
in the CLO’s securities.
We
are subject to risks associated with loan assignments and participations.
We,
or the CLOs in which we invest, may acquire interests in loans either directly (by way of assignment, or “Assignments”) or
indirectly (by way of participation, or “Participations”). The purchaser by an Assignment of a loan obligation typically succeeds
to all the rights and obligations of the selling institution and becomes a lender under the loan or credit agreement with respect to the
debt obligation. In contrast, Participations acquired by us or the CLOs in which we invest in a portion of a debt obligation held by a
selling institution, or the “Selling Institution,” typically result in a contractual relationship only with such Selling Institution,
not with the obligor. We or the CLOs in which we invest would have the right to receive payments of principal, interest and any fees to
which we (or the CLOs in which we invest) are entitled under the Participation only from the Selling Institution and only upon receipt
by the Selling Institution of such payments from the obligor. In purchasing a Participation, we or the CLOs in which we invest generally
will have no right to enforce compliance by the obligor with the terms of the loan or credit agreement or other instrument evidencing
such debt obligation, nor any rights of setoff against the obligor, and we or the CLOs in which we invest may not directly benefit from
the collateral supporting the debt obligation in which it has purchased the Participation. As a result, we or the CLOs in which we invest
would assume the credit risk of both the obligor and the Selling Institution. In the event of the insolvency of the Selling Institution,
we or the CLOs in which we invest will be treated as a general creditor of the Selling Institution in respect of the Participation and
may not benefit from any setoff between the Selling Institution and the obligor.
The holder of a Participation
in a debt obligation may not have the right to vote to waive enforcement of any default by an obligor. Selling Institutions commonly reserve
the right to administer the debt obligations sold by them as they see fit and to amend the documentation evidencing such debt obligations
in all respects. However, most participation agreements with respect to senior secured loans provide that the Selling Institution may
not vote in favor of any amendment, modification or waiver that (1) forgives principal, interest or fees, (2) reduces principal, interest
or fees that are payable, (3) postpones any payment of principal (whether a scheduled payment or a mandatory prepayment), interest or
fees or (4) releases any material guarantee or security without the consent of the participant (at least to the extent the participant
would be affected by any such amendment, modification or waiver).
A Selling
Institution voting in connection with a potential waiver of a default by an obligor may have interests different from ours, and the Selling
Institution might not consider our interests in connection with its vote. In addition, many participation agreements with respect to senior
secured loans that provide voting rights to the participant further provide that, if the participant does not vote in favor of amendments,
modifications or waivers, the Selling Institution may repurchase such Participation at par. An investment by us in a synthetic security
related to a loan involves many of the same considerations relevant to Participations.
The
lack of liquidity in our investments may adversely affect our business.
High-yield
investments, including subordinated CLO securities and collateral held by CLOs in which we invest, generally have limited liquidity. As
a result, prices of high-yield investments have at times experienced significant and rapid decline when a substantial number of holders
(or a few holders of a significantly large “block” of the securities) decided to sell. In addition, we (or the CLOs in which
we invest) may have difficulty disposing of certain high-yield investments because there may be a thin trading market for such securities.
To the extent that a secondary trading market for non-investment grade high-yield investments does exist, it would not be as liquid as
the secondary market for highly rated investments. Reduced secondary market liquidity would have an adverse impact on the fair value of
the securities and on our direct or indirect ability to dispose of particular securities in response to a specific economic event such
as deterioration in the creditworthiness of the issuer of such securities.
As secondary
market trading volumes increase, new loans frequently contain standardized documentation to facilitate loan trading that may improve market
liquidity. There can be no assurance, however, that future levels of supply and demand in loan trading will provide an adequate degree
of liquidity or that the current level of liquidity will continue. Because holders of such loans are offered confidential information
relating to the borrower, the unique and customized nature of the loan agreement, and the private syndication of the loan, loans are not
purchased or sold as easily as publicly traded securities are purchased or sold. Although a secondary market may exist, risks similar
to those described above in connection with an investment in high-yield debt investments are also applicable to investments in lower rated
loans.
The
securities issued by CLOs generally offer less liquidity than other investment grade or high-yield corporate debt, and are subject to
certain transfer restrictions that impose certain financial and other eligibility requirements on prospective transferees. Other investments
that we may purchase in privately negotiated transactions may also be illiquid or subject to legal restrictions on their transfer. As
a result of this illiquidity, our ability to sell certain investments quickly, or at all, in response to changes in economic and other
conditions and to receive a fair price when selling such investments may be limited, which could prevent us from making sales to mitigate
losses on such investments. In addition, CLOs are subject to the possibility of liquidation upon an event of default, which could result
in full loss of value to the CLO equity and junior debt investors. CLO equity tranches are the most likely tranche to suffer a loss of
all of their value in these circumstances.
We
may be exposed to counterparty risk.
We may
be exposed to counterparty risk, which could make it difficult for us or the CLOs in which we invest to collect on the obligations represented
by investments and result in significant losses.
We may
hold investments (including synthetic securities) that would expose us to the credit risk of our counterparties or the counterparties
of the CLOs in which it invests. In the event of a bankruptcy or insolvency of such a counterparty, we or a CLO in which such an investment
is held could suffer significant losses, including the loss of that part of our or the CLO’s portfolio financed through such a transaction,
declines in
the value of our investment, including
declines that may occur during an applicable stay period, the inability to realize any gains on our investment during such period and
fees and expenses incurred in enforcing our rights. If the CLO enters into or owns synthetic securities, the CLO may fall within the definition
of “commodity pool” under CFTC rules, and the collateral manager of the CLO may be required to register as a commodity pool
operator with the CFTC, which could increase costs for the CLO and reduce amounts available to pay to the residual tranche.
In addition,
with respect to certain swaps and synthetic securities, neither a CLO nor we usually has a contractual relationship with the entities,
referred to as “Reference Entities” whose payment obligations are the subject of the relevant swap agreement or security.
Therefore, neither the CLOs nor we generally have a right to directly enforce compliance by the Reference Entity with the terms of this
kind of underlying obligation, any rights of set-off against the Reference Entity or any voting rights with respect to the underlying
obligation. Neither the CLOs nor we will directly benefit from the collateral supporting the underlying obligation and will not have the
benefit of the remedies that would normally be available to a holder of such underlying obligation.
Furthermore,
we may invest in unsecured notes which are linked to loans or other assets held by a bank or other financial institution on its balance
sheet (so called “credit-linked notes”). Although the credit-linked notes are tied to the underlying performance of the assets
held by the bank, such credit-linked notes are not secured by such assets and we have no direct or indirect ownership of the underlying
assets. Thus, as a holder of such credit-linked notes, we would be subject to counterparty risk of the bank which issues the credit-linked
notes (in addition to the risk associated with the assets themselves). To the extent the relevant bank experiences an insolvency event
or goes into receivership, we may not receive payments on the credit-linked notes, or such payments may be delayed.
We
are subject to risks associated with defaults on an underlying asset held by a CLO.
A default
and any resulting loss as well as other losses on an underlying asset held by a CLO may reduce the fair value of our corresponding CLO
investment. A wide range of factors could adversely affect the ability of the borrower of an underlying asset to make interest or other
payments on that asset. To the extent that actual defaults and losses on the collateral of an investment exceed the level of defaults
and losses factored into its purchase price, the value of the anticipated return from the investment will be reduced. The more deeply
subordinated the tranche of securities in which we invest, the greater the risk of loss upon a default. For example, CLO equity is the
most subordinated tranche within a CLO and is therefore subject to the greatest risk of loss resulting from defaults on the CLO’s
collateral, whether due to bankruptcy or otherwise. Any defaults and losses in excess of expected default rates and loss model inputs
will have a negative impact on the fair value of our investments, will reduce the cash flows that we receive from our investments, adversely
affect the fair value of our assets and could adversely impact our ability to pay dividends. Furthermore, the holders of the junior debt
and equity tranches typically have limited rights with respect to decisions made with respect to collateral following an event of default
on a CLO. In some cases, the senior most class of notes can elect to liquidate the collateral even if the expected proceeds are not expected
to be able to pay in full all classes of notes. We could experience a complete loss of our investment in such a scenario.
In addition,
the collateral of CLOs may require substantial workout negotiations or restructuring in the event of a default or liquidation. Any such
workout or restructuring is likely to lead to a substantial reduction in the interest rate of such asset and/or a substantial write-down
or write-off of all or a portion the principal of such asset. Any such reduction in interest rates or principal will negatively affect
the fair value of our portfolio.
We
are subject to risks associated with the bankruptcy or insolvency of an issuer or borrower of a loan that we hold or of an underlying
asset held by a CLO in which we invest.
In the
event of a bankruptcy or insolvency of an issuer or borrower of a loan that we hold or of an underlying asset held by a CLO or other vehicle
in which we invest, a court or other governmental entity may determine that our claims or those of the relevant CLO are not valid or not
entitled to the treatment we expected when making our initial investment decision.
Various laws enacted
for the protection of debtors may apply to the underlying assets in our investment portfolio. The information in this and the following
paragraph represents a brief summary of certain points only, is not intended to be an extensive summary of the relevant issues and is
applicable with respect to U.S. issuers and borrowers only. The following is not intended to be a summary of all relevant risks. Similar
avoidance provisions to those described below are sometimes available with respect to non-U.S. issuers or borrowers, and there is no assurance
that this will be the case which may result in a much greater risk of partial or total loss of value in that underlying asset.
If a
court in a lawsuit brought by an unpaid creditor or representative of creditors of an issuer or borrower of underlying assets, such as
a trustee in bankruptcy, were to find that such issuer or borrower did not receive fair consideration or reasonably equivalent value for
incurring the indebtedness constituting such underlying assets and, after giving effect to such indebtedness, the issuer or borrower (1)
was insolvent; (2) was engaged in a business for which the remaining assets of such issuer or borrower constituted unreasonably small
capital; or (3) intended to incur, or believed that it would incur, debts beyond our ability to pay such debts as they mature, such court
could decide to invalidate, in whole or in part, the indebtedness constituting the underlying assets as a fraudulent conveyance, to subordinate
such indebtedness to existing or future creditors of the issuer or borrower or to recover amounts previously paid by the issuer or borrower
in satisfaction of such indebtedness. In addition, in the event of the insolvency of an issuer or borrower of underlying assets, payments
made on such underlying assets could be subject to avoidance as a “preference” if made within a certain period of time (which
may be as long as one year under U.S. Federal bankruptcy law or even longer under state laws) before insolvency.
Our
underlying assets may be subject to various laws for the protection of debtors in other jurisdictions, including the jurisdiction of incorporation
of the issuer or borrower of such underlying assets and, if different, the jurisdiction from which it conducts business and in which it
holds assets, any of which may adversely affect such issuer’s or borrower’s ability to make, or a creditor’s ability
to enforce, payment in full, on a timely basis or at all. These insolvency considerations will differ depending on the jurisdiction in
which an issuer or borrower or the related underlying assets are located and may differ depending on the legal status of the issuer or
borrower.
We
are subject to risks associated with any hedging or Derivative Transactions in which we participate.
We may
in the future purchase and sell a variety of derivative instruments. To the extent we engage in Derivative Transactions, we expect to
do so to hedge against interest rate, credit and/or other risks or for other investment or risk management purposes. We may use Derivative
Transactions for investment purposes to the extent consistent with our investment objectives if the Adviser deems it appropriate to do
so. Derivative Transactions may be volatile and involve various risks different from, and in certain cases, greater than the risks presented
by other instruments. The primary risks related to Derivative Transactions include counterparty, correlation, illiquidity, leverage, volatility
and OTC trading risks. A small investment in derivatives could have a large potential impact on our performance, effecting a form of investment
leverage on our portfolio. In certain types of Derivative Transactions we could lose the entire amount of our investment. In other types
of Derivative Transactions, the potential loss is theoretically unlimited.
The
following is a more detailed discussion of primary risk considerations related to the use of Derivative Transactions that investors should
understand before investing in our securities.
Counterparty
risk. Counterparty risk is the risk that a counterparty in a Derivative Transaction will be
unable to honor its financial obligation to us, or the risk that the reference entity in a credit default swap or similar derivative will
not be able to honor its financial obligations. Certain participants in the derivatives market, including larger financial institutions,
have experienced significant financial hardship and deteriorating credit conditions. If our counterparty to a Derivative Transaction experiences
a loss of capital, or is perceived to lack adequate capital or access to capital, it may experience margin calls or other regulatory requirements
to increase equity. Under such circumstances, the risk that a counterparty will be unable to honor its obligations may increase substantially.
If a counterparty becomes bankrupt, we may experience significant delays in obtaining recovery (if at all) under the derivative contract
in bankruptcy or other reorganization proceeding; if our claim is unsecured, we will be treated as a general creditor of such prime broker
or counterparty and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain
no recovery in such circumstances. The counterparty risk for cleared
derivatives is generally lower than for
uncleared OTC derivatives since generally a clearing organization becomes substituted for each counterparty to a cleared derivative and,
in effect, guarantees the parties’ performance under the contract as each party to a trade looks only to the clearing house for
performance of financial obligations. However, there can be no assurance that the clearing house, or its members, will satisfy its obligations
to us.
Correlation
risk. When used for hedging purposes, an imperfect or variable degree of correlation between
price movements of the derivative instrument and the underlying investment sought to be hedged may prevent us from achieving the intended
hedging effect or expose us to the risk of loss. The imperfect correlation between the value of a derivative and our underlying assets
may result in losses on the Derivative Transaction that are greater than the gain in the value of the underlying assets in our portfolio.
The Adviser may not hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently
high as to justify the cost of the hedge, or because it does not foresee the occurrence of the risk. These factors may have a significant
negative effect on the fair value of our assets and the market value of our securities.
Liquidity
risk. Derivative Transactions, especially when traded in large amounts, may not be liquid in
all circumstances, so that in volatile markets we would not be able to close out a position without incurring a loss. Although both OTC
and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally
less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors, including congestion,
disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and
technical and operational or system failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges
on which we may conduct transactions in derivative instruments may prevent prompt liquidation of positions, subjecting us to the potential
of greater losses.
Leverage
risk. Trading in Derivative Transactions can result in significant leverage and risk of loss.
Thus, the leverage offered by trading in derivative instruments will magnify the gains and losses we experience and could cause our NAV
to be subject to wider fluctuations than would be the case if we did not use the leverage feature in derivative instruments.
Volatility
risk. The prices of many derivative instruments, including many options and swaps, are highly
volatile. Price movements of options contracts and payments pursuant to swap agreements are influenced by, among other things, interest
rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments, and
national and international political and economic events and policies. The value of options and swap agreements also depends upon the
price of the securities or currencies underlying them.
OTC
trading. Derivative Transactions that may be purchased or sold may include instruments not traded
on an organized market. The risk of non-performance by the counterparty to such Derivative Transaction may be greater and the ease with
which we can dispose of or enter into closing transactions with respect to such an instrument may be less than in the case of an exchange
traded instrument. In addition, significant disparities may exist between “bid” and “asked” prices for certain
derivative instruments that are not traded on an exchange. Such instruments are often valued subjectively and may result in mispricings
or improper valuations. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value, or
both. In contrast, cleared derivative transactions benefit from daily marked-to-market pricing and settlement, and segregation and minimum
capital requirements applicable to intermediaries. Transactions entered into directly between two counterparties generally do not benefit
from such protections; however, certain uncleared derivative transactions are subject to minimum margin requirements which may require
us and our counterparties to exchange collateral based on daily marked-to-market pricing. OTC trading generally exposes us to the risk
that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the
contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing us to suffer a loss. Such “counterparty
risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where we have concentrated
our transactions with a single or small group of counterparties.
We
may be subject to risks associated with investments in other investment companies.
We may
invest in securities of other investment companies subject to statutory limitations prescribed by the 1940 Act. These limitations include
in certain circumstances a prohibition on us acquiring more than 3%
of the voting shares of any other investment
company, and a prohibition on investing more than 5% of our total assets in securities of any one investment company or more than 10%
of our total assets in securities of all investment companies. We will indirectly bear our proportionate share of any management fees
and other expenses paid by such other investment companies, in addition to the fees and expenses that we regularly bear. We may only invest
in other investment companies to the extent that the asset class exposure in such investment companies is consistent with the permissible
asset class exposure for us had we invested directly in securities, and the portfolios of such investment companies are subject to similar
risks as we are.
Investors
will bear indirectly the fees and expenses of the CLO equity securities in which we invest.
Investors
will bear indirectly the fees and expenses (including management fees and other operating expenses) of the CLO equity securities in which
we invest. CLO collateral manager fees are charged on the total assets of a CLO but are assumed to be paid from the residual cash flows
after interest payments to the CLO senior debt tranches. Therefore, these CLO collateral manager fees (which generally range from 0.35%
to 0.50% of a CLO’s total assets) are effectively much higher when allocated only to the CLO equity tranche. The calculation does
not include any other operating expense ratios of the CLOs, as these amounts are not routinely reported to stockholders on a basis consistent
with this methodology; however, it is estimated that additional operating expenses of 0.30% to 0.70% could be incurred. In addition, CLO
collateral managers may earn fees based on a percentage of the CLO’s equity cash flows after the CLO equity has earned a cash-on-cash
return of its capital and achieved a specified “hurdle” rate.
We
and our investments are subject to reinvestment risk.
As part
of the ordinary management of its portfolio, a CLO will typically generate cash from asset repayments and sales and reinvest those proceeds
in substitute assets, subject to compliance with its investment tests and certain other conditions. The earnings with respect to such
substitute assets will depend on the quality of reinvestment opportunities available at the time. If the CLO collateral manager causes
the CLO to purchase substitute assets at a lower yield than those initially acquired (for example, during periods of loan compression
or need to satisfy the CLO’s covenants) or sale proceeds are maintained temporarily in cash, it would reduce the excess interest-related
cash flow that the CLO collateral manager is able to achieve. The investment tests may incentivize a CLO collateral manager to cause the
CLO to buy riskier assets than it otherwise would, which could result in additional losses. These factors could reduce our return on investment
and may have a negative effect on the fair value of our assets and the market value of our securities. In addition, the reinvestment period
for a CLO may terminate early, which would cause the holders of the CLO’s securities to receive principal payments earlier than
anticipated. In addition, in most CLO transactions, CLO debt investors are subject to the risk that the holders of a majority of the equity
tranche, who can direct a call or refinancing of a CLO, causing such CLO’s outstanding CLO debt securities to be repaid at par earlier
than expected. There can be no assurance that we will be able to reinvest such amounts in an alternative investment that provides a comparable
return relative to the credit risk assumed.
We
and our investments are subject to risks associated with non-U.S. investing.
While
we invest primarily in CLOs that hold underlying U.S. assets, these CLOs may be organized outside the United States and we may also invest
in CLOs that hold collateral that are non-U.S. assets.
Investing
in foreign entities may expose us to additional risks not typically associated with investing in U.S. issuers. These risks include changes
in exchange control regulations, political and social instability, restrictions on the types or amounts of investment, 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 exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards, currency fluctuations and greater price volatility. Further, we, and the
CLOs in which we invest, may have difficulty enforcing creditor’s rights in foreign jurisdictions.
In addition,
international trade tensions may arise from time to time which could result in trade tariffs, embargoes or other restrictions or limitations
on trade. The imposition of any actions on trade could trigger a significant reduction in international trade, supply chain disruptions,
an oversupply of certain manufactured
goods, substantial price reductions
of goods and possible failure of individual companies or industries, which could have a negative impact on the value of the CLO securities
that we hold.
Foreign
markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have failed
to keep pace with the volume of securities transactions, making it difficult to conduct such transactions. Delays in settlement could
result in periods when our assets are uninvested. Our inability to make intended investments due to settlement problems or the risk of
intermediary counterparty failures could cause it to miss investment opportunities. The inability to dispose of an investment due to settlement
problems could result either in losses to the funds due to subsequent declines in the value of such investment or, if we have entered
into a contract to sell the security, could result in possible liability to the purchaser. Transaction costs of buying and selling foreign
securities also are generally higher than those involved in domestic transactions. Furthermore, foreign financial markets have, for the
most part, substantially less volume than U.S. markets, and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies.
The
economies of individual non-U.S. countries may also differ favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, volatility of currency exchange rates, depreciation, capital reinvestment, resources self-sufficiency
and balance of payments position.
Currency
Risk. Any of our investments that are denominated in currencies other than U.S. dollars will
be subject to the risk that the value of such currency will decrease in relation to the U.S. dollar. Although we will consider hedging
any non-U.S. dollar exposures back to U.S. dollars, an increase in the value of the U.S. dollar compared to other currencies in which
we make investments would otherwise reduce the effect of increases and magnify the effect of decreases in the prices of our non-U.S. dollar
denominated investments in their local markets. Fluctuations in currency exchange rates will similarly affect the U.S. dollar equivalent
of any interest, dividends or other payments made that are denominated in a currency other than U.S. dollars.
Any
unrealized losses we experience on our portfolio may be an indication of future realized losses, which could reduce our income available
for distribution or to make payments on our other obligations.
As
a registered closed-end management investment company, we are required to carry our investments at market value or, if no market value
is ascertainable, at the fair value as determined in good faith by our board of directors. Decreases in the market values or fair values
of our investments are recorded as unrealized depreciation. Any unrealized losses in our portfolio could be an indication of an issuer’s
inability to meet its repayment obligations to us with respect to the affected investments. This could result in realized losses in the
future and ultimately in reductions of our income available for distribution or to make payments on our other obligations in future periods.
If our
distributions exceed our taxable income and capital gains realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to our common stockholders. A return of capital distribution will
generally not be taxable to our stockholders.
However,
a return of capital distribution will reduce a stockholder’s cost basis in shares of our common stock on which the distribution
was received, thereby potentially resulting in a higher reported capital gain or lower reported capital loss when those shares of our
common stock are sold or otherwise disposed of.
A
portion of our income and fees may not be qualifying income for purposes of the income source requirement.
Some
of the income and fees that we may recognize will not satisfy the qualifying income requirement applicable to RICs. In order to ensure
that such income and fees do not disqualify us as a RIC for a failure to satisfy such requirement, we may need to recognize such income
and fees indirectly through one or more entities classified as corporations for U.S. federal income tax purposes. Such corporations will
be subject to U.S. corporate income tax on their earnings, which ultimately will reduce our return on such income and fees.
Risks Relating to Our Business
and Structure
Our
investment portfolio is recorded at fair value, in accordance with the 1940 Act. As a result, there will 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 the Adviser in accordance with written valuation
policies and procedures, subject to oversight
by our board of directors, in accordance with Rule 2a-5 under the 1940 Act. Typically, there is no public market for the type of investments
we target. As a result, we value these securities at least quarterly based on relevant information compiled by the Adviser and third-party
pricing services (when available), and with the oversight, by our board of directors.
The determination
of fair value and, consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree subjective and dependent
on a valuation process approved and overseen by our board of directors. Certain factors that may be considered in determining the fair
value of our investments include non-binding indicative bids and the number of trades (and the size and timing of each trade) in an investment.
Valuation of certain investments is also based, in part, upon third party valuation models which take into account various market inputs.
Investors should be aware that the models, information and/or underlying assumptions utilized by us or such models will not always allow
us to correctly capture the fair value of an asset. Because such valuations, and particularly valuations of securities that are not publicly
traded like those we hold, are inherently uncertain, they 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 an active public market for these securities
existed. Our determinations of the fair value of our investments have a material impact on our net earnings through the recording of unrealized
appreciation or depreciation of investments and may cause our NAV on a given date to understate or overstate, possibly materially, the
value that we may ultimately realize on one or more of our investments. See “Conflicts
of Interest — Valuation.”
Our
financial condition and results of operations depend on the Adviser’s ability to effectively manage and deploy capital.
Our ability
to achieve our investment objectives depends on the Adviser’s ability to effectively manage and deploy capital, which depends, in
turn, on the Adviser’s ability to identify, evaluate and monitor, and our ability to acquire, investments that meet our investment
criteria.
Accomplishing
our investment objectives is largely a function of the Adviser’s handling of the investment process, its ability to provide competent,
attentive and efficient services and our access to investments offering acceptable terms, either in the primary or secondary markets.
Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material
adverse effect on our business, financial condition, results of operations and prospects. The results of our operations will depend on
many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives
in the financial markets and economic conditions. Furthermore, if we cannot successfully operate our business or implement our investment
policies and strategies as described in this prospectus, it could adversely impact our ability to pay distributions. In addition, because
the trading methods employed by the Adviser on our behalf are proprietary, stockholders will not be able to determine details of such
methods or whether they are being followed.
We
are reliant on the Adviser continuing to serve as our investment adviser.
The Adviser
manages our investments. Consequently, our success depends, in large part, upon the services of the Adviser and the skill and expertise
of the Adviser’s professional personnel, in particular, Thomas P. Majewski. Incapacity of Mr. Majewski could have a material and
adverse effect on our performance. There can be no assurance that the professional personnel of the Adviser will continue to serve in
their current positions or continue to be employed by the Adviser. We can offer no assurance that their services will be available for
any length of time or that the Adviser will continue indefinitely as our investment adviser.
Under
the Personnel and Resources Agreement, Eagle Point Credit Management makes available the personnel and resources, including portfolio
managers and investment personnel, to the Adviser as the Adviser may determine to be reasonably necessary to the conduct of its operations.
the Adviser depends upon access to the investment professionals and other resources of Eagle Point Credit Management and its affiliates
to fulfill its obligations to us under the Investment Advisory Agreement. We are not a party to the Personnel and Resources Agreement
and cannot assure you that Eagle Point Credit Management will fulfill its obligations under the agreement. If Eagle Point Credit Management
fails to perform, we cannot assure that the Adviser will enforce the Personnel and Resources Agreement, that such agreement will not be
terminated by either
party or that we will continue to have
access to the investment professionals of Eagle Point Credit Management and its affiliates or their information.
The
Adviser and the Administrator each has the right to resign on 90 days’ notice, and we may not be able to find a suitable replacement
within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results
of operations.
The Adviser
has the right, under the Investment Advisory Agreement, and the Administrator has the right under the Administration Agreement, to resign
at any time upon 90 days’ written notice, whether we have found a replacement or not. If the Adviser or the Administrator resigns,
we may not be able to find a new investment adviser or hire internal management, or find a new administrator, as the case may be, with
similar expertise and ability to provide the same or equivalent services on acceptable terms within 90 days, or at all. If we are unable
to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations, as
well as our ability to make distributions to our stockholders and other payments to securityholders, are likely to be adversely affected
and the market price of our securities may decline. In addition, the coordination of our internal management and investment activities
is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise
possessed by the Adviser and the Administrator and their affiliates. Even if we are able to retain comparable management and administration,
whether internal or external, the integration of such management and their lack of familiarity with our investment objectives and operations
would likely result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.
Our
success will depend on the ability of the Adviser and certain of its affiliates to attract and retain qualified personnel in a competitive
environment.
Our growth
will require that the Adviser and certain of its affiliates attract and retain new investment and administrative personnel in a competitive
market. The Adviser’s and such affiliates’ ability to attract and retain personnel with the requisite credentials, experience
and skills will depend on several factors including its ability to offer competitive compensation, benefits and professional growth opportunities.
Many of the entities, including investment funds (such as private equity funds, mezzanine funds and business development companies) and
traditional financial services companies, with which the Adviser will compete for experienced personnel have greater resources than the
Adviser has.
There
are significant actual and potential conflicts of interest which could impact our investment returns.
Our executive
officers and directors, and the Adviser and certain of its affiliates and their officers and employees, including the Senior Investment
Team, have several conflicts of interest as a result of the other activities in which they engage. For example, the members of the Adviser’s
investment team are and may in the future become affiliated with entities engaged in business activities similar to ours, including ECC
and EPIIF, and may have conflicts of interest in allocating their time. Moreover, each member of the Senior Investment Team is engaged
in other business activities which divert their time and attention. The professional staff of the Adviser will devote as much time to
us as such professionals deem appropriate to perform their duties in accordance with the Investment Advisory Agreement. However, such
persons may be committed to providing investment advisory and other services for other clients, and engage in other business ventures
in which we have no interest. As a result of these separate business activities, the Adviser has conflicts of interest in allocating management
time, services and functions among us, other advisory clients and other business ventures.
Our
management fee structure may create incentives for the Adviser that are not fully aligned with the interests of our stockholders.
In the
course of our investing activities, we pay a management fee to the Adviser and reimburse the Adviser for certain expenses it incurs. As
a result, investors in our securities receive distributions on a “net” basis after expenses, potentially resulting in a lower
rate of return than an investor might achieve through direct investments.
Since the management
fee is based on our Managed Assets, which includes assets purchased using leverage, the Adviser benefits when we incur debt or use leverage.
The use of leverage increases the risk of investing in us.
The
Adviser’s liability is limited under the Investment Advisory Agreement, and we have agreed to indemnify the Adviser against certain
liabilities, which may lead the Adviser to act in a riskier manner on our behalf than it would when acting for its own account.
Under
the Investment Advisory Agreement, the Adviser does not assume any responsibility to us other than to render the services called for under
the agreement, and it is not responsible for any action of our board of directors in following or declining to follow the Adviser’s
advice or recommendations. The Adviser maintains a contractual and fiduciary relationship with us. Under the terms of the Investment Advisory
Agreement, the Adviser, its officers, managers, members, agents, employees and other affiliates are not liable to us for acts or omissions
performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting willful
misfeasance, bad faith, gross negligence or reckless disregard of the Adviser’s duties under the Investment Advisory Agreement.
In addition, we have agreed to indemnify the Adviser and each of its officers, managers, members, agents, employees and other affiliates
from and against all damages, liabilities, costs and expenses (including reasonable legal fees and other amounts reasonably paid in settlement)
incurred by such persons arising out of or based on performance by the Adviser of its obligations under the Investment Advisory Agreement,
except where attributable to willful misfeasance, bad faith, gross negligence or reckless disregard of the Adviser’s duties under
the Investment Advisory Agreement. These protections may lead the Adviser to act in a riskier manner when acting on our behalf than it
would when acting for its own account.
The
Adviser may not be able to achieve the same or similar returns as those achieved by other portfolios managed by the Senior Investment
Team.
Although
the Senior Investment Team manages other investment portfolios, including accounts using investment objectives, investment strategies
and investment policies similar to ours, we cannot assure you that we will be able to achieve the results realized by any other vehicles
managed by the Senior Investment Team.
We
may experience fluctuations in our NAV and quarterly operating results.
We could
experience fluctuations in our NAV from month to month and in our quarterly operating results due to a number of factors, including the
timing of distributions to our stockholders, fluctuations in the value of the CLO securities that we hold, our ability or inability to
make investments that meet our investment criteria, the interest and other income earned on our investments, the level of our expenses
(including the interest or dividend rate payable on the debt securities or preferred stock we may issue), variations in and the timing
of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general
economic conditions. As a result of these factors, our NAV and results for any period should not be relied upon as being indicative of
our NAV and results in future periods.
Our
board of directors may change our operating policies and strategies without stockholder approval, the effects of which may be adverse.
Our
board of directors has the authority to modify or waive our current operating policies, investment criteria and strategies, other than
those that we have deemed to be fundamental, without prior stockholder approval. We cannot predict the effect any changes to our current
operating policies, investment criteria and strategies would have on our business, NAV, operating results and value of our securities.
However, the effects of any such changes could adversely impact our ability to pay dividends and cause you to lose all or part of your
investment.
Our
management’s estimates of certain metrics relating to our financial performance for a period are subject to revision based on our
actual results for such period.
Our
management makes and publishes unaudited estimates of certain metrics indicative of our financial performance, including the NAV per share
of our common stock and the range of NAV per share of our
common
stock on a monthly basis, and the range of the net investment income and realized gain/loss per share of our common stock on a quarterly
basis. Such estimates are included in this prospectus and may be included in a related prospectus. While any such estimate will be made
in good faith based on our most recently available records as of the date of the estimate, such estimates are subject to financial closing
procedures, the final determination of our NAV as of the end of the applicable quarter and other developments arising between the time
such estimate is made and the time that we finalize our quarterly financial results and may differ materially from the results reported
in the audited financial statements and/or the unaudited financial statements included in filings we make with the SEC. As a result, investors
are cautioned not to place undue reliance on any management estimates presented in this prospectus or any related amendment to this prospectus
or related prospectus and should view such information in the context of our full quarterly or annual results when such results are available.
We
will be subject to corporate-level income tax if we are unable to maintain our RIC status for U.S. federal income tax purposes.
We can
offer no assurance that we will be able to maintain RIC status. To obtain and maintain RIC tax treatment under the Code, we must meet
certain annual distribution, income source and asset diversification requirements.
The annual
distribution requirement for a RIC will be satisfied if we distribute dividends to our stockholders each tax year of an amount generally
at least equal to 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term
capital losses, if any. Because we use debt financing, we are subject to certain asset coverage requirements under the 1940 Act and may
be subject to financial covenants 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.
The income
source requirement will be satisfied if we obtain at least 90% of our income for each tax year from dividends, interest, gains from the
sale of our securities or similar sources.
The asset
diversification requirement will be satisfied if we meet certain asset composition requirements at the end of each quarter of our tax
year. Failure to meet those 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 are expected to be in CLO securities for which there will likely be no active public market,
any such dispositions could be made at disadvantageous prices and could result in substantial losses.
If we
fail to qualify for RIC tax treatment for any reason and remain or become 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 have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For federal
income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as original issue discount
or market discount, which may arise if we acquire a debt security at a significant discount to par, or payment-in-kind interest, which
represents contractual interest added to the principal amount of a debt security and due at the maturity of the debt security. We also
may be required to include in income certain other amounts that we have not yet, and may not ever, receive in cash. Our investments in
payment-in-kind interest may represent a higher credit risk than loans for which interest must be paid in full in cash on a regular basis.
For example, even if the accounting conditions for income accrual are met, the issuer of the security could still default when our actual
collection is scheduled to occur upon maturity of the obligation.
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 maintain RIC tax treatment under the Code. 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 qualify for RIC tax treatment and thus become subject to corporate-level
income tax.
Because
we expect to distribute substantially all of our ordinary income and net realized capital gains to our stockholders, we may need additional
capital to finance the acquisition of new investments and such capital may not be available on favorable terms, or at all.
In order
to maintain our RIC status, we are required to distribute at least 90% of the sum of our net ordinary income and realized net short-term
capital gains in excess of realized net long-term capital losses, if any. As a result, these earnings will not be available to fund new
investments, and we will need additional capital to fund growth in our investment portfolio. If we fail to obtain additional capital,
we could be forced to curtail or cease new investment activities, which could adversely affect our business, operations and results. Even
if available, if we are not able to obtain such capital on favorable terms, it could adversely affect our net investment income.
A
disruption or downturn in the capital markets and the credit markets could impair our ability to raise capital and negatively affect our
business.
We may
be materially affected by market, economic and political conditions globally and in the jurisdictions and sectors in which we invest or
operate, including conditions affecting interest rates and the availability of credit. Unexpected volatility, illiquidity, governmental
action, currency devaluation or other events in the global markets in which we directly or indirectly hold positions could impair our
ability to carry out our business and could cause us to incur substantial losses. These factors are outside our control and could adversely
affect the liquidity and value of our investments, and may reduce our ability to make attractive new investments.
In particular,
economic and financial market conditions significantly deteriorated for a significant part of the past decade as compared to prior periods.
Global financial markets experienced considerable declines in the valuations of debt and equity securities, an acute contraction in the
availability of credit and the failure of a number of leading financial institutions. As a result, certain government bodies and central
banks worldwide, including the U.S. Treasury Department and the U.S. Federal Reserve, undertook unprecedented intervention programs, the
effects of which remain uncertain. Although certain financial markets have improved, to the extent economic conditions experienced during
the past decade recur, they may adversely impact our investments. Signs of deteriorating sovereign debt conditions in Europe and elsewhere
and uncertainty regarding the U.S. economy more generally could lead to further disruption in the global markets. Trends and historical
events do not imply, forecast or predict future events, and past performance is not necessarily indicative of future results. There can
be no assurance that the assumptions made or the beliefs and expectations currently held by the Adviser will prove correct, and actual
events and circumstances may vary significantly.
We may
be subject to risk arising from a default by one of several large institutions that are dependent on one another to meet their liquidity
or operational needs, so that a default by one institution may cause a series of defaults by the other institutions. This is sometimes
referred to as “systemic risk” and may adversely affect financial intermediaries with which we interact in the conduct of
our business.
We also
may be subject to risk arising from a broad sell off or other shift in the credit markets, which may adversely impact our income and NAV.
In addition, if the value of our assets declines substantially, we may fail to maintain the minimum asset coverage imposed upon us by
the 1940 Act. Any such failure would affect our ability to issue additional preferred stock, debt securities and other senior securities,
including borrowings, and may affect our ability to pay distributions on our capital stock, which could materially impair our business
operations. Our liquidity could be impaired further by an inability to access the capital markets or to obtain additional debt financing.
For example, we cannot be certain that we would be able to obtain debt financing on commercially reasonable terms, if at all. In previous
market cycles, many lenders and institutional investors have previously reduced or ceased lending to borrowers. In the event of such type
of market turmoil and tightening of credit, increased market volatility and widespread reduction of business activity could occur, thereby
limiting our investment opportunities.
Moreover, we are unable
to predict when economic and market conditions may be favorable in future periods. Even if market conditions are broadly favorable over
the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.
If
we are unable to refinance and/or obtain additional debt capital, our business could be materially adversely affected.
We have
obtained debt financing in order to obtain funds to make additional investments and grow our portfolio of investments. Such debt capital
may take the form of a term credit facility with a fixed maturity date or other fixed term instruments, and we may be unable to extend,
refinance or replace such debt financings prior to their maturity.
If we
are unable to refinance and/or obtain additional debt capital on commercially reasonable terms, our liquidity will be lower than it would
have been with the benefit of such financings, which would limit our ability to grow our business. Any such limitations on our ability
to grow and take advantage of leverage may decrease our earnings, if any, and distributions to stockholders, which in turn may lower the
trading price of our securities. In addition, in such event, we may need to liquidate certain of our investments, which may be difficult
to sell if required, meaning that we may realize significantly less than the value at which we have recorded our investments. Furthermore,
to the extent we are not able to raise capital and are at or near our targeted leverage ratios, we may receive smaller allocations, if
any, on new investment opportunities under the Adviser’s allocation policy.
Debt
capital that is available to us in the future, if any, including upon the refinancing of then-existing debt prior to its maturity, may
be at a higher cost and on less favorable terms and conditions than costs and other terms and conditions at which we can currently obtain
debt capital. In addition, if we are unable to repay amounts outstanding under any such debt financings and are declared in default or
are unable to renew or refinance these debt financings, we may not be able to make new investments or operate our business in the normal
course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to the credit markets,
a severe decline in the value of the U.S. dollar, an economic downturn or an operational problem that affects third parties or us, and
could materially damage our business.
Regulations
governing our operation as a registered closed-end management investment company affect our ability to raise additional capital and the
way in which we do so. The raising of debt capital may expose us to risks, including the typical risks associated with leverage.
Under
the provisions of the 1940 Act, we are permitted, as a registered closed-end management investment company, to issue senior securities
(including debt securities, preferred stock and/or borrowings from banks or other financial institutions); provided we meet certain asset
coverage requirements (i.e., 300%
for senior securities representing indebtedness and 200% in the case of the issuance of preferred stock under current law). If the value
of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments
and, depending on the nature of our leverage, repay a portion of our indebtedness (including by redeeming a portion of any series of preferred
stock or notes that may be outstanding) at a time when such sales or redemptions may be disadvantageous. Also, any amounts that we use
to service or repay our indebtedness would not be available for distributions to our stockholders.
We are
not generally able to issue and sell shares of our common stock at a price below the then current NAV per share (exclusive of any distributing
commission or discount). We may, however, sell shares of our common stock at a price below the then current NAV per share (1) in connection
with a rights offering to our existing stockholders, (2) with the consent of the majority of our common stockholders, (3) upon the conversion
of a convertible security in accordance with its terms or (4) under such circumstances as the SEC may permit.
Significant
stockholders may control the outcome of matters submitted to our stockholders or adversely impact the market price or liquidity of our
securities.
To the
extent any stockholder, such as Cavello Bay and Enstar’s other affiliates, individually or acting together with other stockholders,
controls a significant number of our voting securities or any class of voting securities, they may have the ability to control the outcome
of matters submitted to our stockholders for
approval, including the election of
directors and any merger, consolidation or sale of all or substantially all of our assets, and may cause actions to be taken that you
may not agree with or that are not in your interests or those of other securityholders.
This concentration
of beneficial ownership also might harm the market price of our securities by:
•
delaying,
deferring or preventing a change in corporate control;
•
impeding
a merger, consolidation, takeover or other business combination involving us; or
•
discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
To the
extent that any stockholder that holds a significant number of our securities is subject to temporary restrictions on resale of such securities,
including certain lock-up restrictions, such restrictions could adversely affect the liquidity of trading in our securities, which may
harm the market price of our securities.
We
are subject to the risk of legislative and regulatory changes impacting our business or the markets in which we invest.
Legal
and regulatory changes. Legal and regulatory changes could occur and may adversely affect us
and our ability to pursue our investment strategies and/or increase the costs of implementing such strategies. New or revised laws or
regulations may be imposed by the Commodity Futures Trading Commission, or the “CFTC,” the SEC, the U.S. Federal Reserve,
other banking regulators, other governmental regulatory authorities or self-regulatory organizations that supervise the financial markets
that could adversely affect us. In particular, these agencies are empowered to promulgate a variety of new rules pursuant to recently
enacted financial reform legislation in the United States. We also may be adversely affected by changes in the enforcement or interpretation
of existing statutes and rules by these governmental regulatory authorities or self-regulatory organizations. Such changes, or uncertainty
regarding any such changes, could adversely affect the strategies and plans set forth in this prospectus and may result in our investment
focus shifting from the areas of expertise of the Senior Investment Team to other types of investments in which the investment team 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.
Derivative
Investments. The derivative investments in which we may invest are subject to comprehensive
statutes, regulations and margin requirements. In particular, certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, or the “Dodd-Frank Act,” requires certain standardized derivatives to be executed on a regulated market and cleared through
a central counterparty, which may result in increased margin requirements and costs for us. The Dodd-Frank Act also established minimum
margin requirements on certain uncleared derivatives which may result in us and our counterparties posting higher margin amounts for uncleared
derivatives. In addition, we have claimed an exclusion from the definition of the term “commodity pool operator” pursuant
to CFTC No-Action Letter 12-38 issued by the staff of the CFTC Division of Swap Dealer and Intermediary Oversight. For us to continue
to qualify for this exclusion, (i) the aggregate initial margin and premiums required to establish our positions in derivative instruments
subject to the jurisdiction of the U.S. Commodity Exchange Act, as amended, or the “CEA,” and (other than positions entered
into for hedging purposes) may not exceed five percent of our liquidation value, (ii) the net notional value of our aggregate investments
in CEA-regulated derivative instruments (other than positions entered into for hedging purposes) may not exceed 100% of our liquidation
value, or (iii) we must meet an alternative test appropriate for a “fund of funds” as set forth in CFTC No-Action Letter 12-38.
In the event we fail to qualify for the exclusion and the Adviser is required to register as a “commodity pool operator” in
connection with serving as our investment adviser and becomes subject to additional disclosure, recordkeeping and reporting requirements,
our expenses may increase.
In October
2020, the SEC adopted Rule 18f-4 under the 1940 Act related to the use of derivatives, short sales, reverse repurchase agreements and
certain other transactions by registered investment companies. Rule 18f-4 permits us to enter into derivatives and other transactions
that create future payment or delivery obligations, including short sales, notwithstanding the senior security provisions of the 1940
Act if we comply with certain value-at-risk leverage limits and derivatives risk management program and board oversight and reporting
requirements or comply with a “limited derivatives users” exception. We have elected to rely on the
limited derivatives users exception.
We may change this election and comply with the other provisions of Rule 18f-4 related to derivatives transactions at any time and without
notice. To satisfy the limited derivatives users exception, we have adopted and implemented written policies and procedures reasonably
designed to manage the our derivatives risk and limit its derivatives exposure in accordance with Rule 18f-4. Rule 18f-4 also permits
us to enter into reverse repurchase agreements or similar financing transactions notwithstanding the senior security provisions of the
1940 Act if we aggregate the amount of indebtedness associated with its reverse repurchase agreements or similar financing transactions
with the aggregate amount of any other senior securities representing indebtedness when calculating our asset coverage ratios as discussed
above or treats all such transactions as derivatives transactions for all purposes under Rule 18f-4.
Loan
Securitizations. Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker
Rule,” generally prohibits, subject to certain exemptions, covered banking entities from engaging in proprietary trading or sponsoring,
or acquiring or retaining an ownership interest in, a hedge fund or private equity fund, or “covered funds.” “Loan securitizations”
that do not invest in bonds (or certain other securities) are exempt from the definition of covered fund. However, the definition of covered
fund has been broadly defined in a way that could include many CLOs.
On October
1, 2020, certain revisions to the Volcker Rule (the “Volcker Changes”) became effective. The Volcker Changes include modifications
to (i) permit covered funds relying on the “loan securitization” exclusion to acquire assets that do not constitute loans
or other assets or rights previously permitted under the “loan securitization” exclusion, in an aggregate amount not to exceed
5% of the aggregate value of the issuing entity’s assets, (ii) exclude from the definition of “ownership interest” certain
“senior loans” or “senior debt interests” issued by a covered fund and (iii) clarify that the rights either to
participate in the removal of a collateral manager for cause, or to participate in the replacement of a collateral manager following a
resignation, both as part of the rights of a creditor to exercise remedies upon the occurrence of an event of default, would not be a
feature that results in a banking entity having an ownership interest in a covered fund.
As a
result of the Volcker Changes, certain CLO issuers are permitted to acquire bonds, securities and other assets that they would not have
been permitted to acquire prior to October 1, 2020. In addition, a substantial number of recent CLOs have taken the position that the
“loan securitization exclusion” is not required to be followed given the changes noted in clauses (ii) and (iii) above. Thus,
collateral supporting the CLOs in which we have invested after October 1, 2020 is more likely to include bonds. However, we cannot assure
you that the performance of the CLO securities in which we invest will be affected by the Volcker Changes or that the Volcker Rule will
not continue to adversely affect the market value or liquidity of any or all of the investments held by us. In addition, the return on
equity securities of CLOs that have amended their transaction documents to qualify as “loan securitizations” may be reduced,
including as a result of the costs of entering into the amendments.
However,
in Kirschner v. JPMorgan Chase Bank, N.A. et al.,
a federal case related to the bankruptcy of Millennium Health LLC, the plaintiffs alleged that broadly syndicated term loans are securities
and, as a result, the arranging banks should have liability under applicable securities laws as underwriters and the sale of the loans
should be subject to federal and state securities laws. On May 22, 2020, the United States District Court for the Southern District of
New York granted summary judgment in favor of the defendants. However, such summary judgment has been appealed. If the appeals court were
to rule in favor of the plaintiffs, we cannot assure you that the federal agencies responsible for implementing the Volcker Rule would
not apply the ruling to the federal securities laws. If loans held by any CLO issuer in which we are invested could be characterized as
securities, the CLO issuer would likely not be permitted to rely on the “loan securitization” exclusion described above absent
regulatory relief or guidance. In addition, such developments would likely materially and negatively impact the leveraged loan market,
including by decreasing the volume of new leveraged loans that are originated and the number of participants in the leveraged loan market,
and potentially prevent the CLO issuers in which we invest from identifying assets that are suitable for purchase. Such developments could
also have a severe impact on the market value and the liquidity of similar CLO securities that we hold, including if banking entities
were required to divest their interests in any CLO securities.
The
joint final rules implementing certain credit risk retention requirements contemplated in Section 941 of the Dodd-Frank Act, or the “Final
U.S. Risk Retention Rules,” became fully effective on December 24, 2016. With respect to the regulation of CLOs, the Final U.S.
Risk Retention Rules require that the “sponsor”
or a “majority owned affiliate”
thereof (in each case as defined in the rules), will retain an “eligible vertical interest” or an “eligible horizontal
interest” (in each case as defined therein) or any combination thereof in the CLO in the manner required by the Final U.S.
Risk Retention Rules. As a result of certain litigation in the United States Court of Appeals for the District of Columbia Circuit, collateral
managers of open market CLOs are not required to comply with the Final U.S. Risk Retention Rules. To the extent either the underlying
collateral manager or its majority-owned affiliate divests itself of the notes previously held in order to comply with the Final U.S.
Risk Retention Rules, this will reduce the degree to which the relevant collateral manager’s incentives are aligned with those of
the noteholders of the CLO (which may include us as a CLO noteholder), and could influence the way in which the relevant collateral manager
manages the CLO assets and/or makes other decisions under the transaction documents related to the CLO in a manner that is adverse to
us. In addition, we cannot assure you that any of the transactions, structures or arrangements currently under consideration by or currently
used by CLO market participants will comply with the Final U.S. Risk Retention Rules to the extent such rules are reinstated or otherwise
become applicable to open market CLOs.
In Europe,
there has also been political and regulatory scrutiny of the securitization industry. Regulation EU 2017/2402 of the European Parliament
and the Council of 12 December 2017 (as amended from time to time and including any delegated or implementing legislation and any binding
guidance adopted with respect thereto, the “EU Securitisation Regulation”) establishes a general framework for securitization
and a specific framework for simple, transparent and standardized securitization. In addition, the EU Securitisation Regulation, as it
forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018, and as amended by the Securitization (Amendment)
(EU Exit) Regulations 2019 (as may be further amended from time to time and including any delegated or implementing legislation and any
binding guidance adopted with respect thereto, the “UK Securitization Regulation”) is applicable with respect to certain entities
in the United Kingdom. The UK regime has begun to diverge from the EU regime as the EU Securitisation Regulation has recently been amended
without corresponding amendments to the UK Securitisation Regulation. These divergences are expected to continue.
The
EU Securitization Regulation and the UK Securitisation Regulation restrict certain investors from investing in securitizations unless,
broadly speaking and among other things: (a)(i) the originator, sponsor or original lender with respect to the relevant securitization
will retain, on an on-going basis, a net economic interest of not less than 5% with respect to certain specified credit risk tranches
or securitized exposures and (ii) the risk retention is disclosed to the investor in accordance with the EU Securitisation Regulation
or the UK Securitisation Regulation (as applicable); and (b) such investor is able to demonstrate that it has undertaken certain due diligence
with respect to various matters, including the risk characteristics of its investment position and the underlying assets, and that procedures
are established for such activities to be monitored on an on-going basis.
To the
extent a CLO is structured in compliance with the EU or the UK securitization laws, our ability to invest in the residual tranches of
such CLOs could be limited, or we could be required to hold our investment for the life of the CLO. If a CLO has not been structured to
comply with the EU Securitisation Regulation or the UK Securitisation Regulation (which could be the case for CLOs issued in the United
States or elsewhere outside of the EU and the UK), it will limit the ability of certain investors to purchase CLO securities, which may
adversely affect the price and liquidity of the securities (including the residual tranche) in the secondary market.
In addition,
Japan has adopted certain risk retention rules that mandate an “indirect” compliance requirement, meaning that certain categories
of Japanese investors will be required to apply higher risk weighting to securitization exposures they hold unless the relevant originator
commits to hold a retention interest equal to at least 5% of the exposure of the total underlying assets in the transaction or such investors
determine that the underlying assets were not “inappropriately originated.” The Japanese rules and any other risk retention
rules that may be adopted in Asia could deter Japanese and other investors from purchasing CLO securities, which may limit the liquidity
of CLO securities and, in turn, adversely affect the price of such CLO securities in the secondary market.
The
SEC staff could modify its position on certain non-traditional investments, including investments in CLO securities.
The
staff of the SEC from time to time has undertaken a broad review of the potential risks associated with different asset management activities,
focusing on, among other things, liquidity risk and leverage risk.
The staff of the Division of Investment
Management has, in correspondence with registered management investment companies, previously raised questions about the level of, and
special risks associated with, investments in CLO securities. While it is not possible to predict what conclusions, if any, the staff
may reach in these areas, or what recommendations, if any, the staff might make to the SEC, the imposition of limitations on investments
by registered management investment companies in CLO securities could adversely impact our ability to implement our investment strategy
and/or our ability to raise capital through public offerings, or could cause us to take certain actions that may result in an adverse
impact on our stockholders, our financial condition and/or our results of operations. We are unable at this time to assess the likelihood
or timing of any such regulatory development.
Risks Relating to an Investment
in Our Common Stock
Common
stock of closed-end management investment companies frequently trades at discounts to their respective NAVs, and we cannot assure you
that the market price of our common stock will not decline below our NAV per share.
Common
stock of closed-end management investment companies frequently trades at discounts to their respective NAVs and our common stock may also
be discounted in the market. This characteristic of closed-end management investment companies is separate and distinct from the risk
that our NAV per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our NAV per share.
The risk of loss associated with this characteristic of closed-end management investment companies may be greater for investors expecting
to sell common stock purchased in an offering soon after such offering. In addition, if our common stock trades below our NAV per share,
we will generally not be able to sell additional common stock to the public at market price except (1) in connection with a rights offering
to our existing stockholders, (2) with the consent of the majority of the holders of our common stock, (3) upon the conversion of a convertible
security in accordance with its terms or (4) under such circumstances as the SEC may permit.
Our
common stock price may be volatile and may decrease substantially.
The
trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market may be higher
or lower than the price you paid to purchase shares of our common stock, depending on many factors, some of which are beyond our control
and may not be directly related to our operating performance. These factors include the following:
•
price
and volume fluctuations in the overall stock market from time to time;
•
investor
demand for shares of our common stock;
•
significant
volatility in the market price and trading volume of securities of registered closed-end management investment companies or other companies
in our sector, which are not necessarily related to the operating performance of these companies,
•
changes
in regulatory policies or tax guidelines with respect to RICs or registered closed-end management investment companies;
•
failure
to qualify as a RIC, or the loss of RIC status;
•
any
shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
•
changes,
or perceived changes, in the value of our portfolio investments;
•
departures
of any members of the Senior Investment Team;
•
operating
performance of companies comparable to us; or
•
general
economic conditions and trends and other external factors.
We
and the Adviser could be the target of litigation.
We or
the Adviser could become the target of securities class action litigation or other similar claims if our stock price fluctuates significantly
or for other reasons. The outcome of any such proceedings could
materially adversely affect our business,
financial condition, and/or operating results and could continue without resolution for long periods of time. Any litigation or other
similar claims could consume substantial amounts of our management’s time and attention, and that time and attention and the devotion
of associated resources could, at times, be disproportionate to the amounts at stake. Litigation and other claims are subject to inherent
uncertainties, and a material adverse impact on our financial statements could occur for the period in which the effect of an unfavorable
final outcome in litigation or other similar claims becomes probable and reasonably estimable. In addition, we could incur expenses associated
with defending ourselves against litigation and other similar claims, and these expenses could be material to our earnings in future periods.
Sales
in the public market of substantial amounts of our common stock may have an adverse effect on the market price of our common stock.
Sales
of substantial amounts of our common stock, including by selling stockholders, or the availability of such common stock for sale, whether
or not actually sold, could adversely affect the prevailing market price of our common stock. If this occurs and continues, it could impair
our ability to raise additional capital through the sale of equity securities should we desire to do so.
Our
stockholders will experience dilution in their ownership percentage if they do not participate in our dividend reinvestment plan.
All
distributions declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested
in shares of our common stock. As a result, our stockholders that do not participate in our dividend reinvestment plan will experience
dilution in their ownership percentage of our common stock over time.
Indebtedness
incurred in connection with borrowings under our Credit Facility may cause the NAV and market value of our common stock to be more volatile.
Any
indebtedness incurred in connection with our Credit Facility and any future issuances of preferred stock or debt securities may cause
the NAV and market value of our common stock to become more volatile. If the interest rate payable on our indebtedness were to approach
the net rate of return on our investment portfolio, the benefit of leverage to the common stockholders would be reduced. If the interest
rate payable on our indebtedness were to exceed the net rate of return on our portfolio, the leverage would result in a lower rate of
return to the common stockholders than if we had not incurred any indebtedness. Any decline in the NAV of our investments would be borne
entirely by the common stockholders. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater
decrease in NAV to the common stockholders than if we were not leveraged through the borrowings under our Credit Facility. This greater
NAV decrease would also tend to cause a greater decline in the market price for common stock. We might be in danger of failing to maintain
the required asset coverage or, in an extreme case, our current investment income might not be sufficient to meet the interest payments
on our indebtedness. In order to counteract such an event, we might need to liquidate investments in order to make payments under our
Credit Facility. In addition, we would pay (and the common stockholders would bear) all costs and expenses relating to the ongoing maintenance
of our Credit Facility, including higher advisory fees if our total return exceeds the interest rate payable on our indebtedness.
The
impact of tax legislation on us, our stockholders and our investments is uncertain.
Changes
in tax laws, regulations or administrative interpretations or any amendments thereto could adversely affect us, the entities in which
we invest, or our stockholders. You are urged to consult with your tax advisor with respect to the impact of any such legislation or other
regulatory or administrative developments and proposals and their potential effect on your investment in us.
General Risk Factors
Provisions
of the General Corporation Law of the State of Delaware and our certificate of incorporation and bylaws could deter takeover attempts
and have an adverse effect on the price of our securities.
The
General Corporation Law of the State of Delaware, or the “DGCL,” contains provisions that may discourage, delay or make more
difficult a change in control of us or the removal of our directors. Our
certificate of incorporation and bylaws
contain provisions that limit liability and provide for indemnification of our directors and officers. These provisions and others also
may have the effect of deterring hostile takeovers or delaying changes in control or management. We are subject to Section 203 of the
DGCL, the application of which is subject to any applicable requirements of the 1940 Act. This section generally prohibits us from engaging
in mergers and other business combinations with stockholders that beneficially own 15% or more of our voting stock, or with their affiliates,
unless our directors or stockholders approve the business combination in the prescribed manner. If our board of directors does not approve
a business combination, Section 203 of the DGCL may discourage third parties from trying to acquire control of us and increase the difficulty
of consummating such an offer.
We have
also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our certificate of
incorporation classifying our board of directors in three classes serving staggered three-year terms, and provisions of our certificate
of incorporation authorizing our board of directors to classify or reclassify shares of our preferred stock in one or more classes or
series, to cause the issuance of additional shares of our capital stock, and to amend our certificate of incorporation, without stockholder
approval, in certain instances. These provisions, as well as other provisions of our certificate of incorporation and bylaws, may delay,
defer or prevent a transaction or a change in control that might otherwise be in the best interests of our securityholders.
Terrorist
actions, natural disasters, outbreaks or pandemics may disrupt the market and impact our operations.
Terrorist
acts, acts of war, natural disasters, outbreaks or pandemics may disrupt the Company’s operations, as well as the operations of
the businesses in which it invests. Such acts have created, and continue to create, economic and political uncertainties and have contributed
to global economic instability. For example, many countries have experienced outbreaks of infectious illnesses in recent decades, including
swine flu, avian influenza, SARS and COVID-19. Since December 2019, the spread of COVID-19 has caused social unrest and commercial disruption
on a global scale.
Global
economies and financial markets are highly interconnected, and conditions and events in one country, region or financial market may adversely
impact issuers in a different country, region or financial market. The COVID-19 pandemic has magnified these risks and has had, and may
continue to have, a material adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross
border commercial activity and market sentiment are increasingly impacted by the outbreak and government and other measures seeking to
contain its spread. The effects of the COVID-19 pandemic contributed to increased volatility in global financial markets and have affected
countries, regions, companies, industries and market sectors more dramatically than others. The COVID-19 pandemic has had, and any other
outbreak of an infectious disease or serious environmental or public health concern could have, a significant negative impact on economic
and market conditions, could exacerbate pre-existing political, social and economic risks in certain countries or regions and could trigger
a prolonged period of global economic slowdown, which may impact the Company and its underlying investments.
Following
the onset of the pandemic, certain CLOs we held experienced increased defaults by underlying borrowers. Obligor defaults and rating agency
downgrades caused, and may in the future cause, payments that would have otherwise been made to the CLO equity or CLO debt securities
that we held to instead be diverted to buy additional loans within a given CLO or paid to senior CLO debt holders as an early amortization
payment. In addition, defaults and downgrades of underlying obligors caused, and may in the future cause, a decline in the value of CLO
securities generally. If CLO cash flows or income decrease as a result of the pandemic, the portion of our distribution comprised of a
return of capital could increase or distributions could be reduced.
We
are subject to risks related to cybersecurity and other disruptions to information systems.
We are
highly dependent on the communications and information systems of the Adviser, the Administrator and their affiliates as well as certain
other third-party service providers. We, and our service providers, are susceptible to operational and information security risks. While
we, the Adviser and the Administrator have procedures in place with respect to information security, technologies may become the target
of cyber-attacks or information security breaches that could result in the unauthorized gathering, monitoring, release, misuse, loss or
destruction of our and/or our stockholders’ confidential and other
information, or otherwise disrupt our
operations or those of our service providers. Disruptions or failures in the physical infrastructure or operating systems and cyber-attacks
or security breaches of the networks, systems or devices that we and our service providers use to service our operations, or disruption
or failures in the movement of information between service providers could disrupt and impact the service providers’ and our operations,
potentially resulting in financial losses, the inability of our stockholders to transact business and of us to process transactions, inability
to calculate our NAV, misstated or unreliable financial data, violations of applicable privacy and other laws, regulatory fines, penalties,
litigation costs, increased insurance premiums, reputational damage, reimbursement or other compensation costs, and/or additional compliance
costs. Our service providers’ policies and procedures with respect to information security have been established to seek to identify
and mitigate the types of risk to which we and our service providers are subject. As with any risk management system, there are inherent
limitations to these policies and procedures as there may exist, or develop in the future, risks that have not been anticipated or identified.
There can be no assurance that we or our service providers will not suffer losses relating to information security breaches (including
cyber attacks) or other disruptions to information systems in the future.
Risks Related to the Offering
It
is not possible to predict the actual number of shares we will sell under the Purchase Agreement to BRPC II, or the actual gross proceeds
resulting from those sales. Further, we may not have access to the full amount available under the Purchase Agreement with BRPC II.
We
entered into the Purchase Agreement with BRPC II, pursuant to which BRPC II has committed to purchase up to $20,000,000 of our common
stock, subject to certain limitations and conditions set forth in the Purchase Agreement. The shares of our common stock that may be issued
under the Purchase Agreement may be sold by us to BRPC II at our discretion from time to time over a 24-month period commencing on the
Commencement Date unless the Purchase Agreement is terminated earlier.
We generally
have the right to control the timing and amount of any sales of our shares of common stock to BRPC II under the Purchase Agreement. Sales
of our common stock, if any, to BRPC II under the Purchase Agreement will depend upon market conditions and other factors to be determined
by us. We may ultimately decide to sell to BRPC II all, some or none of the shares of our common stock that may be available for us to
sell to BRPC II pursuant to the Purchase Agreement. Depending on market liquidity at the time, resales of those shares by BRPC II may
cause the public trading price of our common stock to decrease.
Because
the purchase price per share to be paid by BRPC II for the shares of common stock that we may elect to sell to BRPC II under the Purchase
Agreement will fluctuate based on the market prices of our common stock, it is not possible for us to predict, as of the date of this
prospectus and prior to any such sales, the number of shares of common stock that we will sell to BRPC II, the purchase price per share
that BRPC II will pay for shares purchased from us under the Purchase Agreement, or the aggregate gross proceeds that we will receive
from those purchases by BRPC II under the Purchase Agreement, if any.
Any
issuance and sale by us under the Purchase Agreement of a substantial amount of shares of common stock in addition to the 1,398,973 shares
of common stock being registered for resale by BRPC II under this prospectus could cause downward selling pressure on our common stock.
Our
inability to access a portion or the full amount available under the Purchase Agreement, in the absence of any other financing sources,
could have a material adverse effect on our business.
The
sale of the shares of common stock acquired by BRPC II, or the perception that such sales may occur, could cause the price of our common
stock to fall.
The
purchase price for the shares that we may sell to BRPC II under the Purchase Agreement will fluctuate based on the price of our common
stock. Depending on market liquidity at the time, sales of such shares or any other sales of our common stock, including through our “at-the-market”
program, may cause the trading price of our common stock to fall.
If and
when we do sell shares to BRPC II, after BRPC II has acquired the shares, BRPC II may resell all, some, or none of those shares at any
time or from time to time in its discretion. Therefore, sales to BRPC II by
us could result in substantial dilution
to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to
BRPC II, or the anticipation of such sales, could make it more difficult for us to sell equity securities in the future at a time and
at a price that we might otherwise wish to effect sales.
Investors
who buy shares at different times will likely pay different prices.
Pursuant
to the Purchase Agreement, we will have discretion, subject to market demand, to vary the timing, prices, and numbers of shares sold to
BRPC II. If and when we do elect to sell shares of our common stock to BRPC II pursuant to the Purchase Agreement, after BRPC II has acquired
such shares, BRPC II may resell all, some or none of such shares at any time or from time to time in its discretion and at different prices.
As a result, investors who purchase shares from BRPC II in this offering at different times will likely pay different prices for those
shares, and different outcomes in their investment results. Investors may experience a decline in the value of the shares they purchase
from BRPC II in this offering as a result of future sales made by us to BRPC II at prices lower than the prices such investors paid for
their shares in this offering. In addition, if we sell a substantial number of shares to BRPC II under the Purchase Agreement, or if investors
expect that we will do so, the actual sales of shares or the mere existence of our arrangement with BRPC II may make it more difficult
for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect such
sales.
43
FEES
AND EXPENSES
The
information required by this item is contained in our annual
report on Form N-CSR for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022
and incorporated by reference herein.
44
COMMITTED EQUITY FINANCING
We
entered into the Purchase Agreement and the Registration Rights Agreement with BRPC II. Under the Purchase Agreement, upon the terms and
conditions set forth therein, we, at our sole option and discretion, will have the right to sell to BRPC II up to the lesser of (i) the
Total Commitment and (ii) the Exchange Cap, to the extent applicable. We have paid BRPC II $500,000 as consideration for its commitment
to purchase shares of our common stock pursuant to the Purchase Agreement.
Upon
the Commencement, we will have the right, but not the obligation, from time to time at our sole option and discretion over the 24-month
period beginning on the Commencement Date to direct BRPC II to purchase certain shares of our common stock unless the Purchase Agreement
is terminated earlier. Sales of common stock by us to BRPC II under the Purchase Agreement, and the timing of any such sales, are solely
at our option, and we are under no obligation to sell any securities to BRPC II under the Purchase Agreement.
In no
event may we issue to BRPC II under the Purchase Agreement more than 1,398,973 shares of common stock, which number of shares is equal
to 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Purchase Agreement, or the “Exchange
Cap,” unless we obtain stockholder approval to issue shares of common stock in excess of the Exchange Cap in accordance with applicable
NYSE rules. The Exchange Cap is not applicable to issuances and sales of common stock pursuant to the Purchase Agreement to the extent
such shares of common stock are sold at a price equal to or in excess of the applicable “minimum price” (as defined
in the applicable listing rules of the NYSE) of our common stock, calculated at the time such purchases are effected by us under the Purchase
Agreement, if any. Moreover, BRPC II will not be required to purchase or acquire any shares of our common stock under the Purchase Agreement
which, when aggregated with all other shares of common stock then beneficially owned by BRPC II and its affiliates (as calculated pursuant
to Section 13(d) of the Exchange Act and Rule 13d-3 thereunder), would result in BRPC II beneficially owning more than 4.99% of the outstanding
shares of common stock.
The
Purchase Agreement and the Registration Rights Agreement contain customary representations, warranties, conditions and indemnification
obligations of the parties. The representations, warranties and covenants contained in such agreements were made only for purposes of
such agreements and as of specific dates, were solely for the benefit of the parties to such agreements and are subject to limitations
agreed upon by the contracting parties.
Neither
we nor BRPC II may assign or transfer any of our respective rights and obligations under the Purchase Agreement or the Registration Rights
Agreement, and no provision of the Purchase Agreement or the Registration Rights Agreement may be modified or waived by the parties.
Purchases of Common Stock
Under the Purchase Agreement
From
and after the Commencement Date, subject to certain conditions, we will have the right, but not the obligation, from time to time at our
sole discretion over the 24-month period commencing on the Commencement Date, to direct BRPC II to purchase a specified amount of shares
of common stock, not to exceed certain maximum numbers of shares per purchase calculated in accordance with the Purchase Agreement by
timely delivering written notice to BRPC II. The maximum number of shares of common stock that BRPC II is required to purchase in any
single purchase under the Purchase Agreement may not exceed the lesser of (i) 1,000,000 shares of our common stock and (ii) 20.0% of the
total aggregate number (or volume) of shares of our common stock traded on the NYSE during the applicable measurement period.
All
share and dollar amounts used in determining the purchase price per share of common stock to be purchased by BRPC II, or in determining
the applicable maximum purchase share amounts or applicable volume or price threshold amounts in connection with any such purchase, will
be equitably adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction
occurring during any period used to calculate such per share purchase price, maximum purchase share amounts or applicable volume or price
threshold amounts.
Purchase
Price
The
per share purchase price that BRPC II will be required to pay for shares of common stock in a purchase directed by us pursuant to the
Purchase Agreement will be determined by reference to the VWAP
45
calculated
in accordance with the Purchase Agreement, less a fixed 3.0% discount. There is no maximum price per share that BRPC II could be obligated
to pay for our common stock we may elect to sell to it under the Purchase Agreement. However, the net proceeds to us from BRPC II per
share of our common stock sold under the Purchase Agreement, including the 3% discount, will never be less than the NAV per share of our
common stock at the time of such sale.
Conditions
to Commencement and Each Purchase
BRPC
II’s obligation to purchase shares of our common stock under the Purchase Agreement, are subject to (i) the initial satisfaction,
at the Commencement, and (ii) the satisfaction on the applicable purchase date of the conditions precedent thereto set forth in the Purchase
Agreement, all of which are entirely outside of BRPC II’s control. These conditions include the following:
•
the
accuracy in all material respects of the representations and warranties of the Company included in the Purchase Agreement;
•
the
Company having performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the
Purchase Agreement to be performed, satisfied or complied with by the Company;
•
trading
in the common stock shall not have been suspended by the SEC or the NYSE, the Company shall not have received any final and non-appealable
notice that the listing or quotation of the common stock on the NYSE shall be terminated on a date certain (unless, prior to such date,
the common stock is listed or quoted on any other Eligible Market, as such term is defined in the Purchase Agreement), and there shall
be no suspension of, or restriction on, accepting additional deposits of the common stock, electronic trading or book-entry services by
DTC with respect to the common stock;
•
the
absence of any statute, regulation, order, decree, writ, ruling or injunction by any court or governmental authority of competent jurisdiction
which prohibits the consummation of or that would materially modify or delay any of the transactions contemplated by the Purchase Agreement
or the Registration Rights Agreement;
•
the
absence of any action, suit or proceeding before any arbitrator or any court or governmental authority seeking to restrain, prevent or
change the transactions contemplated by the Purchase Agreement or the Registration Rights Agreement, or seeking material damages in connection
with such transactions;
•
no
condition, occurrence, state of facts or event constituting a Material Adverse Effect (as such term is defined in the Purchase Agreement)
shall have occurred and be continuing; and
•
the
receipt by BRPC II of the legal opinions and negative assurances, and bring-down legal opinions and negative assurances as required under
the Purchase Agreement.
Termination of the Purchase
Agreement
Unless
earlier terminated, the Purchase Agreement will terminate automatically on the earliest to occur of:
•
the
first day of the month next following the 24-month anniversary of the effective date of the registration statement of which this prospectus
forms a part;
•
the
date on which BRPC II shall have purchased shares of common stock under the Purchase Agreement for an aggregate gross purchase price equal
to $20,000,000;
•
the
date on which the common stock shall have failed to be listed or quoted on the NYSE or any other Eligible Market for a period of one (1)
trading day;
•
the
30th trading day after the date on which a voluntary or involuntary bankruptcy proceeding involving our company has been commenced that
is not discharged or dismissed prior to such trading day; and
•
the
date on which a custodian is appointed for the Company in a bankruptcy proceeding for all or substantially all of its property, or the
Company makes a general assignment for the benefit of its creditors.
46
We have the right to
terminate the Purchase Agreement at any time after Commencement, at no cost or penalty, upon five (5) trading days’ prior written
notice to BRPC II. We and BRPC II may also terminate the Purchase Agreement at any time by mutual written consent.
BRPC II also has the
right to terminate the Purchase Agreement upon five (5) trading days’ prior written notice to us, but only upon the occurrence of
certain events, including:
•
the
occurrence of a Material Adverse Effect (as defined in the Purchase Agreement);
•
the
occurrence of a Fundamental Transaction (as defined in the Purchase Agreement) involving our company;
•
trading
in the common stock on the NYSE (or if the common stock is then listed on an Eligible Market, trading in the common stock on such Eligible
Market) has been suspended for a period of three (3) consecutive trading days; or
•
the
Company is in material breach or default of the Purchase Agreement, and, if such breach or default is capable of being cured, such breach
or default is not cured within ten (10) trading days after notice of such breach or default is delivered to the Company.
No termination
of the Purchase Agreement by us or by BRPC II will become effective prior to the fifth trading day immediately following the date on which
any pending purchase has been fully settled in accordance with the terms and conditions of the Purchase Agreement. Furthermore, no termination
of the Purchase Agreement will affect the Registration Rights Agreement, which will survive any termination of the Purchase Agreement.
No
Short-Selling or Hedging by BRPC II
BRPC
II has agreed that none of BRPC II, its sole member, any of their respective officers or any entity managed or controlled by BRPC II or
its sole member will engage in or effect, directly or indirectly, for its own account or for the account of any other of such persons
or entities, any (i) “short sale” (as such term is defined in Rule 200 of Regulation SHO of the Exchange Act) of the
common stock or (ii) hedging transaction, which establishes a net short position with respect to our common stock, during the term of
the Purchase Agreement.
Prohibition
on Certain Variable Rate Transactions
Prior
to termination of the Purchase Agreement, subject to certain specified exceptions, we will be prohibited from effecting or entering into
certain transactions in which equity securities are sold at prices that vary based on the trading price of our common stock or entering
into an “equity line of credit” or other substantially similar continuous offering with a third party, in which we may offer,
issue or sell common stock or any securities exercisable, exchangeable or convertible into common stock at a future determined price.
Effect
of Sales of our Common Stock under the Purchase Agreement
All
shares of common stock that may be issued or sold by us to BRPC II under the Purchase Agreement that are being registered under the Securities
Act for resale by BRPC II in this offering are expected to be freely tradable. The shares of common stock being registered for resale
in this offering may be issued and sold by us to BRPC II from time to time at our discretion over a period of up to 24 months after the
Commencement Date. The resale by BRPC II of a significant amount of shares, or the perception that these sales may occur, could cause
the market price of our common stock to decline and to be highly volatile.
BRPC
II may resell all, some or none of the shares of common stock that it acquires from us at any time or from time to time in its discretion
and at different prices. As a result, investors who purchase shares from BRPC II in this offering at different times will likely pay different
prices for those shares and experience different outcomes in their investment results. Investors may experience a decline in the value
of the shares they purchase from BRPC II in this offering as a result of future sales made by BRPC II at prices lower than the prices
such investors paid for their shares.
Because
the purchase price per share to be paid by BRPC II for the shares of common stock that we may elect to sell to BRPC II under the Purchase
Agreement will fluctuate based on the market prices of our
47
common
stock, it is not possible for us to predict the number of shares of common stock that we will sell to BRPC II, the actual purchase price
per share to be paid by BRPC II for those shares, or the actual gross proceeds to be raised by us from those sales, if any. As of August
15, 2022, there were 6,998,368 shares of our common stock outstanding, of which 2,799,289 shares were held by non-affiliates. If all of
the 1,398,973 shares offered for resale by BRPC II under this prospectus were issued and outstanding as of August 15, 2022, such shares
would represent approximately 16.7% of the total number of shares of our common stock outstanding and approximately 33.3% of the total
number of outstanding shares held by non-affiliates.
Although
the Purchase Agreement provides that we may, in our discretion, from time to time after the date of this prospectus and during the term
of the Purchase Agreement, direct BRPC II to purchase shares of our common stock from us for a maximum aggregate purchase price of up
to $20,000,000, only 1,398,973 shares of common stock are being registered for resale under the registration statement that includes this
prospectus. Assuming all of the 1,398,973 shares offered for resale by BRPC II under this prospectus were sold by us to BRPC II for per
share price of $16.70 (which represents the official closing price of our common stock on the NYSE on August 15, 2022, the trading day
immediately preceding the date of the Purchase Agreement), less a 3.0% discount (the same fixed percentage discount that will be used
to calculate the applicable per share purchase price for shares of common stock that we may elect to sell to BRPC II under the Purchase
Agreement), we would receive aggregate gross proceeds of approximately $22.7 million. However, because the market prices of our common
stock will fluctuate from time to time after the date of this prospectus and, as a result, the actual purchase prices to be paid by BRPC
II for shares of our common stock under the Purchase Agreement will fluctuate because they will be based on the market prices of our common
stock. Moreover, in no event will we sell shares to BRPC II having an aggregate offering price of greater than $20.0 million.
If
it becomes necessary for us to issue and sell to BRPC II under the Purchase Agreement more shares of our common stock than are being registered
for resale under this prospectus in order to receive aggregate gross proceeds equal to $20,000,000 from sales of our common stock to BRPC
II under the Purchase Agreement, we must first file with the SEC and have declared effective one or more additional registration statements
to register under the Securities Act the resale by BRPC II of any such additional shares of our common stock. In addition, if it becomes
necessary for us to issue and sell to BRPC II under the Purchase Agreement an aggregate number of shares that would exceed the Exchange
Cap share issuance limit of 1,398,973 shares (excluding any issuances and sales of common stock pursuant to the Purchase Agreement at
a price equal to or in excess of the applicable “minimum price” for the common stock calculated in accordance with applicable
NYSE listing rules), then before we could issue any shares of common stock in excess of the Exchange Cap share issuance limit under the
Purchase Agreement (assuming such shares do not qualify for exclusion from the Exchange Cap share limit because they were sold at a price
exceeding the adjusted “minimum price” referred to above), we would also need to obtain the requisite stockholder approval
to issue any such shares of common stock in excess of the Exchange Cap under the Purchase Agreement in accordance with applicable NYSE
listing rules. The number of shares of our common stock ultimately offered for sale by BRPC II is dependent upon the number of shares
of common stock, if any, we ultimately sell to BRPC II under the Purchase Agreement.
The
issuance of our common stock to BRPC II pursuant to the Purchase Agreement will not affect the rights or privileges of our existing stockholders,
except that the economic and voting interests of each of our existing stockholders will be diluted. Although the number of shares of our
common stock that our existing stockholders own will not decrease, the shares of our common stock owned by our existing stockholders will
represent a smaller percentage of our total outstanding shares of our common stock after any such issuance.
The
following table sets forth the amount of gross proceeds we would receive from BRPC II from our sale of shares of common stock to BRPC
II under the Purchase Agreement at varying purchase prices:
48
|
Assumed Average Purchase Price
Per Share |
| |
Number of Registered Shares to be Issued if Full Purchase(1) |
| |
Percentage of Outstanding Shares After Giving Effect to the Issuance to BRPC II(2) |
| |
Gross Proceeds from the Sale of Shares to BRPC II Under the Purchase Agreement |
| |||||||||
|
$15.00 |
| | | | 1,333,333 | | | | | | 14.9 | % | | | | $ | 20,000,000 | | |
| $15.72(3) | | | | | 1,272,265 | | | | | | 14.3 | % | | | | $ | 20,000,000 | | |
|
$16.00 |
| | | | 1,250,000 | | | | | | 14.1 | % | | | | $ | 20,000,000 | | |
|
$16.70(4) |
| | | | 1,197,605 | | | | | | 13.6 | % | | | | $ | 20,000,000 | | |
|
$17.00 |
| | | | 1,176,471 | | | | | | 13.4 | % | | | | $ | 20,000,000 | | |
|
$18.00 |
| | | | 1,111,111 | | | | | | 12.8 | % | | | | $ | 20,000,000 | | |
|
$19.00 |
| | | | 1,052,632 | | | | | | 12.2 | % | | | | $ | 20,000,000 | | |
(1)
We
are registering 1,398,973 shares of common stock that we ultimately may sell to BRPC II under the Purchase Agreement.
(2)
The
denominator is based on 7,598,949 shares outstanding as of November 30, 2022, adjusted to include the issuance of the number of shares
set forth in the second column that we would have sold to BRPC II, assuming the average purchase price in the first column. The numerator
is based on the number of shares of common stock set forth in the second column. Does not include shares that may be issued in connection
with other equity offerings, including our “at-the-market” program, or pursuant to our dividend reinvestment plan.
(3)
The
closing sale price of our common stock on the NYSE on December 13, 2022.
(4)
The
closing sale price of our common stock on the NYSE on August 15, 2022.
49
USE OF PROCEEDS
This prospectus
relates to shares of our common stock that may be offered and sold from time to time by BRPC II. All of the common stock offered by BRPC
II pursuant to this prospectus will be sold by BRPC II for its own account. We will not receive any of the proceeds from these sales.
We
may receive up to $20,000,000 aggregate gross proceeds under the Purchase Agreement from any sales we make to BRPC II pursuant to the
Purchase Agreement. The net proceeds from sales, if any, under the Purchase Agreement, will depend on the frequency and prices at which
we sell shares of common stock to BRPC II after the date of this prospectus. See “Plan
of Distribution”. We intend to use the net proceeds from the sale of our common stock
to BRPC II pursuant to the Purchase Agreement to acquire investments in accordance with our investment objectives and strategies described
in this prospectus, to make distributions to our stockholders and for general working capital purposes. In addition, we may also use a
portion of the net proceeds from the sale of our common stock pursuant to the Purchase Agreement to repay any outstanding indebtedness
(including borrowings from the BNP Credit Facility) or preferred stock at the time of such sale. We currently anticipate that it will
take approximately three to six months after completion of any sale pursuant to the Purchase Agreement to invest substantially all of
the net proceeds in our targeted investments or otherwise utilize such proceeds, although such period may vary and depends on the size
of the applicable sale and the availability of appropriate investment opportunities consistent with our investment objectives and market
conditions. We cannot assure you we will achieve our targeted investment pace, which may negatively impact our returns. Until appropriate
investments or other uses can be found, we may invest in temporary investments, such as cash, cash equivalents, U.S. government securities
and other high-quality debt investments that mature in one year or less, which we expect will have returns substantially lower than the
returns that we anticipate earning from investments in CLO securities and related investments. Investors should expect, therefore, that
before we have fully invested the proceeds of any sales pursuant to the Purchase Agreement in accordance with our investment objectives
and strategies, assets invested in these instruments would earn interest income at a modest rate, which may not exceed our expenses during
this period. To the extent that the net proceeds from any sales pursuant to the Purchase Agreement have not been fully invested in accordance
with our investment objectives and strategies prior to the next payment of a distribution to our stockholders, a portion of the proceeds
may be used to pay such distribution and may represent a return of capital.
50
SENIOR
SECURITIES
The
information required by this item is contained in our annual
report on Form N-CSR for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022 and incorporated by reference
herein.
PRICE
RANGE OF COMMON STOCK AND DISTRIBUTIONS
The
information required by this item in respect of the Company’s fiscal years ended December 31, 2020 and December 31, 2021 is contained
in our annual
report on Form N-CSR for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022 and incorporated by reference
herein.
The
following table lists the high and low closing sale price for our common stock, the high and low closing sale price as a percentage of
NAV and distributions declared per share each quarter since January 1, 2022.
| | | | | | | | | |
Closing Sales
Price |
| |
Premium
(Discount) of High Sales Price to NAV(2) |
| |
Premium
(Discount) of Low Sales Price to NAV(2) |
| |
Distributions
Declared(3) |
| ||||||||||||||||||
|
Period
|
| |
NAV(1)
|
| |
High
|
| |
Low
|
| |||||||||||||||||||||||||||
| Fiscal year ending December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
First quarter
|
| | | $ | 16.52 | | | | | $ | 17.38 | | | | | $ | 15.85 | | | | | | 5.2 | % | | | | | (4.1 | )% | | | | $ | 0.38 | | |
|
Second quarter
|
| | | $ | 13.66 | | | | | $ | 17.91 | | | | | $ | 14.75 | | | | | | 31.1 | % | | | | | 8.0 | % | | | | $ | 0.38 | | |
|
Third quarter
|
| | | $ | 13.05 | | | | | $ | 17.29 | | | | | $ | 13.60 | | | | | | 32.5 | % | | | | | 4.2 | % | | | | $ | 0.42 | | |
|
Fourth quarter (through
December 13, 2022) |
| | | | * | | | | | $ | 16.11 | | | | | $ | 13.57 | | | | | | * | | | | | | * | | | | | $ | 0.48 | | |
*
Not
determinable at the time of filing.
(1)
NAV
per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the
high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period.
(2)
Calculated
as of the respective high or low closing sales price divided by the quarter end NAV.
(3)
Represents
the cash distributions (including dividends, dividends reinvested and returns of capital, if any) per share that we have declared on our
common stock in the specified quarter. Tax characteristics of distributions will vary.
51
BUSINESS
We are
an externally managed, diversified closed-end management investment company that has registered as an investment company under the 1940
Act.
Our Structure
The
following chart reflects our organizational structure and our relationship with the Adviser and the Administrator as of the date of this
prospectus:
Our
primary investment objective is to generate high current income, with a secondary objective to generate capital appreciation. We seek
to achieve our investment objectives by investing primarily in junior debt tranches of CLOs that are collateralized by a portfolio consisting
primarily of below investment grade U.S. senior secured loans with a large number of distinct underlying borrowers across various industry
sectors. We focus on CLO debt tranches rated “BB” (e.g., BB+, BB or BB-, or their equivalent) by Moody’s, S&P
or Fitch, and/or other applicable nationally recognized statistical rating organizations. We may also invest in other junior debt tranches
of CLOs, senior debt tranches of CLOs and other related securities and instruments. In addition, we may invest up to 35% of our total
assets (at the time of investment) in CLO equity securities. We expect our investments in CLO equity securities to primarily reflect minority
ownership positions. We may also invest in other securities and instruments that the Adviser believes are consistent with our investment
objectives such as securities issued by other securitization vehicles (such as CBOs). The amount that we will invest in other securities
and instruments, which may include investments in debt and other securities issued by CLOs collateralized by non-U.S. loans or securities
of other collective investment vehicles, will vary from time to time and, as such, may constitute a material part of our portfolio on
any given date, all as based on the Adviser’s assessment of prevailing market conditions.The
CLO securities in which we primarily seek to invest are rated below investment grade or, in the case of CLO equity securities, are unrated
and are considered speculative with respect to timely payment of interest and repayment of principal. Below investment grade and unrated
securities are also sometimes referred to as “junk” securities.
These
investment objectives are not fundamental policies of ours and may be changed by our board of directors without prior approval of our
stockholders.
Investment Strategy
We pursue
a differentiated strategy within the CLO market premised upon our Adviser’s strong emphasis on assessing the skill of CLO collateral
managers and analyzing the structure of a CLO.
We believe
that the Senior Investment Team’s direct and often longstanding relationships with CLO collateral managers, its CLO structural expertise
and the relative scale of the Adviser and its affiliates in the CLO market are competitive advantages as we seek to achieve our investment
objectives.
We seek
to construct a portfolio of CLO securities that provides varied exposure across several key categories, including:
•
number
and investment style of CLO collateral managers; and
•
CLO
vintage period.
We believe
that we are structured as an efficient vehicle for investors to gain exposure to the types of CLO securities and related investments historically
accessed by primarily institutional investors. We believe that our
52
closed-end fund structure allows the
Adviser to take a long-term view from a portfolio management perspective without the uncertainty posed by redemptions in an open-end fund
structure. As such, the Adviser can focus principally on maximizing long-term risk-adjusted returns for the benefit of stockholders.
CLO Overview
The
CLOs that we primarily target are securitization vehicles that pool portfolios of primarily below investment grade U.S. senior secured
loans. Such pools of underlying assets are often referred to as CLO “collateral.” While the vast majority of the portfolio
of most CLOs consists of senior secured loans, many CLOs enable the CLO collateral manager to invest up to 10% of the portfolio in assets
that are not first lien senior secured loans, including second lien loans, unsecured loans, senior secured bonds and senior unsecured
bonds.
CLOs
are generally required to hold a portfolio of assets that is highly diversified by underlying borrower and industry and that is subject
to a variety of asset concentration limitations. Most CLOs are non-static, revolving structures that generally allow for reinvestment
over a specific period of time (the “reinvestment period”), which is typically up to five years. The terms and covenants of
a typical CLO structure are, with certain exceptions, based primarily on the cash flow generated by, and the par value (as opposed to
the market price or fair value) of, the collateral. These covenants include collateral coverage tests, interest coverage tests and collateral
quality tests.
A CLO
funds the purchase of a portfolio of primarily senior secured loans via the issuance of CLO equity and debt securities in the form of
multiple, primarily floating rate, debt tranches. The CLO debt tranches typically are rated “AAA” (or its equivalent)
at the most senior level down to “BB” or “B” (or its equivalent), which is below investment grade, at the
junior level by Moody’s, S&P and/or Fitch. The interest rate on the CLO debt tranches is the lowest at the AAA-level and generally
increases at each level down the rating scale. The CLO equity tranche is unrated and typically represents approximately 8% to 11% of a
CLO’s capital structure. Below investment grade and unrated securities are sometimes referred to as “junk” securities.
The diagram below is for illustrative purposes only and highlights a hypothetical structure intended to depict a typical CLO in the market.
A minority of CLOs also include a B-rated debt tranche (in which we may invest), and the structure of CLOs in which we invest may otherwise
vary from this example. The left column represents the CLO’s assets, which support the liabilities and equity in the right column.
The right column shows the various classes of debt and equity issued by the hypothetical CLO in order of seniority as to rights in payments
from the assets. The percentage ranges appearing below the rating of each class represents the percent such class comprises of the overall
“capital stack” (i.e., total debt and equity issued by the CLO).
CLOs
have two priority-of-payment schedules (commonly called “waterfalls”), which are detailed in a CLO’s indenture and govern
how cash generated from a CLO’s underlying collateral is distributed to the CLO’s debt and equity investors. The interest
waterfall applies to interest payments received on a CLO’s
53
underlying collateral. The principal
waterfall applies to cash generated from principal on the underlying collateral, primarily through loan repayments and the proceeds from
loan sales. Through the interest waterfall, any excess interest-related cash flow available after the required quarterly interest payments
to CLO debt investors are made and certain CLO expenses (such as administration and management fees) are paid is then distributed to the
CLO’s equity investors each quarter, subject to compliance with certain tests.
The
Adviser believes that excess interest-related cash flow is an important driver of CLO equity returns. In addition, relative to certain
other high-yielding credit investments such as mezzanine or subordinated debt, CLO equity is expected to have a shorter payback period
with higher front-end loaded quarterly cash flows during the early years of a CLO’s life if there is no disruption in the interest
waterfall due to a failure to remain in compliance with certain tests.
A CLO’s
indenture typically requires that the maturity dates of a CLO’s assets, typically five to eight years from the date of issuance
of a senior secured loan, be shorter than the maturity date of the CLO’s liabilities, typically 12 to 13 years from the date of
issuance. However, CLO investors do face reinvestment risk with respect to a CLO’s underlying portfolio. In addition, in most CLO
transactions, CLO debt investors are subject to prepayment risk in that the holders of a majority of the equity tranche can direct a call
or refinancing of a CLO, which would cause the CLO’s outstanding CLO debt securities to be repaid at par.
Most
CLOs are non-static, revolving structures that generally allow for reinvestment over a specific period of time (“reinvestment period,”
which is typically up to five years). Specifically, a CLO’s collateral manager normally has broad latitude — within
a specified set of asset eligibility and diversity criteria — to manage and modify a CLO’s portfolio over time.
We believe that skilled CLO collateral managers can add significant value to both CLO debt and equity investors through a combination
of their credit expertise and a strong understanding of how to manage effectively within the rules-based structure of a CLO.
After
the CLO’s reinvestment period has ended, in accordance with the CLO’s principal waterfall, cash generated from principal payments
or other proceeds are generally distributed to repay CLO debt investors in order of seniority. That is, the AAA tranche investors are
repaid first, the AA tranche investors second and so on, with any remaining principal being distributed to the equity tranche investors.
In certain instances, principal may be reinvested after the end of the reinvestment period.
CLOs contain
a variety of structural features and covenants that are designed to enhance the credit protection of CLO debt investors, including overcollateralization
tests and interest coverage tests. The overcollateralization tests and interest coverage tests require CLOs to maintain certain levels
of overcollateralization (measured as par value of assets to liabilities subject to certain adjustments) and interest coverage, respectively.
If a CLO breaches an overcollateralization test or interest coverage test, excess interest-related cash flow that would otherwise be available
for distribution to the CLO equity tranche investors is diverted to prepay CLO debt investors in order of seniority until such time as
the covenant breach is cured. If the covenant breach is not or cannot be cured, the CLO equity investors (and potentially other debt tranche
investors) may experience a deferral of cash flow, a partial or total loss of their investment and/or the CLO may eventually experience
an event of default. For this reason, CLO equity investors are often referred to as being in a first loss position. The Adviser will have
no control over whether or not the CLO is able to satisfy its relevant interest coverage tests or overcollateralization tests.
CLOs also
typically have interest diversion tests, which also acts to ensure that CLOs maintain adequate overcollateralization. If a CLO breaches
an interest diversion test, excess interest-related cash flow that would otherwise be available for distribution to the CLO equity tranche
investors is diverted to acquire new loan collateral until the test is satisfied. Such diversion would lead to payments to the equity
investors being delayed and/or reduced.
Cash flow
CLOs do not have mark-to-market triggers and, with limited exceptions (such as the proportion of assets rated “CCC+” or lower
(or their equivalent) by which such assets exceed a specified concentration limit, discounted purchases and defaulted assets), CLO covenants
are generally calculated using the par value of collateral, not the market value or purchase price. As a result, a decrease in the market
price of a CLO’s performing collateral portfolio does not generally result in a requirement for the CLO collateral manager to sell
assets (i.e., no forced sales) or for CLO equity investors to contribute additional capital (i.e., no margin calls).
54
Overview of Senior Secured
Loans
Broadly
syndicated senior secured loans are typically originated and structured by banks on behalf of corporate borrowers with proceeds often
used for leveraged buyout transactions, mergers and acquisitions, recapitalizations, refinancings, and financing capital expenditures.
Broadly syndicated senior secured loans are typically distributed by the arranging bank to a diverse group of investors primarily consisting
of CLOs, loan and high-yield bond registered funds, loan separate accounts, banks, insurance companies, finance companies and hedge funds.
Senior secured loans are floating rate instruments, typically making quarterly interest payments based on a spread over LIBOR.
The table
below depicts a representative capital structure for a typical company issuing a senior secured loan of the type the CLOs we primarily
invest in may acquire and illustrates the cushion provided by subordinated debt and equity capital. The actual capital structure of any
particular borrower may vary.
In
addition to investing in BB-Rated CLO Debt, we may invest in other junior debt tranches of CLOs, senior debt tranches of CLOs and other
related securities and instruments. In addition, we may invest up to 35% of our total assets (at the time of investment) in CLO equity
securities.
While
we believe that BB-Rated CLO Debt and CLO equity securities have certain attractive fundamental attributes, such securities are subject
to a number of risks as discussed in the “Risk Factors”
section of this prospectus. Among our primary targeted investments, the risks associated with CLO equity are generally greater than those
associated with CLO debt. In addition, many of the statistics and data noted in this prospectus relate to historical periods when market
conditions were, in some cases, materially different than they are as of the date of this prospectus.
As with
other asset classes, market conditions and dynamics for senior secured loans and CLO securities evolve over time. For example, over the
past decade, the senior secured loan market has evolved from one in which covenant-lite loans represented a minority of the market to
one in which such loans represent a significant majority of the market.
Investment Process
The Senior
Investment Team regularly sources and evaluates potential investment opportunities in both the primary and secondary market. We believe
our Adviser’s investment analysis and due diligence process, which includes a strong emphasis on assessing the skill of CLO collateral
managers and analyzing the structure of a CLO differentiates our approach to investing in CLO securities. This process, augmented by the
first-hand CLO industry experience of the Senior Investment Team, is designed to be repeatable and is focused on key areas for analysis
that the Adviser believes are most relevant to potential future performance.
The Adviser
seeks to implement its investment process, described below, in a methodical and disciplined fashion.
55
Sourcing of Investment
Opportunities
The
Senior Investment Team maintains regular dialogue with many CLO collateral managers and the investment banks active in the CLO market.
Members of the Senior Investment Team have met or conducted calls with the majority of these firms. In addition, members of the Senior
Investment Team have longstanding relationships with many CLO collateral managers, some dating back over a decade.
In instances
in which the Senior Investment Team seeks to proceed with a primary market investment, we believe that the Adviser’s and Eagle Point
Credit Management’s collective relative size and prominence in the CLO market and the Senior Investment Team’s broad and often
longstanding relationships with CLO collateral managers and arranging banks may, in certain instances, result in achieving allocations
of CLO debt investment opportunities, the syndications of which can be oversubscribed.
Investment
Analysis and Due Diligence
The
Adviser employs a methodical investment analysis and due diligence process that we believe is more akin to a private equity style investment
approach than to the typical process used by many investors in freely tradable fixed income-type securities, such as CLO debt and equity.
The Adviser views its investment analysis and due diligence process as broadly being comprised of the following key areas for evaluation:
(1) analysis of a CLO collateral manager’s investment strategy and approach, (2) analysis of the quality of a CLO collateral manager
and its investment team, (3) analysis of a CLO collateral manager’s historical investment performance (including the analysis of
multiple CLO specific metrics with a comparison against each CLO’s quarterly vintage cohort), (4) analysis of the underlying loan
collateral, (5) analysis of the particular CLO’s structure, including the negotiation of terms and protections and (6) historic
primary and secondary pricing levels of tranches of CLOs managed by a CLO collateral manager.
The
first-hand experience of the Senior Investment Team with, and knowledge of, CLO collateral managers and their past investment activities
and behavior provides a strong basis for the Adviser’s due diligence of potential investment opportunities and is further supplemented
by the Adviser’s proprietary systems that facilitate the analysis of key performance metrics associated with CLOs in the market.
Members
of the Senior Investment Team have significant experience structuring, valuing and investing in CLOs throughout their careers, and the
Adviser believes that its knowledge of CLO structures is a core competency and competitive edge. We believe that the initial structuring
of a CLO is an important factor in the ultimate risk-adjusted returns, and that experienced and knowledgeable investors can add meaningful
value relative to other market participants by selecting those investments with more protective and advantageous structures.
Monitoring
and Risk Management
Active
monitoring of our investments is a critical component of the Adviser’s risk management and mitigation objectives. From data sourced
from CLO trustee reports (which detail each asset in the CLO portfolio as well as any purchases and sales that the CLO collateral manager
made during the period) and third party data sources, the Adviser utilizes its internal proprietary systems (which capture and facilitate
the analysis of this data) to review key metrics for each CLO security. In addition, based on the Adviser’s screens and general
market intelligence, the Adviser focuses discussions from time to time with CLO collateral managers on particular underlying credits.
As part of these discussions, the Adviser also reviews portfolio activity with applicable CLO collateral managers as well as loan and
CLO market developments. Additional factors that the Adviser actively monitors, which these discussions help to illuminate, include any
shifts in investment strategy, personnel changes or other organizational developments at the CLO collateral manager which may impact future
performance.
Other Investment Techniques
Leverage.
We may use leverage as and to the extent permitted by the 1940 Act. We are permitted to obtain leverage using any form of financial leverage
instruments, including funds borrowed from banks or other financial institutions, margin facilities, notes or preferred stock and leverage
attributable to reverse repurchase agreements or similar transactions. Over the long term, management expects us to operate under
56
normal
market conditions generally with leverage within a range of 25% to 35% of total assets, although the actual amount of our leverage will
vary over time. Certain instruments that create leverage are considered to be senior securities under the 1940 Act. With respect to senior
securities representing indebtedness (i.e., borrowing or deemed borrowing), other than temporary borrowings as defined under the 1940
Act, we are required under current law to have an asset coverage of at least 300%, as measured at the time of borrowing and calculated
as the ratio of our total assets (less all liabilities and indebtedness not represented by senior securities) over the aggregate amount
of our outstanding senior securities representing indebtedness. With respect to senior securities that are stocks (i.e., shares of preferred
stock), we are required under current law to have an asset coverage of at least 200%, as measured at the time of the issuance of any such
shares of preferred stock and calculated as the ratio of our total assets (less all liabilities and indebtedness not represented by senior
securities) over the aggregate amount of our outstanding senior securities representing indebtedness plus the aggregate liquidation preference
of any outstanding shares of preferred stock. See “Description
of Our Capital Stock — Preferred Stock.”
As
of September 30, 2022, our leverage, which includes borrowings under the BNP Credit Facility, represented approximately 40.4% of our total
assets (less current liabilities). As of September 30, 2022, we had one series of preferred stock outstanding, our 5.00% Series A Term
Preferred Stock due 2026, or the “Series A Term Preferred Stock”. As
of September 30, 2022, our asset coverage ratio in respect of senior securities representing indebtedness as calculated pursuant to Section
18 of the 1940 Act was 688% and our asset coverage ratio in respect to our senior securities representing preferred stock as calculated
pursuant to Section 18 of the 1940 Act was 247%.
In the event we fail to meet our applicable asset coverage ratio requirements, we may not be able to incur additional debt and/or additional
issue preferred stock and could be required by law or otherwise to sell a portion of our investments to repay some debt or redeem shares
of preferred stock (if any) when it is disadvantageous to do so, which could have a material adverse effect on our operations, and we
may not be able to make certain distributions or pay dividends of an amount necessary to continue to qualify as a RIC for U.S. federal
income tax purposes.
Over
the long term, management expects us to operate under normal market conditions generally with leverage within a range of 25% to 35% of
total assets, although the actual amount of our leverage will vary over time. We expect that we will, or that we may need to, raise additional
capital in the future to fund our continued growth, and we may do so by issuing preferred stock or debt securities or through other leveraging
instruments. Subject to the limitations under the 1940 Act, we may incur additional leverage opportunistically and may choose to increase
or decrease our leverage. We may use different types or combinations of leveraging instruments at any time based on the Adviser’s
assessment of market conditions and the investment environment, including forms of leverage other than preferred stock and/or credit facilities.
In addition, we may borrow for temporary, emergency or other purposes as permitted under the 1940 Act, which indebtedness would be in
addition to the asset coverage ratios described above. By leveraging our investment portfolio, we may create an opportunity for increased
net income and capital appreciation. However, the use of leverage also involves significant risks and our leverage strategy may not be
successful. For example, the more leverage is employed, the more likely a substantial change will occur in our NAV. Accordingly, any event
that adversely affects the value of an investment would be magnified to the extent leverage is utilized. See “Risk
Factors — Risks Related to Our Investments — We may leverage our portfolio, which would magnify the
potential for gain or loss on amounts invested and will increase the risk of investing in us.”
The Adviser intends to leverage our portfolio only when it believes that the potential return on the additional investments acquired through
the use of leverage is likely to exceed the costs incurred in connection with the use of leverage. There can be no assurance that the
Adviser will borrow in order to leverage our assets or, if it does borrow, what percentage of our assets such borrowings will represent.
To the
extent the income derived from investments purchased with funds received from leverage exceeds the cost of leverage, our return will be
greater than if leverage had not been used. Conversely, if the income from the securities purchased with such funds is not sufficient
to cover the cost of leverage or if we incur capital losses, our return will be less than if leverage had not been used, and therefore
the amount available for distribution to holders of our capital stock as dividends and other distributions will be reduced or potentially
eliminated. The Adviser may determine to maintain our leveraged position if it expects that the long-term benefits of maintaining the
leveraged position will outweigh the current reduced return. We may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit. Either of these requirements will increase the cost of borrowing
over the stated
57
interest
rate. In addition, capital raised through the issuance of preferred stock, or borrowing will be subject to dividend payments or interest
costs that may or may not exceed the income and appreciation on the assets purchased.
On
September 24, 2021, we entered into the BNP Credit Facility with BNP Paribas, as lender, that established a revolving credit facility
of up to $25,000,000. As of September 30, 2022, we had outstanding borrowings under the BNP Credit Facility of $21,325,000. Borrowings
from the BNP Credit Facility are secured by eligible securities held in our portfolio of investments. The BNP Credit Facility includes
usual and customary covenants. Among other things, these covenants place limitations or restrictions on our ability to (i) incur other
indebtedness, (ii) change certain investment policies, and (iii) pledge or create liens upon our assets. In addition, we are required
to deliver financial information to the lender, maintain an asset coverage ratio of not less than 300%, a preferred asset coverage ratio
of not less than 200% and, maintain our registration as a closed-end management investment company.
To the
extent we issue shares of preferred stock or notes, we may be subject to fees, covenants and investment restrictions required by a national
securities rating agency, as a result. Such covenants and restrictions imposed by a rating agency or lender may include asset coverage
or portfolio composition requirements that are more stringent than those imposed on us by the 1940 Act. While it is not anticipated that
these covenants or restrictions will significantly impede the Adviser in managing our portfolio in accordance with our investment objectives
and policies, if these covenants or guidelines are more restrictive than those imposed by the 1940 Act, we would not be able to utilize
as much leverage as we otherwise could have, which could reduce our investment returns. In addition, we expect that any notes we issue
or additional credit facilities we enter into would contain covenants that may impose geographic exposure limitations, credit quality
minimums, liquidity minimums, concentration limitations and currency hedging requirements on us. These covenants would also likely limit
our ability to pay distributions in certain circumstances, incur additional debt, change fundamental investment policies and engage in
certain transactions, including mergers and consolidations. Such restrictions could cause the Adviser to make different investment decisions
than if there were no such restrictions and could limit the ability of the board of directors and our stockholders to change fundamental
investment policies.
Our
willingness to utilize leverage, and the amount of leverage we incur, will depend on many factors, the most important of which are investment
outlook, market conditions and interest rates. Successful use of a leveraging strategy may depend on our ability to predict correctly
interest rates and market movements, and there is no assurance that a leveraging strategy will be successful during any period in which
it is employed. Any leveraging cannot be achieved until the proceeds resulting from the use of leverage have been invested in accordance
with our investment objectives and policies. See “Risk
Factors — Risks Related to Our Investments — We may leverage our portfolio, which would magnify the
potential for gain or loss on amounts invested and will increase the risk of investing in us.”
Preferred
Stock. We are authorized to issue 20,000,000 shares of preferred stock and we may issue preferred
stock at any time. We have designated 2,400,000 shares as Series A Term Preferred Stock. If we issue additional preferred stock, costs
of the offering will be borne immediately at such time by holders of our common stock and result in a reduction of the NAV per share of
our common stock at that time. Under the requirements of the 1940 Act, we must, immediately after the issuance of any preferred stock,
have an “asset coverage” of at least 200%. Asset coverage means the ratio by which the value of our total assets, less all
liabilities and indebtedness not represented by senior securities (as defined in the 1940 Act), bears to the aggregate amount of senior
securities representing our indebtedness, if any, plus the aggregate liquidation preference of the preferred stock. If we seek a rating
of the preferred stock, additional asset coverage requirements, which may be more restrictive than those imposed by the 1940 Act, may
be imposed. See “Description of Our Capital Stock — Preferred
Stock.”
Debt
Securities. In the event we issue debt securities, the costs of any offering of debt securities
will be borne immediately at such time by the holders of our common stock and result in a reduction of the NAV per share of common stock
at that time. Under the current requirements of the 1940 Act, we must, immediately after the issuance of any senior security representing
indebtedness, have an asset coverage of at least 300%.
Asset
coverage means the ratio which the value of our total assets (including the proceeds of indebtedness), less all liabilities and indebtedness
not represented by senior securities, bears to the aggregate
58
amount of senior securities representing
indebtedness. Any future rating of our debt securities may impose additional asset coverage requirements, which may be more restrictive
than those imposed by the 1940 Act.
Leverage
Effects. The extent that we employ leverage, if any, will depend on many factors, the most important
of which are investment outlook, market conditions and interest rates. Successful use of a leveraging strategy depends on the Adviser’s
ability to predict correctly interest rates and market movements. There is no assurance that a leveraging strategy will be successful
during any period in which it is employed. We may incur additional leverage, including through entry into additional credit facilities
or through the issuance of preferred stock or debt securities, opportunistically or not at all and may choose to increase or decrease
our leverage.
Derivative
Transactions. We may engage in Derivative Transactions from time to time. To the extent we engage
in Derivative Transactions, we expect to do so to hedge against interest rate, credit and/or other risks, or for other investment or risk
management purposes. We may use Derivative Transactions for investment purposes to the extent consistent with our investment objectives
if the Adviser deems it appropriate to do so. We may purchase and sell a variety of derivative instruments, including exchange-listed
and OTC options, futures, options on futures, swaps and similar instruments, various interest rate transactions, such as swaps, caps,
floors or collars, and credit transactions and credit default swaps. We also may purchase and sell derivative instruments that combine
features of these instruments. Our use of Derivative Transactions, if any, will generally be deemed to create leverage for us and involves
significant risks. No assurance can be given that our strategy and use of derivatives will be successful, and our investment performance
could diminish compared with what it would have been if Derivative Transactions were not used.
The
Adviser has claimed an exclusion from the definition of the term “commodity pool operator” under the CEA pursuant to CFTC
Regulation 4.5 under the CEA promulgated by the CFTC with respect to us, and we currently intend to operate in a manner that would permit
the Adviser to continue to claim such exclusion. See “Risk Factors — Risks
Relating to Our Business and Structure — We are subject to the risk of legislative and regulatory changes impacting
our business or the markets in which we invest” and
“Risk Factors — Risks Related to Our Investments — We
are subject to risks associated with any hedging or Derivative Transactions in which we participate.”
Illiquid
Transactions. Generally, investments will be purchased or sold by us in private markets, including
securities that are not publicly traded or that are otherwise illiquid and securities acquired directly from the issuer.
Temporary
Defensive Position. We may take a temporary defensive position and invest all or a substantial
portion of our total assets in cash or cash equivalents, government securities or short-term fixed income securities during periods in
which we believe that adverse market, economic, political or other conditions make it advisable to maintain a temporary defensive position.
As the CLOs and loan accumulation facilities in which we invest are generally illiquid in nature, we may not be able to dispose of such
investments and take a defensive position. To the extent that we invest defensively, we likely will not achieve our investment objectives.
Co-Investment
with Affiliates. In certain instances, we expect to co-invest on a concurrent basis with other
accounts managed by the Adviser and may do so with other accounts managed by certain of the Adviser’s affiliates, subject to compliance
with applicable regulations and regulatory guidance and the Adviser’s written allocation procedures. We will be able to rely on
the exemptive relief granted by the SEC to Eagle Point Credit Management and certain of its affiliates to participate in certain negotiated
co-investments alongside other accounts, including ECC and EPIIF, managed by Eagle Point Credit Management, or certain of its affiliates,
subject to certain conditions, including (i) that a majority of our directors who have no financial interest in the transaction and a
majority of our directors who are not interested persons, as defined in the 1940 Act, approve the co-investment and (ii) the price, terms
and conditions of the co-investment are the same for each participant. A copy of the application for exemptive relief, including all of
the conditions, and the related order are available on the SEC’s website at www.sec.gov.
Competition
We compete
for investments in CLO securities with other investment funds (including asset managers, business development companies, mutual funds,
pension funds, private equity funds and hedge funds) as well
59
as traditional financial services companies
such as commercial banks, investment banks, finance companies and insurance companies.
Additionally,
because competition for higher yielding investment opportunities generally has increased, many new investors have entered the CLO market
over the past few years. As a result of these new entrants, competition for investment opportunities in CLO securities may intensify.
Many of these entities have greater financial and managerial resources than we do. We believe we are able to compete with these entities
on the basis of the Senior Investment Team’s deep and highly-specialized CLO market experience, the Adviser’s and Eagle Point
Credit Management’s collective relative size and prominence in the CLO market, and the Senior Investment Team’s longstanding
relationships with many CLO collateral managers.
60
THE ADVISER AND THE ADMINISTRATOR
Our
board of directors is responsible for the overall management and supervision of our business and affairs, including the appointment of
advisers and sub-advisers. Pursuant to the Investment Advisory Agreement, our board of directors has appointed the Adviser as our investment
adviser.
The
Adviser
The
Adviser, collectively with Eagle Point Credit Management, as of September 30, 2022, had approximately $7.3 billion of total assets under
management, including capital commitments that were undrawn as of such date. Based on Eagle Point Credit Management’s CLO equity
assets under management, the Adviser believes that, collectively with Eagle Point Credit Management, it is among the largest CLO equity
investors in the market. The Adviser is primarily owned by the Trident V Funds through intermediary holding companies. Additionally, the
Senior Investment Team and an affiliate of Enstar hold an indirect ownership interest in the Adviser. The Adviser is ultimately governed
through intermediary holding companies by the Adviser’s Board of Managers, which includes Mr. Majewski and certain principals of
Stone Point. See “— Adviser’s Board of
Managers.” The Adviser is located at 600 Steamboat Road, Suite 202, Greenwich, CT 06830.
In
addition to managing our investments, the Adviser’s affiliates and members of the Senior Investment Team manage investment accounts
for other clients, including ECC, a publicly traded, closed-end management investment company that is registered under the 1940 Act and
for which Eagle Point Credit Management serves as investment adviser and EPIIF, a non-listed, closed-end management investment company
that is registered under the 1940 Act and for which Eagle Point Credit Management serves as investment adviser, privately offered pooled
investment vehicles and institutional separate accounts. Many of these accounts pursue an investment strategy that substantially or partially
overlaps with the strategy that we pursue. The Adviser’s affiliation with Stone Point and the Trident V Funds, and the management
of ECC and EPIIF and such other vehicles and accounts by the Adviser’s affiliates and Senior Investment Team, give rise to certain
conflicts of interest. See “Conflicts of Interest.”
Portfolio Managers
We are
managed by members of the Senior Investment Team. The Senior Investment Team is led by Mr. Majewski, Managing Partner of the Adviser,
and is also comprised of Daniel W. Ko, Portfolio Manager, and Daniel M. Spinner, Portfolio Manager. The Senior Investment Team is primarily
responsible for our day-to-day investment management and the implementation of our investment strategy and process.
Each
member of the Senior Investment Team is a CLO industry specialist who has been directly involved in the CLO market for the majority of
his career and has built relationships with key market participants, including CLO collateral managers, investment banks and investors.
Members of the Senior Investment Team have been involved in the CLO market as:
•
the
head of the CLO business at various investment banks;
•
a
lead CLO structurer and CDO workout specialist at an investment bank;
•
a
CLO equity and debt investor;
•
principal
investors in CLO collateral management firms; and
•
a
lender and mergers and acquisitions adviser to CLO collateral management firms.
We believe
that the complementary, yet highly specialized, skill set of each member of the Senior Investment Team provides the Adviser with a competitive
advantage in its CLO-focused investment strategy.
Biographical
information on the Senior Investment Team, each of whom has served as a portfolio manager since our inception, is set forth below:
Thomas
P. Majewski, Managing Partner of the Adviser. Mr. Majewski is a Managing Partner of the Adviser
and Managing Partner and a founder of Eagle Point Credit Management. He serves as a director and Chief Executive Officer of Eagle Point
Credit Company and serves as a trustee, Chairman and Chief Executive
61
Officer of Eagle Point Institutional
Income Fund. Mr. Majewski has been involved in the formation and/or monetization of many CLO transactions across multiple market cycles.
Mr. Majewski led the creation of some of the earliest refinancing CLOs, introducing techniques that are now commonplace in the market.
Mr. Majewski’s experience in the CLO market dates back to the 1990s. He has spent his entire career in the structured finance and
credit markets. Mr. Majewski is also a member of the Adviser’s Board of Managers and Eagle Point Credit Management’s investment
committee.
Prior
to joining Eagle Point Credit Management in September 2012, Mr. Majewski was a Managing Director and U.S. Head of CLO Banking at RBS Securities
Inc., or “RBS,” from September 2011 through September 2012, where he was responsible for all aspects of RBS’s new-issue
CLO platform. Prior to joining RBS, Mr. Majewski was the U.S. country head at AMP Capital Investors (US) Ltd. and AE Capital Advisers
(US) LLC, where he was responsible for investing in credit, structured products and other private assets on behalf of several Australian
investors. Prior to this, Mr. Majewski was a Managing Director and head of CLO banking at Merrill Lynch Pierce Fenner and Smith Inc. Mr.
Majewski also has held leadership positions within the CLO groups at JPMorgan Securities Inc. and Bear, Stearns & Co. Inc. Mr. Majewski
serves as a member of the board of managers and investment committee of Marble Point, and as a director of Marble Point Loan Financing
Limited, an investment fund managed by Marble Point which is listed on the London Stock Exchange. Mr. Majewski has a B.S. from Binghamton
University and has been a Certified Public Accountant (inactive).
Mr. Majewski
also serves as a member of the board of directors of Eagle Point Credit Company and chairman of the board of trustees of Eagle Point Institutional
Income Fund.
Daniel
W. Ko, Portfolio Manager. Mr. Ko is a Portfolio Manager of the Adviser and Eagle Point Credit
Management. Mr. Ko is responsible for manager evaluation and structuring investment opportunities in the primary CLO market, analyzing
secondary CLO market opportunities, executing trades and monitoring investments. Mr. Ko has specialized in structured finance throughout
his entire career.
Prior
to joining Eagle Point Credit Management in December 2012, Mr. Ko was with Bank of America Merrill Lynch, or “BAML,” for the
previous six years, most recently as Vice President of the CLO structuring group, where he was responsible for modeling the projected
deal cash flows, negotiating deal terms with both debt and equity investors and coordinating the rating process. In addition, he was responsible
for exploring non-standard structuring initiatives such as financing trades with dynamic leverage, emerging market CBOs and European CLOs.
Prior to joining the CLO structuring group, Mr. Ko managed BAML’s legacy CLO, trust-preferred securities CDO and asset-backed securities
CDO portfolios. Prior to Bank of America’s merger with Merrill Lynch, Mr. Ko was an associate in Merrill Lynch’s CDO structuring
group, Mr. Ko graduated magna cum laude from the University of Pennsylvania’s Wharton School with a B.S. in finance and accounting.
Daniel
M. Spinner (CAIA), Portfolio Manager. Mr. Spinner is a Principal and Portfolio Manager of the
Adviser and Eagle Point Credit Management. Mr. Spinner is primarily responsible for manager evaluation and due diligence and for monitoring
investments. Mr. Spinner is also actively involved in investor relations and communications. Mr. Spinner is an alternative asset management
industry specialist with 20 years of experience advising, financing and investing in alternative asset management firms and funds. Mr.
Spinner’s experience in the CLO market dates back to the late 1990s.
Prior
to joining Eagle Point Credit Management in February 2013, Mr. Spinner was an Investment Analyst at the 1199SEIU Benefit and Pension Funds,
from June 2009 to February 2013, where he oversaw the private equity, special opportunities credit and real estate allocations. The 1199SEIU
Benefit and Pension Funds are collectively among the largest Taft-Hartley plans in the United States. Prior to this, Mr. Spinner was a
Managing Director at Bear, Stearns & Co. Inc. focused on alternative asset managers. Prior to Bear Stearns, Mr. Spinner was the co-founder
and president of Structured Capital Partners, Inc., a financial holding company formed to invest in structured credit managers. Mr. Spinner
was credit trained at Chase Manhattan Bank where he began his career as an investment banker and spent seven years in the Financial Institutions
Group (including at JPMorgan Securities Inc. post-merger), where he had coverage responsibility for asset management firms including CLO
collateral managers. Mr. Spinner serves as a member of the board of managers and investment committee of Marble Point. Mr. Spinner earned
a B.A., summa cum laude, from Gettysburg College and an M.B.A. from Columbia University.
62
The following table
sets forth accounts within each category listed for which members of the Senior Investment Team are jointly and primarily responsible
for day-to-day portfolio management as of December 31, 2021. Among the accounts listed below, one of the “Registered Investment
Companies” (with total assets of $768.0 million), 6 of the “Other Pooled Investment Vehicles” (with total
assets of $2,035.6 million) and 22 of the “Other Accounts” (with total assets of $1,447.0 million) are subject to a
performance fee.
| | | |
Registered Investment Companies |
| |
Other Pooled Investment Vehicles |
| |
Other Accounts |
| |||||||||||||||||||||||||||
|
Portfolio Manager |
| |
Number of Accounts |
| |
Total Assets (in millions) |
| |
Number of Accounts |
| |
Total Assets (in millions)(1) |
| |
Number of Accounts |
| |
Total Assets (in millions) |
| ||||||||||||||||||
|
Thomas P. Majewski |
| | | | 2 | | | | | $ | 941.2 | | | | | | 9 | | | | | $ | 2,376.2 | | | | | | 46 | | | | | $ | 3,986.5 | | |
|
Daniel W. Ko |
| | | | 2 | | | | | $ | 941.2 | | | | | | 9 | | | | | $ | 2,376.2 | | | | | | 46 | | | | | $ | 3,986.5 | | |
|
Daniel M. Spinner |
| | | | 2 | | | | | $ | 941.2 | | | | | | 9 | | | | | $ | 2,376.2 | | | | | | 46 | | | | | $ | 3,986.5 | | |
(1)
Total
Assets are estimated and unaudited and may vary from final audited figures. Total assets exclude amounts invested in the equity of another
investment vehicle managed by the portfolio manager so as to avoid double counting.
Compensation
of Portfolio Managers. Investment professionals of the Adviser are paid out of the total revenues
of the Adviser and certain of its affiliates, including Eagle Point Credit Management, including the advisory fees earned with respect
to providing advisory services to the registrant. Professional compensation is structured so that key professionals benefit from strong
investment performance generated on accounts that the Adviser and such affiliates manage and from their longevity with the Adviser and
its affiliates. Each member of the senior investment team has indirect equity ownership interests in the Adviser and related long-term
incentives. Members of the senior investment team also receive a fixed base salary and an annual market and performance-based cash bonus.
The bonus is determined by the Adviser’s ultimate board of managers, and is based on both quantitative and qualitative analysis
of several factors, including the profitability of the Adviser and its affiliates, and the contribution of the individual employee. Many
of the factors considered by management in reaching its compensation determinations will be impacted by the registrant’s long-term
performance and the value of the registrant’s assets as well as the portfolios managed for the Adviser’s and such affiliates’
other clients.
Securities
Owned in the Company by Portfolio Managers. The table below sets forth the dollar range of the
value of the shares of our common stock that are owned beneficially by each portfolio manager as of December 31, 2021. For purposes of
this table, beneficial ownership is defined to mean a direct or indirect pecuniary interest.
|
Name of Portfolio Manager |
| |
Dollar Range
of Equity Securities in the Company(1) |
| |||
|
Thomas P. Majewski |
| | | $ | 100,001 – $500,000 | | |
|
Daniel W. Ko |
| | | $ | 50,001 – $100,000 | | |
|
Daniel M. Spinner |
| | | $ | 100,001 – $500,000 | | |
(1)
Dollar
ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000,
$100,001 – $500,000, $500,001 – $1,000,000 and over $1,000,000.
Adviser’s Board of
Managers
The
Adviser is ultimately governed through intermediary holding companies by the Adviser’s Board of Managers, which governs and oversees
the overall activities of the Adviser. The Adviser’s Board of Managers is comprised of Mr. Majewski, Mr. James Carey, Mr. Scott
Bronner and Mr. James Matthews. The Adviser’s Board of Managers is also responsible for governance and oversight of certain affiliates
of the Adviser, including Eagle Point Credit Management. Mr. Majewski’s biographical information is included above under “—
Portfolio Managers”
and Mr. Matthews’ biographical information is included under “Management — Biographical
63
Information
about each Director” below. Biographical information regarding each other
member of the Adviser’s Board of Managers is summarized below:
James
D. Carey. Mr. Carey is a Senior Principal of Stone Point and a member of the investment committees
of the Trident V Funds. Mr. Carey is also a member of the Adviser’s Board of Managers, the Adviser’s investment committee,
and Eagle Point Credit Management’s investment committee. Mr. Carey joined Stone Point in 1997 from Merrill Lynch & Co. Prior
to joining Merrill Lynch & Co., Mr. Carey was a corporate attorney with Kelley Drye & Warren LLP. Mr. Carey is a director of a
number of portfolio companies of the Trident V Funds managed by Stone Point, including Alliant Insurance Services, Inc., the holding company
of Amherst Pierpont Securities LLC, Enstar Group Limited, Privilege Underwriters, Inc., HireRight and Sedgwick Claims Management Services,
Inc.
Mr.
Carey holds a B.S. from Boston College, a J.D. from Boston College Law School and an M.B.A. from the Duke University Fuqua School of Business.
Scott
Bronner. Mr. Bronner is a Managing Director at Stone Point. Mr. Bronner is also a member of
the Adviser’s Board of Managers, the Adviser’s investment committee, and Eagle Point Credit Management’s investment
committee. Mr. Bronner joined Stone Point in 2009. He is a director of a number of portfolio companies of the Trident Funds managed by
Stone Point. Prior to joining Stone Point, Mr. Bronner was an Analyst in the Private Equity Division at Lehman Brothers Inc.
Investment Advisory Agreement
Services.
Subject to the overall supervision of our board of directors, the Adviser manages the day-to-day operations of, and provides investment
advisory and management services to, us. Under the terms of our Investment Advisory Agreement, the Adviser:
•
determines
the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
•
identifies,
evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective investments);
•
executes,
closes, services and monitors the investments we make;
•
determines
the securities and other assets that we purchase, retain or sell; and
•
provides
us with such other investment advisory, research and related services as we may from time to time reasonably require for the investment
of our funds.
The
Adviser’s services under the Investment Advisory Agreement are not exclusive, and both it and its members, officers and employees
are free to furnish similar services to other persons and entities so long as its services to us are not impaired.
The
Investment Advisory Agreement was most recently approved by the board of directors in May 2022. A discussion regarding the basis for the
board of directors’ most recent approval of the Investment Advisory Agreement is included in our semi-annual report for the period
ended June 30, 2022.
Duration
and Termination. Unless earlier terminated as described below, the Investment Advisory Agreement
will remain in effect if approved annually by our 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” of
any party to such agreement, as such term is defined in Section 2(a)(19) of the 1940 Act. The Investment Advisory Agreement will automatically
terminate in the event of its assignment. The Investment Advisory Agreement may also be terminated by our board of directors or the affirmative
vote of a majority of our outstanding voting securities (as defined in the 1940 Act) without penalty upon not less than 60 days’
written notice to the Adviser and by the Adviser upon not less than 90 days’ written notice to us.
Indemnification.
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties
or by reason of the reckless disregard of its duties and obligations, the Adviser and its officers, managers, partners, agents, employees,
controlling persons,
64
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 the Adviser’s services under the Investment Advisory
Agreement or otherwise as our investment adviser.
Management
Fee. We pay the Adviser a management fee for its services under the Investment Advisory Agreement.
To the extent permitted by applicable law, the Adviser may elect to defer all or a portion of these management fee for a specified period
of time. The management fee equals an annual rate of 1.25% of our Managed Assets and is calculated monthly based on our Managed Assets
at the end of each calendar month and payable quarterly in arrears. “Managed Assets” means our total assets (including assets
attributable to our use of leverage) minus the sum of our accrued liabilities (other than liabilities incurred for the purpose of creating
leverage). The management fee for any partial month will be pro-rated (based on the number of days actually elapsed at the end of such
partial month relative to the total number of days in such calendar month). For the fiscal year ended December 31, 2019, we incurred management
fees of approximately $1.2 million payable to the Adviser. For the fiscal year ended December 31, 2019, the Adviser voluntarily waived
a portion of the management fee in the amount of approximately $0.4 million. The waived management fee is not subject to recoupment by
the Adviser. For the fiscal year ended December 31, 2020, we incurred management fees of approximately $1.3 million payable to the Adviser.
For the fiscal year ended December 31, 2021, we incurred management fees of approximately $1.7 million payable to the Adviser.
Payment
of Expenses. The Adviser’s investment team, when and to the extent engaged in providing
investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services,
are provided and paid for by the Adviser. We bear all other costs and expenses of our operations and transactions, including (without
limitation):
•
the
cost of calculating our NAV (including the cost and expenses of any independent valuation firm or pricing service);
•
interest
payable on debt, if any, incurred to finance our investments;
•
fees
and expenses, including legal fees and expenses and travel expenses, incurred by the Adviser or payable to third parties relating to performing
due diligence on prospective investments, monitoring our investments and, if necessary, enforcing our rights;
•
brokerage
fees and commissions;
•
federal
and state registration fees and exchange listing fees;
•
federal,
state and local taxes;
•
costs
of offerings or repurchases of our common stock and other securities;
•
the
management fee;
•
distributions
on shares of our common stock and other securities;
•
administration
fees payable to the Administrator under the Administration Agreement;
•
direct
costs and expenses of administration and operation, including printing, mailing, long distance telephone and staff, including fees payable
in connection with outsourced administrative functions;
•
transfer
agent and custody fees and expenses;
•
independent
director fees and expenses;
•
the
costs of any reports, proxy statements or other notices to our stockholders, including printing costs;
•
costs
of holding stockholder meetings;
•
litigation,
indemnification and other non-recurring or extraordinary expenses;
•
fees
and expenses associated with marketing and investor relations efforts;
•
dues,
fees and charges of any trade association of which we are a member;
65
•
fees and expenses associated with independent
audits and outside legal costs;
•
fidelity
bond;
•
directors
and officers/errors and omissions liability insurance, and any other insurance premiums;
•
costs
associated with our reporting and compliance obligations under the 1940 Act and applicable U.S. federal and state securities laws; and
•
all
other expenses reasonably incurred by us or the Administrator in connection with administering our business, such as the allocable portion
of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including
rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and
related expenses of our chief compliance officer, chief financial officer, chief operating officer and their respective support staff.
License Agreement
We have
entered into a license agreement, or the “License Agreement,” with the Adviser pursuant to which the Adviser has granted us
a non-exclusive, royalty-free license to use the “Eagle Point” name and logo. Under the License Agreement, we have a right
to use the “Eagle Point” name and logo, for so long as the Adviser or one of its affiliates remains our investment adviser.
The License Agreement is terminable by either party at any time in its sole discretion upon 60 days’ prior written notice and is
also terminable by the Adviser in the case of certain events, including certain events of non-compliance. Other than with respect to this
license, we have no legal right to the “Eagle Point” name and logo.
The Administrator and the
Administration Agreement
We have
entered into the Administration Agreement, pursuant to which the Administrator furnishes us with office facilities, equipment and clerical,
bookkeeping and record-keeping services at such facilities. Under the Administration Agreement, the Administrator performs, or arranges
for the performance of, our required administrative services, which include being responsible for the financial records which we are required
to maintain and preparing reports to our stockholders. In addition, the Administrator provides us with accounting services; assists us
in determining and publishing our NAV; oversees the preparation and filing of our tax returns; monitors our compliance with tax laws and
regulations; and prepares, and assists us with any audits by an independent public accounting firm of, our financial statements. The Administrator
is also responsible for the printing and dissemination of reports to our stockholders and the maintenance of our website; provides support
for our investor relations; generally oversees the payment of our expenses and the performance of administrative and professional services
rendered to us by others; and provides such other administrative services as we may from time to time designate. Payments under the Administration
Agreement are equal to an amount based upon our allocable portion of the Administrator’s overhead in performing its obligations
under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable
portion of the compensation of our chief financial officer and chief compliance officer and our allocable portion of the compensation
of any administrative support staff. Our allocable portion of such total compensation is based on an allocation of the time spent on us
relative to other matters. To the extent the Administrator outsources any of its functions, we pay the fees on a direct basis, without
profit to the Administrator. Certain accounting and other administrative services have been delegated by the Administrator to SS&C
Technologies, Inc., or “SS&C,” for which the fee is calculated based on our net assets (subject to a monthly minimum),
and certain investor relations related services have been delegated to ICR, LLC, whose charges are payable monthly. The Administration
Agreement may be terminated by us without penalty upon not less than 60 days’ written notice to the Administrator and by the Administrator
upon not less than 90 days’ written notice to us. The Administration Agreement will remain in effect if approved by the board of
directors, including by a majority of our independent directors, on an annual basis. For the fiscal year ended December 31, 2019, we incurred
approximately $0.4 million in administration fees consisting of approximately $0.3 million and approximately $0.09 million relating to
services provided by the Administrator and SS&C, respectively. For the period from January 1, 2019 to May 31, 2019, the Administrator
voluntarily waived approximately $0.1 million in administration fees relating to services provided by the Administrator, which would have
otherwise been charged to us. Such waived amount
66
is not subject to recoupment. For the
fiscal year ended December 31, 2020, we incurred approximately $0.4 million in administration fees consisting of approximately $0.3 million
and approximately $0.1 million relating to services provided by the Administrator and SS&C, respectively. For the fiscal year ended
December 31, 2021, we incurred approximately $0.5 million in administration fees consisting of approximately $0.4 million and approximately
$0.1 million relating to services provided by the Administrator and SS&C, respectively.
When considering
the approval of the Administration Agreement, the board of directors considers, among other factors, (i) the reasonableness of the compensation
paid by us to the Administrator and any third-party service providers in light of the services provided, the quality of such services,
any cost savings to us as a result of the arrangements and any conflicts of interest, (ii) the methodology employed by the Administrator
in determining how certain expenses are allocated to the Company, (iii) the breadth, depth and quality of such administrative services
provided, (iv) certain comparative information on expenses borne by other companies for somewhat similar services known to be available
and (v) the possibility of obtaining such services from a third party. The Administration Agreement was most recently reapproved by the
board of directors in May 2022.
Limitation
on Liability and Indemnification. The Administration Agreement provides that the Administrator
and its officers, directors, employees agents, control persons and affiliates are not liable to us or any of our stockholders for any
act or omission by it or its employees in the supervision or management of our investment activities or for any damages, liabilities,
costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) or losses sustained by us or
our stockholders, except that the foregoing exculpation does not extend to any act or omission constituting willful misfeasance, bad faith,
gross negligence or reckless disregard of its obligations under the Administration Agreement. The Administration Agreement also provides
for indemnification by us of the Administrator’s members, directors, officers, employees, agents, control persons and affiliates
for liabilities incurred by them in connection with their services to us, subject to the same limitations and to certain conditions.
67
MANAGEMENT
Our
board of directors is responsible for the overall management and supervision of our business and affairs, including the appointment of
advisers and sub-advisers. Our directors may appoint officers who assist in managing our day-to-day affairs.
The Board of Directors
The
board of directors currently consists of six members, four of whom are not “interested persons” (as defined in the
1940 Act) of us. We refer to these directors as our “independent directors.”
Under
our certificate of incorporation and bylaws, our board of directors is divided into three classes with staggered three-year terms. The
term of only one of the three classes expires at each annual meeting of our stockholders. The classification of our board of directors
across staggered terms may prevent replacement of a majority of the directors for up to a two-year period.
Duties of Directors; Meetings
and Committees
Under
our certificate of incorporation, our board of directors is responsible for managing our affairs, including the appointment of advisers
and sub-advisers. The board of directors appoints officers who assist in managing our day-to-day affairs.
The
board of directors has appointed Mr. Majewski as Chairperson. The Chairperson presides at meetings of the board of directors and may call
meetings of the board and any committee whenever he deems necessary. The Chairperson participates in the preparation of the agenda for
meetings of the board of directors and the identification of information to be presented to the board of directors with respect to matters
to be acted upon by the directors. The Chairperson also acts as a liaison with our management, officers and attorneys and the other directors
generally between meetings. The Chairperson may perform such other functions as may be requested by the board of directors from time to
time. Except for any duties specified in this prospectus or pursuant to our certificate of incorporation or bylaws, or as assigned by
the board of directors, the designation of a director as Chairperson does not impose on that director any duties, obligations or liability
that are greater than the duties, obligations or liability imposed on any other director, generally.
The
board of directors has designated Mr. Weiss as Lead Independent Director. The Lead Independent Director generally acts as a liaison between
the other independent directors and our management, officers and attorneys between meetings of the board of directors. The Lead Independent
Director may perform such other functions as may be requested by the board of directors from time to time. Except for any duties specified
in this prospectus or pursuant to our certificate of incorporation or bylaws, or as assigned by the board of directors, the designation
of a director as Lead Independent Director does not impose on that director any duties, obligations or liability that are greater than
the duties, obligations or liability imposed on any other director, generally.
The
board of directors believes that this leadership structure is appropriate because it allows the board of directors to exercise informed
judgment over matters under its purview, and it allocates areas of responsibility among committees or working groups of directors and
the full board of directors in a manner that enhances effective oversight. The board of directors also believes that having a majority
of independent directors is appropriate and in the best interest of our stockholders. Nevertheless, the board of directors also believes
that having interested persons serve on the board of directors brings corporate and financial viewpoints that are, in the board of directors’
view, crucial elements in its decision-making process. In addition, the board of directors believes that Mr. Majewski, Managing Partner
of the Adviser, provides the board of directors with the Adviser’s perspective in managing and sponsoring us. The leadership structure
of the board of directors may be changed, at any time and in the discretion of the board of directors, including in response to changes
in circumstances or our characteristics. The board of directors held four regular meetings and one special meeting during the fiscal year
ended December 31, 2021.
Committees of the Board
of Directors
The
board of directors has established two standing committees: the audit committee and the nominating committee. The current membership of
each committee is set forth below. Interested directors are generally able to attend and participate in any committee meeting, as appropriate.
68
| |
Audit |
| |
Nominating |
|
| | Scott W. Appleby | | | Scott W. Appleby, Chair | |
| | Kevin F. McDonald | | | Kevin F. McDonald | |
| | Paul E. Tramontano | | | Paul E. Tramontano | |
| | Jeffrey L. Weiss, Chair | | | Jeffrey L. Weiss | |
Audit
Committee
All of
the members of the audit committee are independent directors, and each member is financially literate with at least one having accounting
or financial management expertise. The board of directors has adopted a written charter for the audit committee. The audit committee recommends
to the full board of directors the independent registered public accounting firm for us, oversees the work of the independent registered
public accounting firm in connection with our audit, communicates with the independent registered public accounting firm on a regular
basis and provides a forum for the independent registered public accounting firm to report and discuss any matters it deems appropriate
at any time. Mr. Weiss serves as Chairperson of the audit committee. The audit committee also functions as our qualified legal compliance
committee and is responsible for the confidential receipt, retention and consideration of any report of evidence of (1) a material violation
of applicable federal or state securities law, (2) a material breach of fiduciary duty arising under federal or state law or (3) a similar
material violation of any federal or state law by us or any of our officers, directors, employees or agents that has occurred, is ongoing
or is about to occur. The audit committee met four times during the fiscal year ended December 31, 2021.
Nominating
Committee
The nominating
committee is comprised of all of the independent directors. The nominating committee periodically reviews the committee structure, conducts
an annual self-assessment of the board of directors and makes the final selection and nomination of candidates to serve as independent
directors. In addition, the nominating committee makes recommendations regarding the compensation of the Company’s independent directors
for approval by the Board as there is no separate compensation committee of the Company. The board of directors nominates and selects
our interested directors and the officers. Mr. Appleby serves as Chairperson of the nominating committee. The nominating committee met
three times during the fiscal year ended December 31, 2021.
In reviewing
a potential nominee and in evaluating the re-nomination of current independent directors, the nominating committee will generally apply
the following criteria: (1) the nominee’s reputation for integrity, honesty and adherence to high ethical standards; (2) the nominee’s
business acumen, experience and ability to exercise sound judgment; (3) a commitment to understand the Company and the responsibilities
of a director of an investment company; (4) a commitment to regularly attend and participate in meetings of the board of directors and
its committees; (5) the ability to understand potential conflicts of interest involving management of the Company and to act in the interests
of all stockholders; and (6) the absence of a real or apparent conflict of interest that would impair the nominee’s ability to represent
the interests of all the stockholders and to fulfill the responsibilities of an independent director. The nominating committee does not
necessarily place the same emphasis on each criteria and each nominee may not have each of these qualities.
As long
as an existing independent director continues, in the opinion of the nominating committee, to satisfy these criteria, we anticipate that
the nominating committee would favor the re-nomination of an existing independent director rather than nominate a new candidate. Consequently,
while the nominating committee will consider nominees recommended by stockholders to serve as independent directors, the nominating committee
may only act upon such recommendations if there is a vacancy on the board of directors or a committee and it determines that the selection
of a new or additional independent director is in our best interests. In the event that a vacancy arises or a change in membership is
determined to be advisable, the nominating committee will, in addition to any stockholder recommendations, consider candidates identified
by other means, including candidates proposed by members of the nominating committee. The nominating committee may retain a consultant
to assist it in a search for a qualified candidate. The nominating committee has adopted procedures for the selection of independent directors.
69
The nominating committee
has not adopted a formal policy with regard to the consideration of diversity in identifying individuals for election as independent directors,
but the nominating committee will consider such factors as it may deem are in the best interests of the Company and the stockholders.
Such factors may include the individual’s professional experience, education, skills and other individual qualities or attributes,
including gender, race or national origin.
For
any stockholder recommendation for independent director to be included in our proxy statement, it must be submitted in compliance with
all of the pertinent provisions of Rule 14a-8 under the Exchange Act to be considered by the nominating committee. In evaluating a nominee
recommended by a stockholder, the nominating committee, in addition to the criteria discussed above, may consider the objectives of the
stockholder in submitting that nomination and whether such objectives are consistent with the interests of all stockholders. If the board
of directors determines to include a stockholder’s candidate among the slate of nominees, the candidate’s name will be placed
on our proxy card. If the nominating committee or the board of directors determines not to include such candidate among the board of directors’
designated nominees and the stockholder has satisfied the requirements of Rule 14a-8, the stockholder’s candidate will be treated
as a nominee of the stockholder who originally nominated the candidate. In that case, the candidate will not be named on the proxy card
distributed with our proxy statement.
A stockholder
who is entitled to vote at the applicable annual meeting and who intends to nominate a director must comply with the advance notice procedures
in our bylaws. To be timely, a stockholder’s notice must be delivered by a nationally recognized courier service or mailed by first
class United States mail, postage or delivery charges prepaid, and received at our principal executive offices addressed to the attention
of the Secretary not less than ninety (90) days nor more than one hundred twenty (120) days in advance of the anniversary of the date
our proxy statement was released to the stockholders in connection with the previous year’s annual meeting of stockholders; provided,
however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the previous year’s proxy statement, notice by the stockholder
must be received by the Secretary not later than the close of business on the later of (x) the ninetieth (90th) day prior to such annual
meeting and (y) the seventh (7th) day following the day on which public announcement of the date of such meeting is first made. Such stockholder’s
notice to the Secretary shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as
a director, (a) the name, age, business address and residence address of the person, (b) the principal occupation or employment of the
person, (c) the class and number of shares of our capital stock that are beneficially owned by the person and (d) any other information
relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the rules and
regulations of the SEC under Section 14 of the Exchange Act, and (ii) as to the stockholder giving the notice (a) the name and record
address of the stockholder and (b) the class and number of shares of our capital stock that are beneficially owned by the stockholder.
We may require any proposed nominee to furnish such other information as may reasonably be required to determine the eligibility of such
proposed nominee to serve as a director.
Stockholders
may communicate with the directors as a group or individually. Any such communication should be sent to the board of directors or an individual
director c/o the Secretary of the Company at the following address: 600 Steamboat Road, Suite 202, Greenwich, CT 06830. The Secretary
may determine not to forward any letter to directors that does not relate to the business of the Company.
Risk Oversight
As a
registered investment company, we are subject to a variety of risks, including investment risks, financial risks, compliance risks and
operational risks. As part of its overall activities, the board of directors oversees the management of our risk management structure
by various departments of the Adviser and the Administrator, as well as by our chief compliance officer. The responsibility to manage
our risk management structure on a day-to-day basis is subsumed within the Adviser’s overall investment management responsibilities.
The Adviser has its own, independent interest in risk management.
The
board of directors recognizes that it is not possible to identify all of the risks that may affect us or to develop processes and controls
to eliminate or mitigate their occurrence or effects. The board of directors discharges risk oversight as part of its overall activities.
In addressing issues regarding our risk management between meetings, appropriate representatives of the Adviser communicate with the Chairperson
of the board
70
of directors, the relevant
committee chair or our chief compliance officer, who is directly accountable to the board of directors. As appropriate, the Chairperson
of the board of directors and the committee chairs confer among themselves, with our chief compliance officer, the Adviser, other service
providers and external fund counsel to identify and review risk management issues that may be placed on the board of director’s
agenda and/or that of an appropriate committee for review and discussion with management.
Compliance
Policies and Procedures
We
have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation 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.
The chief compliance officer is responsible for administering the policies and procedures.
Biographical
Information about each Director
Information
about our directors is as follows:
|
Name, Address(1)
and Age |
| |
Position(s) held with the Company |
| |
Term of Office and Length of Time Served |
| |
Principal Occupation(s) During the Past 5 Years |
| |
Other
Directorships(4) |
|
| Interested Directors | | | | | | | | | | | | | |
|
Thomas P. Majewski(2)
Age: 48
|
| | Class III Director, Chairperson of the Board and Chief Executive Officer | | | Since inception; Term expires 2023 | | | Managing Partner of the Adviser since September 2018; Managing Partner of Eagle Point Credit Management LLC since September 2012. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
|
James R. Matthews(3)
Age: 55
|
| | Class II Director | | | Since inception; Term expires 2025 | | | Managing Director of Stone Point Capital LLC. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
| Independent Directors | | | | | | | | | | | | | |
|
Scott W. Appleby
Age: 58
|
| | Class I Director | | | Since inception; Term expires 2024 | | | President of Appleby Capital, Inc., a financial advisory firm, since April 2009. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
|
Kevin F. McDonald
Age: 56
|
| | Class III Director | | | Since inception; Term expires 2023 | | | Chief Operating Officer of AltaRock Partners, an asset management firm, since January 2019; Director of Business Development and Investor Relations of Folger Hill Asset Management, LP from December 2014 to July 2018; Principal of Taylor Investment Advisors, LP from March 2002 to March 2017. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
|
Paul E. Tramontano
Age: 61
|
| | Class II Director | | | Since inception; Term expires 2025 | | | Senior Managing Director and Portfolio Manager at First Republic Investment Management since October 2015. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
|
Jeffrey L. Weiss
Age: 61
|
| | Class I Director | | | Since inception; Term expires 2024 | | | Private Investor since June 2012; Managing Partner of Colter Lewis Investment Partners LLC since January 2018. | | | Eagle Point Credit Company Inc. and Eagle Point Institutional Income Fund | |
(1)
The
business address of each our directors is c/o Eagle Point Income Company Inc., 600 Steamboat Road, Suite 202, Greenwich, CT 06830.
71
(2)
Mr. Majewski is an interested director
due to his position as our Chief Executive Officer and his position with the Adviser.
(3)
Mr.
Matthews is an interested director due to his position with Stone Point, which is an affiliate of the Adviser.
(4)
Eagle
Point Credit Company Inc. and Eagle Point Institutional Income Fund are considered to be in the same fund complex as us and, as a result,
each director serves as a director of three investment companies in the same complex.
Other
than as disclosed in the table above, none of our directors serves, nor have they served during the last five years, on the board of directors
of another company registered pursuant to Section 12 of the Exchange Act (or subject to the reporting requirements of Section 15(d) of
the Exchange Act) or registered under the 1940 Act (including any other companies in a fund complex with us).
In addition
to the description of each director’s “Principal Occupation(s)” set forth above, the following provides further information
about each director’s specific experience, qualifications, attributes or skills that led to the conclusion that they should serve
as a director. The information in this section should not be understood to mean that any of the directors is an “expert” within
the meaning of the federal securities laws.
Although
the nominating committee has general criteria that guides its choice of candidates to serve on the board of directors, there are no specific
required qualifications for membership on the board of directors. The board of directors believes that the different perspectives, viewpoints,
professional experience, education and individual qualities of each director represent a diversity of experiences and a variety of complementary
skills. When considering potential nominees to fill vacancies on the board of directors, and as part of its annual self-evaluation, the
board of directors reviews the mix of skills and other relevant experiences of the directors.
Independent
Directors
Scott
W. Appleby. Mr. Appleby is the President of Appleby Capital, Inc. and has more than 21 years
of banking experience at Appleby Capital, Deutsche Bank, Robertson Stephens, ABN Amro and Paine Webber. As a senior equity analyst, Mr.
Appleby has written on global exchanges, alternative asset managers and financial technology. Mr. Appleby was also one of the first Internet
analysts and, in 1997, the first analyst to cover the electronic brokerage industry. Mr. Appleby remains an active writer and speaker
on financial technology and Wall Street trends. Mr. Appleby serves on a number of private company and community boards. Mr. Appleby holds
an M.B.A. from Cornell University and a B.S. from the University of Vermont.
Mr.
Appleby also serves as an independent director of ECC and is a member of the audit committee and the chairman of the nominating committee
of the board of directors of EC. He also serves as an independent trustee of EPIIF and is a member of the audit committee and the chairman
of the nominating committee of the board of trustees of EPIIF.
Kevin
F. McDonald. Mr. McDonald is the Chief Operating Officer of AltaRock Partners as of January
2019. Mr. McDonald previously served as Director of Business Development and Investor Relations of Folger Hill Asset Management, LP from
December 2014 to July 2018. Mr. McDonald was a Principal of Taylor Investment Advisors, LP, which he co-founded, from 2002 to March 2017,
and served as the Chief Executive Officer from 2006 to December 2014. Previously, Mr. McDonald was a Director at Larch Lane Advisors LLC
from 1999 to 2001. Mr. McDonald was a Vice President in the futures and options group at JP Morgan Securities from 1994 to 1999 and served
as an Assistant Treasurer and proprietary fixed-income trader at BSI Bank (subsidiary of Generali S.P.A.) from 1991 to 1994. Mr. McDonald
began his career at Chemical Bank in 1989 where he was a credit analyst in the corporate finance group. Mr. McDonald holds a B.A. from
the University of Virginia.
Mr.
McDonald also serves as an independent director of ECC and is a member of the audit committee and the nominating committee of the board
of directors of ECC. He also serves as an independent trustee of EPIIF and is a member of the audit committee and nominating committee
of the board of trustees of EPIIF.
Paul
E. Tramontano. Mr. Tramontano has served as a Senior Managing Director and Wealth Manager at
First Republic Investment Management since October 2015. Prior to joining First Republic Investment
72
Management, Mr. Tramontano was the founder
and Co-Chief Executive Officer at Constellation Wealth Advisors LLC for eight years and was responsible for managing the firm’s
East Coast operations as well as serving on both the investment and executive management committees. Prior to forming Constellation Wealth
Advisors, Mr. Tramontano spent 17 years at Citi Smith Barney, most recently as a Managing Director and Senior Advisor of Citi Family Office.
Mr. Tramontano holds a B.S. from Villanova University and attended the Certified Investment Management program at the Wharton School of
Business at the University of Pennsylvania.
Mr. Tramontano
also serves as an independent director of ECC and is a member of the audit committee and the nominating committee of the board of directors
of ECC. He also serves as an independent trustee of EPIIF and is a member of the audit committee and nominating committee of the board
of trustees of EPIIF.
Jeffrey
L. Weiss. Mr. Weiss has served as the Managing Partner of Colter Lewis Investment Partners LLC
since January 2018 and is also a private investor (since 2012). Mr. Weiss is a former Managing Director at Lehman Brothers and Barclays,
where he also held a number of senior leadership positions. From 2008 to 2012, Mr. Weiss served as Global Head of Financial Institutions
at Barclays. Prior to joining Barclays, Mr. Weiss spent 25 years with Lehman Brothers, most recently as a Managing Director. From 2005
to 2008, Mr. Weiss served on the management committee of Lehman Brothers and from 2007 to 2008 Mr. Weiss was responsible for the financial
institutions group businesses at Lehman Brothers. Mr. Weiss holds a B.S. from the University of Wisconsin.
Mr.
Weiss also serves as an independent director of ECC and is the chairman of the audit committee and a member of the nominating committee
of the board of directors of ECC. He also serves as an independent trustee of EPIIF and the chairman of the audit committee and a member
of the nominating committee of the board of trustees of EPIIF.
Interested
Directors
Thomas
P. Majewski. Information regarding Mr. Majewski is included
under “The Adviser and the Administrator — Portfolio Managers”
above.
James
R. Matthews. Mr. Matthews was appointed to the Board as a representative of the Adviser and
the Trident V Funds. Mr. Matthews is currently a Managing Director of Stone Point (since October 2011). Mr. Matthews is a member of the
Adviser’s Board of Managers and Eagle Point Credit Management’s investment committee. He joined Stone Point in 2011 from Evercore
Partners Inc., where he was a Senior Managing Director and Co-Head of Private Equity. From 2000 to 2007, Mr. Matthews was with Welsh,
Carson, Anderson & Stowe, where he was a General Partner and focused on investments in the information services and business services
sectors. Previously, Mr. Matthews was a General Partner of J.H. Whitney & Co. and started his career as an Analyst in the mergers
and acquisitions group of Salomon Brothers Inc. Mr. Matthews is a director of various portfolio companies of Stone Point’s Trident
Funds, including Alliant Insurance Services, Inc., HireRight Holdings Corporation, SambaSafety Holdings, LLC, Tree Line Direct Lending
GP, LLC, Tree Line Capital Partners, LLC and Verisys Corporation. Mr. Matthews holds a B.S. from Boston College and an M.B.A. from the
Harvard Graduate School of Business Administration.
Mr. Matthews
also serves as chairperson of the board of directors of ECC and trustee of EPIIF.
73
Officers
Information
regarding our officers who are not directors is as follows:
|
Name, Address and Age(1)
|
| |
Positions Held with the Company |
| |
Term of Office(2)
and Length of Time Served |
| |
Principal Occupation(s) During the Last Five Years |
|
|
Kenneth P. Onorio
Age: 54 |
| | Chief Financial Officer and Chief Operating Officer | | | Since inception | | | Chief Financial Officer of Eagle Point Credit Company since July 2014 and Chief Operating Officer of Eagle Point Credit Company since November 2014; Chief Financial Officer of the Adviser since October 2018 and Eagle Point Credit Management since July 2014; Chief Financial Officer and Chief Operating Officer of Eagle Point Institutional Income Fund since January 2022. Chief Operating Officer of the Adviser since October 2018 and Eagle Point Credit Management since August 2014. | |
|
Nauman S. Malik
Age: 42 |
| | Chief Compliance Officer | | | Since inception | | | Chief Compliance Officer of Eagle Point Credit Company since September 2015; Chief Compliance Officer of Eagle Point Institutional Income Fund since January 2022; General Counsel of the Adviser since October 2018 and Eagle Point Credit Management since June 2015; Chief Compliance Officer of the Adviser from October 2018 to March 2020 and Eagle Point Credit Management from September 2015 to March 2020. | |
|
Courtney B. Fandrick
Age: 40 |
| | Secretary | | | Since inception | | | Secretary of Eagle Point Credit Company since August 2015; Secretary of Eagle Point Institutional Income Fund since January 2022; Chief Compliance Officer of the Adviser and Eagle Point Credit Management since March 2020; Deputy Chief Compliance Officer of the Adviser from October 2018 to March 2020 and Eagle Point Credit Management from December 2014 to March 2020. | |
(1)
The
address for each of our officers is c/o Eagle Point Income Company Inc., 600 Steamboat Road, Suite 202, Greenwich, CT 06830. All of our
officers are also officers or employees of the Adviser.
(2)
Each
of our officers holds office until their successors are chosen and qualified, or until their earlier resignation or removal.
Kenneth
P. Onorio. Mr. Onorio has served as our Chief Financial Officer and our Chief Operating Officer
since inception. Mr. Onorio also serves as the Chief Financial Officer and Chief Operating Officer of the Adviser and Eagle Point Credit
Management. Prior to joining Eagle Point Credit Management in 2014, Mr. Onorio was an Executive Director within Private Equity and Hedge
Fund Administration at JPMorgan Alternative Investment Services from September 2008 to July 2014. During his tenure at JPMorgan, his
74
responsibilities included managing Hedge
Fund and Private Equity Fund Administration. Mr. Onorio received his B.S. from Fordham University and is a Certified Public Accountant
(inactive).
Mr. Onorio
also serves as Chief Financial Officer and Chief Operating Officer of ECC and EPIIF.
Nauman
S. Malik. Mr. Malik has served as our Chief Compliance Officer since inception. Mr. Malik also
serves as the General Counsel of the Adviser and Eagle Point Credit Management. He was the Chief Compliance Officer of the Adviser from
October 2018 to March 2020 and Chief Compliance Officer of Eagle Point Credit Management from September 2015 to March 2020. Prior to joining
Eagle Point Credit Management, Mr. Malik was a corporate attorney with Dechert LLP. Mr. Malik received his J.D. from Georgetown University
Law Center and his B.S. in finance from the University of Pennsylvania’s Wharton School.
Mr. Malik
also serves as Chief Compliance Officer of ECC and EPIIF.
Courtney
B. Fandrick. Ms. Fandrick has served as our Secretary since inception. Ms. Fandrick also serves
as the Chief Compliance Officer of the Adviser and Eagle Point Credit Management. She was the Deputy Chief Compliance Officer of the Adviser
from October 2018 to March 2020 and Deputy Chief Compliance Officer of Eagle Point Credit Management from December 2014 to March 2020.
Prior to joining Eagle Point Credit Management in December 2014, Ms. Fandrick was Senior Compliance Associate at Bridgewater Associates,
LP, an investment advisory firm. Ms. Fandrick received her B.A. in Mathematics and Statistics from Miami University and her MBA from University
of Phoenix.
Ms. Fandrick
also serves as Secretary of ECC and EPIIF.
Director Compensation
The following
table sets forth certain information with respect to the compensation of each director for the fiscal year ended December 31, 2021.
|
Name of Director |
| |
Aggregate
Compensation from the Company(1) |
| |
Aggregate
Compensation from the Fund Complex(2) |
| ||||||
| Independent Directors | | | | | | | | | | | | | |
|
Scott W. Appleby |
| | | $ | 65,000(3) | | | | | $ | 165,000(3)(4) | | |
|
Kevin F. McDonald |
| | | $ | 60,000(3) | | | | | $ | 155,000(3)(4) | | |
|
Paul E. Tramontano |
| | | $ | 60,000(3) | | | | | $ | 155,000(3)(4) | | |
|
Jeffrey L. Weiss |
| | | $ | 70,000(3) | | | | | $ | 177,500(3)(4) | | |
| Interested Directors | | | | | | | | | | | | | |
|
Thomas P. Majewski |
| | | | — | | | | | | — | | |
|
James R. Matthews |
| | | | — | | | | | | — | | |
(1)
We
do not maintain a pension plan or retirement plan for any of our directors.
(2)
The
“Fund Complex” includes the Company, ECC and EPIIF.
(3)
Reflects
$32,500, $30,000, $30,000, and $35,000 relating to the year ended December 31, 2020 that was payable to each of Mr. Appleby, Mr. McDonald,
Mr. Tramontano and Mr. Weiss as of December 31, 2020, respectively, and paid during the fiscal year ended December 31, 2021; does not
reflect $127,500 relating to the year ended December 31, 2021 that was paid during the month ended January 31, 2022, which amount was
comprised of $32,500, $30,000, $30,000 and $35,000 paid to each of Mr. Appleby, Mr. McDonald, Mr. Tramontano and Mr. Weiss, respectively.
(4)
Reflects
$50,000, $47,500, $47,500, and $53,750 relating to the year ended December 31, 2020 that was payable to each of Mr. Appleby, Mr. McDonald,
Mr. Tramontano and Mr. Weiss as of December 31, 2020, respectively, and paid during the fiscal year ended December 31, 2021; does not
reflect $198,750 relating to the year ended December 31, 2021 that was paid during the month ended January 31, 2022,
75
which amount was comprised
of $50,000, $47,500, $47,500 and $53,750 paid to each of Mr. Appleby, Mr. McDonald, Mr. Tramontano and Mr. Weiss, respectively.
Director Ownership of Shares
of Our Common Stock
The table
below sets forth the dollar range of the value of our common stock that is owned beneficially by each director as of December 31, 2021.
For purposes of this table, beneficial ownership is defined to mean a direct or indirect pecuniary interest.
|
Name of Director |
| |
Dollar Range of
Equity Securities in the Company(1) |
| |
Aggregate Dollar Range of Equity Securities in the Fund Complex(1) |
|
| Interested Directors | | | | | | | |
|
Thomas P. Majewski |
| |
Over $100,000 |
| |
Over $100,000 |
|
|
James R. Matthews |
| |
None |
| |
None |
|
| Independent Directors | | | | | | | |
|
Scott W. Appleby |
| |
$50,001 – $100,000 |
| |
Over $100,000 |
|
|
Kevin F. McDonald |
| |
$10,001 – $50,000 |
| |
Over $100,000 |
|
|
Paul E. Tramontano |
| |
$50,001 – $100,000 |
| |
Over $100,000 |
|
|
Jeffrey L. Weiss |
| |
$50,001 – $100,000 |
| |
Over $100,000 |
|
(1)
Dollar
ranges are as follows: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000
and over $100,000.
76
DETERMINATION OF NET
ASSET VALUE
We determine
the NAV per share of our common stock by dividing the value of our portfolio investments, cash and other assets (including interest accrued
but not collected) less all of our liabilities (including accrued expenses, the aggregate liquidation preference of our preferred stock,
borrowings, including the BNP Credit Facility, and interest payables) by the total number of outstanding shares of our common stock on
a quarterly basis (or more frequently, as appropriate). The most significant estimate inherent in the preparation of our financial statements
is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. There is
no single method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the
specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of
investments we make. Rule 2a-5 under the 1940 Act establishes requirements for determining fair value in good faith for purposes of the
1940 Act. Pursuant to Rule 2a-5, our board has elected to designate the Adviser as “valuation designee” to perform fair value
determinations in respect of our portfolio investments that do not have readily available market quotations.
We account
for our investments in accordance with GAAP, and fair value our investment portfolio in accordance with the provisions of the FASB ASC
Topic 820 Fair Value Measurements and Disclosures of the Financial Accounting Standards Board’s Accounting Standards Codification,
as amended, which defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value
measurements. Fair value is the estimated amount that would be received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date (i.e., the exit price).
In valuing
our investments in CLO debt, CLO equity and loan accumulation facilities, the Adviser considers a variety of relevant factors, including
a third-party pricing service, recent trading prices for specific investments, recent purchases and sales known to the Adviser in similar
securities and output from a third-party financial model. The third-party financial model contains detailed information on the characteristics
of CLOs, including recent information about assets and liabilities, and is used to project future cash flows. Key inputs to the model,
including assumptions for future loan default rates, recovery rates, prepayment rates, reinvestment rates and discount rates are determined
by considering both observable and third-party market data and prevailing general market assumptions and conventions as well as those
of the Adviser.
Specifically,
we utilize a third-party pricing service in connection with the valuation of our investments in CLO debt. However, if pricing from such
third-party pricing service is determined to be stale or otherwise not reflective of current market conditions, we may use an average
of independent broker quotes to determine fair value. We engage a third-party independent valuation firm as an input to the Company’s
valuation of the fair value of its investments in CLO equity. The valuation firm’s advice is only one factor considered in the valuation
of such investments, and the Adviser does not rely on such advice in determining the fair value of our investments in accordance with
the 1940 Act.
Our investment
portfolio is valued at least each quarter in accordance with the Adviser’s valuation policies and procedures. Fair valuations are
ultimately determined by the Adviser’s valuation committee, which is comprised of a majority of non-investment personnel. Our board
of directors oversees the valuation designee and the process that it uses to determine the fair value of our assets. In this regard, the
board receives periodic and, as applicable, prompt reporting regarding certain material valuation matters, as required by Rule 2a-5 under
the 1940 Act.
77
DIVIDEND
REINVESTMENT PLAN
The
information required by this item is contained in our annual
report on Form N-CSR for the fiscal year ended December 31, 2021, filed with the SEC on February 17, 2022
and incorporated by reference herein.
78
CONFLICTS OF INTEREST
Affiliations of the Adviser
and the Administrator
Our executive
officers and directors, and the Adviser and certain of its affiliates and their officers and employees, including the Senior Investment
Team, have several conflicts of interest as a result of the other activities in which they engage. The Adviser and the Administrator are
affiliated with other entities engaged in the financial services business. In particular, the Adviser and the Administrator are affiliated
with Eagle Point Credit Management and Stone Point, and certain members of the Adviser’s Board of Managers are principals of Stone
Point. Pursuant to certain management agreements, Stone Point has received delegated authority to act as the investment manager of the
Trident V Funds. The Adviser and the Administrator are primarily owned by the Trident V Funds through intermediary holding companies.
The Trident V Funds and other private equity funds managed by Stone Point invest in financial services companies. In addition, the Adviser
is under common control with Marble Point, which is separately registered as an investment adviser with the SEC. Marble Point is a CLO
collateral manager and manager of other investment vehicles that invest in senior secured loans, CLO securities and other related investments.
Further the Adviser and its affiliates engage and may in the future engage in a variety of business activities, including investment management,
financing, and software analytics. A such, the Adviser and its affiliates may have multiple business relationships with CLO collateral
managers that encompass a range of activities, such as investment in CLOs managed by a CLO collateral manager on behalf of the Company,
financing, or investing in other securities issued by, other vehicles managed by such CLO collateral manager or an affiliate thereof,
or otherwise providing advisory, research or data services to such CLO collateral manager for compensation. Additionally, an affiliate
of Enstar indirectly owns a portion of the limited liability interests in the Adviser. Also, under the Personnel and Resources Agreement,
Eagle Point Credit Management makes available the personnel and resources, including portfolio managers and investment personnel, to the
Adviser as the Adviser may determine to be reasonably necessary to the conduct of its operations. These relationships may cause the Adviser’s,
the Administrator’s and certain of their affiliates’ interests, and the interests of their officers and employees, including
the Senior Investment Team, to diverge from our interests and may result in conflicts of interest that may not be foreseen, which conflicts
may not be resolved in a manner that is always or exclusively in our best interest. The Adviser has entered into, and may in the future
enter into additional, business arrangements with certain of our stockholders, including granting indirect ownership in limited liability
company interests in the Adviser. In such cases, such stockholders may have an incentive to vote shares held by them in a manner that
takes such arrangements into account.
Other Accounts
The Adviser
is responsible for the investment decisions made on our behalf. There are no restrictions on the ability of the Adviser and certain of
its affiliates (including Eagle Point Credit Management, Stone Point and Marble Point) to manage accounts for multiple clients, including
accounts for affiliates of the Adviser or their directors, officers or employees, following the same, similar or different investment
objectives, philosophies and strategies as those used by the Adviser for our account. In those situations, the Adviser and its affiliates
may have conflicts of interest in allocating investment opportunities between us and any other account managed by such person. See “—
Allocation of Opportunities” below. Such conflicts of interest would be expected to be
heightened where the Adviser manages an account for an affiliate or its directors, officers or employees. In addition, certain of these
accounts may provide for higher management fees or have incentive fees or may allow for higher expense reimbursements, all of which may
contribute to a conflict of interest and create an incentive for the Adviser to favor such other accounts. Further, accounts managed by
the Adviser or certain of its affiliates hold, and may in the future be allocated, certain investments in CLOs, such as equity tranches,
which conflict with the positions held by other accounts in such CLOs, such as us. In these cases, when exercising the rights of each
account with respect to such investments, the Adviser and/or its affiliates will have a conflict of interest as actions on behalf of one
account may have an adverse effect on another account managed by the Adviser or such affiliate, including us. In such cases, such conflicts
may not be resolved in a manner that is always or exclusively in our best interests.
In addition,
Eagle Point Credit Management, Stone Point, Marble Point and their affiliates, and the investment funds managed by Eagle Point Credit
Management, Stone Point, Marble Point and such affiliates,
may also invest in companies that compete
with the Adviser and that therefore manage other accounts and funds that compete for investment opportunities with us.
Our
executive officers and directors, as well as other current and potential future affiliated persons, officers and employees of the Adviser
and certain of its affiliates, may serve as officers, directors or principals of, or manage the accounts for, other entities, including
ECC and EPIIF, with investment strategies that substantially or partially overlap with the strategy that we pursue. Accordingly, they
may have obligations to investors in those entities, the fulfillment of which obligations may not be in the best interests of us or our
stockholders.
Further,
the professional staff of the Adviser and Administrator will devote as much time to us as such professionals deem appropriate to perform
their duties in accordance with the Investment Advisory Agreement and Administration Agreement, respectively. However, such persons are
also committed to providing investment advisory and other services for other clients, including Eagle Point Income Company, unregistered
pooled investment vehicles, and separately managed accounts, and engage in other business ventures in which we have no interest. In addition,
certain personnel of the Adviser also serve as members of the investment committee of Marble Point or otherwise may be involved in providing
research, analysis, valuation and/or other support services to Marble Point or other affiliates of the Adviser.
Certain
of the Adviser’s, the Administrator’s and their affiliates’ senior personnel and ultimate managers serve and may serve
as officers, directors, managers or principals of other entities that operate in the same or a related line of business as the Adviser,
the Administrator, and their affiliates, or that are service providers to firms or entities such as the Adviser, the Administrator, the
Company, CLOs or other similar entities. Accordingly, such persons may have obligations to investors in those entities the fulfillment
of which may not be in our best interest. In addition, certain of such persons hold direct and indirect personal investments in various
companies, including certain investment advisers and other operating companies, some of which do or may provide services to the Adviser,
the Administrator, us, or other accounts serviced by the Adviser, the Administrator, or their affiliates, or to any issuer in which the
Company may invest. The Company may pay fees or other compensation to any such operating company or financial institution for services
received. Further, these relationships may result in conflicts of interest that may not be foreseen or may not be resolved in a manner
that is always or exclusively in our best interest.
In addition,
payments under the Administration Agreement are equal to an amount based upon our allocable portion of the Administrator’s overhead.
See “The Adviser and the Administrator — The
Administrator and the Administration Agreement” above.
As a
result of these separate business activities and payment structure, the Adviser and Administrator have conflicts of interest in allocating
management and administrative time, services and functions among us, other accounts that they provide services to, their affiliates and
other business ventures or clients.
Allocation of Opportunities
As a
fiduciary, the Adviser owes a duty of loyalty to its clients and must treat each client fairly. When the Adviser purchases or sells securities
for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. To this end, the Adviser and
Eagle Point Credit Management have adopted and reviewed policies and procedures pursuant to which they allocate investment opportunities
appropriate for more than one client account in a manner deemed appropriate in their sole discretion to achieve a fair and equitable result
over time. Pursuant to these policies and procedures, when allocating investment opportunities, the Adviser and Eagle Point Credit Management
may take into account regulatory, tax or legal requirements applicable to an account. In allocating investment opportunities, the Adviser
and Eagle Point Credit Management may use rotational, percentage or other allocation methods provided that doing so is consistent with
the Adviser’s and Eagle Point Credit Management’s internal conflict of interest and allocation policies and the requirements
of the Investment Advisers Act of 1940, or the “Advisers Act,” the 1940 Act and other applicable laws. In addition, an account
managed by the Adviser, such as us, is expected to be considered for the allocation of investment opportunities together with other accounts
managed by affiliates of the Adviser, including Eagle Point Credit Management. There is no assurance that such opportunities will be allocated
to any particular account equitably in the short-term or that any such account, including us, will be able to participate in all investment
opportunities that are suitable for it.
Leverage
We have
incurred leverage through the issuance of the Series A Term Preferred stock and indebtedness for borrowed money. We may incur additional
leverage, directly or indirectly, through one or more special purpose vehicles, indebtedness for borrowed money, as well as leverage in
the form of Derivative Transactions, preferred stock, debt securities and other structures and instruments, in significant amounts and
on terms that the Adviser and our board of directors deem appropriate, subject to applicable limitations under the 1940 Act. Such leverage
may be used for the acquisition and financing of our investments, to pay fees and expenses and for other purposes. Such leverage may be
secured and/or unsecured. Any such leverage does not include leverage embedded or inherent in the CLO structures in which we invest or
in derivative instruments in which we may invest. The more leverage we employ, the more likely a substantial change will occur in our
NAV. Accordingly, any event that adversely affects the value of an investment would be magnified to the extent leverage is utilized. In
addition, our BNP Credit Facility imposes and any debt facility into which we may enter would likely impose financial and operating covenants
that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments
or to make the distributions required to maintain our ability to be subject to tax as a RIC under Subchapter M of the Code.
Allocation of Expenses
and Selection of Service Providers
From time
to time, the Adviser and the Administrator will be required to determine how certain costs and expenses are to be allocated among the
Company and certain other accounts. Often, an expense is relevant only to the Company and would be borne only by us. However, it is sometimes
the case that costs and expenses are relevant to more than one account. To the extent the Company, on the one hand, and Adviser, Administrator
and/or one or more accounts, on the other hand, incur costs or expenses that are applicable to more than one of them, the Adviser and
the Administrator will allocate such costs and expenses in a manner that they determine to be fair and reasonable, notwithstanding their
potential interest in the outcome, and may make corrective allocations should they determine that such corrections are necessary or advisable.
Further, the Adviser and the Administrator and their affiliates, and their respective personnel and the investment funds serviced by such
persons, have interests in companies that provide services to asset management firms such as the Adviser, and to other businesses. Because
of these relationships, such persons have a conflict of interest when considering service providers with respect to the Company and have
an incentive to select those service providers in which such persons have an interest. The selection of such a service provider may result
in the Company bearing fees and expenses paid to a service provider that is affiliated with, or otherwise has a relationship with, the
Adviser, the Administrator or their affiliates.
In addition,
the Adviser and the Administrator have a conflict of interest where a service provider provides services directly to the Adviser and/or
the Administrator or an affiliate thereof, and separately provides services to the Company, in that the Adviser, the Administrator and/or
an affiliate thereof may potentially obtain services at a lower cost than it otherwise could have as a result of the service provider’s
work performed on behalf of, and the compensation paid to the service provider by, the Company. In addition, the Adviser and the Administrator
and their affiliates may use some of the same service providers as are retained on behalf of the Company and, in some cases, fee rates,
amounts or discounts may be offered to the Adviser, the Administrator and/or their affiliates by a third party service provider which
differ from those offered to the Company as a result of scheduled or ad hoc rate changes, differences in the scope, type or nature of
the service or transaction, alternative fee arrangements and negotiation.
Valuation
Generally,
there is not a public market for the CLO investments we target. As a result, we value, and our board of directors reviews and determines,
in good faith, in accordance with the 1940 Act, the value of, these securities based on relevant information compiled by the Adviser and
third-party pricing services (when available) as described under “Determination of Net Asset Value.” Our interested directors
are associated with the Adviser and have an interest in the Adviser’s economic success. The participation of the Adviser’s
investment professionals in our valuation process, and the interest of our interested directors in the Adviser, could result in a conflict
of interest as the management fee paid to the Adviser is based, in part, on our net assets.
Co-Investments and Related Party Transactions
In the
ordinary course of business, we may enter into transactions with persons who are affiliated with us by reason of being under common control
of the Adviser or its affiliates, including Eagle Point Credit Management and Stone Point. 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 between us, the Adviser and its affiliates and our employees, officers
and directors. We will not enter into any such transactions unless and until we are satisfied that doing so is consistent with the 1940
Act, applicable SEC exemptive rules, interpretations or guidance, or the terms of our exemptive order (as discussed below), as applicable.
Our affiliations may require us to forgo attractive investment opportunities. For example, we may be limited in our ability to invest
in CLOs managed by certain affiliates of the Adviser.
In certain
instances, we expect to co-invest on a concurrent basis with other accounts managed by the Adviser and may do so with other accounts managed
by certain of the Adviser’s affiliates, subject to compliance with applicable regulations and regulatory guidance and the Adviser’s
written allocation procedures. We will be able to rely on the exemptive relief granted by the SEC to Eagle Point Credit Management and
certain of its affiliates to participate in certain negotiated co-investments alongside other accounts, including ECC and EPIIF, managed
by Eagle Point Credit Management, or certain of its affiliates, subject to certain conditions, including that (i) a majority of our directors
who have no financial interest in the transaction and a majority of our directors who are not interested persons, as defined in the 1940
Act, approve the co-investment and (ii) the price, terms and conditions of the co-investment are the same for each participant. The Adviser
may determine not to allocate certain potential co-investment opportunities to the Company after taking into account regulatory requirements
or other considerations. See “— Allocation of
Opportunities” above.
Stone Point-Related Investments
Portfolio
companies of investment funds managed by Stone Point and other affiliates of Stone Point may engage in lending activities, which could
result in us investing in CLOs that include loans underwritten by such a portfolio company or affiliate. In addition, the CLOs in which
we expect to invest consist principally of senior secured loans, which in many cases may be issued to operating companies that are primarily
owned by private equity funds, including funds that may be managed by Stone Point or its affiliates. In addition to the above, because
portfolio companies of such investment funds engage in a wide range of businesses, such entities may engage in other activities now or
in the future that create a conflict of interest for the Adviser with respect to its management of us. Any of these potential transactions
and activities may result in the Adviser having a conflict of interest that may not be resolved in a manner that is always or exclusively
in our best interest or in the best interest of our stockholders.
Material Non-Public Information
By reason
of the advisory and/or other activities of the Adviser and its affiliates, including Marble Point, the Adviser and its affiliates may
acquire confidential or material non-public information or be restricted from initiating transactions in certain securities. The Adviser
will not be free to divulge, or to act upon, any such confidential or material non-public information and, due to these restrictions,
it may not be able to initiate a transaction for our account that it otherwise might have initiated. As a result, we may be frozen in
an investment position that we otherwise might have liquidated or closed out or may not be able to acquire a position that we might otherwise
have acquired.
Enstar’s Indirect
Ownership Interest in the Adviser
The
Adviser has entered into an arrangement with Enstar in connection with Cavello Bay’s, an affiliate of Enstar’s, contribution
of BB-Rated CLO Debt securities to us. See “Business — Our
Structure and Formation Transactions.” This arrangement provides that the Enstar affiliate
will indirectly hold a portion of the limited liability company interests in the Adviser until such time as either (i) the Enstar affiliate
exercises a put right to sell its interest under the agreement to the Adviser (which put right may only be exercised after the second
anniversary of the initial public offering of our common stock) or (ii) the Adviser exercises a call right to buy the interest of the
Enstar affiliate under the agreement (which call right is subject to certain conditions). This
arrangement may cause Enstar or its affiliates
to have interests that diverge from the interests of other stockholders on certain matters (e.g., on material amendments to the Investment
Advisory Agreement).
Code of Ethics and Compliance
Procedures
In order
to address the conflicts of interest described above, we have adopted a code of ethics under Rule 17j-l of the 1940 Act. Similarly, the
Adviser has separately adopted the “Adviser Code of Ethics.” The Adviser Code of Ethics requires the officers and employees
of the Adviser to act in the best interests of the Adviser and its client accounts (including us), act in good faith and in an ethical
manner, avoid conflicts of interests with the client accounts to the extent reasonably possible and identify and manage conflicts of interest
to the extent that they arise. Personnel subject to each code of ethics 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 code’s requirements.
In addition, our code of ethics and the Adviser’s Code of Ethics are incorporated by reference as exhibits to the registration statement
of which this prospectus is a part, and are available on the EDGAR Database on the SEC’s website at Our directors and officers,
and the officers and employees of the Adviser, are also required to comply with applicable provisions of the U.S. federal securities laws
and make prompt reports to supervisory personnel of any actual or suspected violations of law.
In addition,
the Adviser has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed
to protect against potential incentives that may favor one account over another. The Adviser has adopted policies and procedures that
address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client accounts are treated equitably over time.
U.S. FEDERAL INCOME TAX
MATTERS
The
following is a summary of certain U.S. federal income tax consequences generally applicable to the purchase, ownership and disposition
of our common stock, which will be referred to as “stock,” issued as of the date of this prospectus. Unless otherwise stated,
this summary deals only with our securities held as capital assets for U.S. federal tax purposes (generally, property held for investment).
As used
herein, a “U.S. holder” means a beneficial owner of the securities that is for U.S. federal income tax purposes any of the
following:
•
an
individual citizen or resident of the United States;
•
a
corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws
of the United States, any state or other political subdivision thereof (including the District of Columbia);
•
a
trust if it (a) is subject to the primary supervision of a court within the United States and one or more United States persons have the
authority to control all substantial decisions of the trust or (b) has a valid election in effect under applicable United States Treasury
regulations, or “Treasury Regulations,” to be treated as a United States person; or
•
an
estate, the income of which is subject to U.S. federal income taxation regardless of its source.
The
term “non-U.S. holder” means a beneficial owner of the securities (other than a partnership or any other entity or other arrangement
treated as a partnership for U.S. federal income tax purposes) that is not a U.S. holder.
An individual
may, subject to exceptions, be deemed to be a resident of the United States for U.S. federal income tax purposes, as opposed to a non-resident
alien, by, among other ways, being present in the United States (i) on at least 31 days in the calendar year, and (ii) for an aggregate
of at least 183 days during a three-year period ending in the current calendar year, counting for such purposes all of the days present
in the current year, one-third of the days present in the immediately preceding calendar year, and one-sixth of the days present in the
second preceding calendar year. Individuals who are residents for such purposes are subject to U.S. federal income tax as if they were
United States citizens.
This
summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you, as a holder of our securities,
if you are a person subject to special tax treatment under the U.S. federal income tax laws, including, without limitation:
•
a
dealer in securities or currencies;
•
a
financial institution;
•
a
RIC;
•
a
real estate investment trust;
•
a
tax-exempt organization;
•
an
insurance company;
•
a
person holding the securities as part of a hedging, integrated, conversion or constructive sale transaction or a straddle;
•
a
person subject to the special accounting rules under Section 451(b) of the Code;
•
a
trader in securities that has elected the mark-to-market method of accounting for their securities;
•
a
person subject to alternative minimum tax;
•
a
partnership or other pass-through entity for U.S. federal income tax purposes;
•
a
U.S. holder whose “functional currency” (as defined in Section 985 of the Code) is not the U.S. dollar;
•
a
CFC;
•
a PFIC; or
•
A
United States expatriate or foreign persons or entities (except to the extent set forth below).
If a
partnership (including any entity classified or arrangement treated as a partnership for U.S. federal income tax purposes) holds the securities,
the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are
a partnership or a partner in a partnership holding our securities, you should consult your own tax advisors regarding the tax consequences
of an investment in our securities.
This
summary is based on the Code, Treasury Regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed,
possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those summarized below. This summary
does not represent a detailed description of the U.S. federal income tax consequences that may be applicable to you in light of your particular
circumstances and does not address the effects of any aspects of U.S. estate or gift, or state, local or non-U.S. income, estate, or gift
tax laws. It is not intended to be, and should not be construed to be, legal or tax advice to any particular purchaser of our securities.
We have not sought and will not seek any ruling from the Internal Revenue Service, or the “IRS.” No assurance can be given
that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below. You
should consult your own tax advisors concerning the particular U.S. federal income tax consequences to you of the ownership of our securities,
as well as the consequences to you arising under the laws or other guidance of any other taxing jurisdiction.
Important U.S. Federal
Income Tax Considerations Affecting Us
We have
elected to be treated, and intend to qualify each tax year thereafter, as a RIC under the Code. Accordingly, we must satisfy certain requirements
relating to sources of our income and diversification of our total assets and certain distribution requirements to maintain our RIC status
and to avoid being subject to U.S. federal income or excise tax on any undistributed taxable income. To the extent we qualify for treatment
as a RIC and satisfy the applicable distribution requirements, we will not be subject to U.S. federal income tax on income paid to our
stockholders in the form of dividends or capital gain dividends.
To qualify
as a RIC for U.S. federal income tax purposes, we must derive at least 90% of our gross income each tax year from dividends, interest,
payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, net income
derived from an interest in a qualified publicly traded partnership, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to our business of investing in stock, securities and currencies, or the “90%
Gross Income Test.” A “qualified publicly traded partnership” is a publicly traded partnership that meets certain requirements
with respect to the nature of its income. To qualify as a RIC, we must also satisfy certain requirements with respect to the diversification
of our assets. We must have, at the close of each quarter of the tax year, at least 50% of the value of our total assets represented by
cash, cash items, U.S. government securities, securities of other RICs and other securities that, in respect of any one issuer, do not
represent more than 5% of the value of our assets nor more than 10% of the voting securities of that issuer. In addition, at those times,
not more than 25% of the value of our assets may be invested in securities (other than U.S. government securities or the securities of
other RICs) of any one issuer, or of two or more issuers, which we control and which are engaged in the same or similar trades or businesses
or related trades or businesses, or of one or more qualified publicly traded partnerships, or the “Asset Diversification Tests.”
If we fail to satisfy the 90% Gross Income Test, we will nevertheless be considered to have satisfied the test if (i) (a) such failure
is due to reasonable cause and not due to willful neglect and (b) we report the failure pursuant to Treasury Regulations to be adopted,
and (ii) we pay a tax equal to the excess non-qualifying income. If we fail to meet any of the Asset Diversification Tests with respect
to any quarter of any tax year, we will nevertheless be considered to have satisfied the requirements for such quarter if we cure such
failure within six months and either (i) such failure is de minimis or (ii) (a) such failure is due to reasonable cause and not due to
willful neglect and (b) we report the failure under Treasury Regulations to be adopted and pay an excise tax. If we fail to qualify as
a RIC for more than two consecutive taxable years and then seek to re-qualify as a RIC, we generally would be required to recognize gain
to the extent of any unrealized appreciation in our assets unless we elect to pay U.S. corporate income tax on any such unrealized appreciation
during the succeeding 5-year period.
As a RIC, we generally
will not be subject to federal income tax on our investment company taxable income (as that term is defined in the Code) and net capital
gains (the excess of net long-term capital gains over net short-term capital loss), if any, that we distribute in each tax year as dividends
to stockholders, provided that we distribute dividends of an amount at least equal to the sum of 90% of our investment company taxable
income, determined without regard to any deduction for dividends paid, plus 90% of our net tax-exempt interest income for such tax year,
or the “90% Distribution Requirement.” We intend to distribute to our stockholders, at least annually, substantially all of
our investment company taxable income, net tax-exempt income and net capital gains. In order to avoid incurring a nondeductible 4% federal
excise tax obligation, the Code requires that we distribute (or be deemed to have distributed) by December 31 of each calendar year dividends
of an amount generally at least equal to the sum of (i) 98% of our ordinary income (taking into account certain deferrals and elections)
for such calendar year, (ii) 98.2% of our capital gain net income, adjusted for certain ordinary losses and generally computed on the
basis of the one-year period ending on October 31 of such calendar year (unless we have made an election under Section 4982(e)(4) of the
Code to have our required distribution from net income measured using the one-year period ending on November 30 of such calendar year)
and (iii) 100% of any ordinary income and capital gain net income from prior calendar years (as previously computed) that were not paid
out during such calendar years and on which we incurred no U.S. federal income tax, or the “Excise Tax Distribution Requirement.”
Any dividends declared by us during October, November or December of any calendar year, payable to stockholders of record on a specified
date in such a month and actually paid during January of the following calendar year, will be treated for federal income tax purposes
as if it had been paid by us, as well as received by our U.S. stockholders, on December 31 of the calendar year in which the distribution
was declared.
We may
incur in the future the 4% federal excise tax on a portion of our income and capital gains. While we intend to distribute income and capital
gains to minimize our exposure to the 4% federal excise tax, we may not be able to, or may choose not to, distribute amounts sufficient
to avoid the imposition of the tax entirely. In that event, we generally will be liable for the 4% federal excise tax only on the amount
by which we do not meet the excise tax avoidance requirement. If we do not qualify as a RIC or fail to satisfy the 90% Distribution Requirement
for any tax year, we would be subject to corporate income tax on our taxable income, and all distributions from earnings and profits,
including distributions of net capital gains (if any), will be taxable to the stockholder as ordinary income. Such distributions generally
would be eligible (i) to be treated as qualified dividend income in the case of individual and other non-corporate stockholders and (ii)
for the dividends received deduction, or the “DRD,” in the case of certain corporate stockholders. In addition, in order to
requalify for taxation as a RIC, we may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain
distributions.
For purposes
of the 90% Gross Income Test, income that we earn from equity interests in certain entities that are not treated as corporations or as
qualified publicly traded partnerships for U.S. federal income tax purposes (e.g., certain CLOs that are treated as partnerships) will
generally have the same character for us as in the hands of such an entity; consequently, we may be required to limit our equity investments
in any such entities that earn fee income, rental income, or other nonqualifying income.
Some of
the income and fees that we may recognize will not satisfy the 90% Gross Income Test. In order to ensure that such income and fees do
not disqualify us as a RIC for a failure to satisfy such test, we may be required to recognize such income and fees indirectly through
one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be subject to pay U.S. corporate
income tax on their earnings, which ultimately will reduce our return on such income and fees.
We may
be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt instruments that
are treated under applicable tax rules as having original issue discount (which may arise if we receive warrants in connection with the
origination of a loan or possibly in other circumstances), we must include in income each tax 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 tax year.
We may also have to include in income other amounts that we have not yet received in cash, such as contractual payment-in-kind interest
(which represents contractual interest added to the loan balance and due at the end of the loan term) 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 tax year of accrual,
we may be required to make a distribution
to our stockholders in order to satisfy the 90% Distribution Requirement or the Excise Tax Distribution Requirement, even though we will
not have received any corresponding cash amount.
We may
invest (directly or indirectly through an investment in an equity interest in a CLO treated as a partnership for U.S. federal income tax
purposes) a portion of our net assets in below investment grade instruments. Investments in these types of instruments may present special
tax issues for us. U.S. federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, original
issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless instruments, how payments
received on obligations in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy
or workout context are taxable. These and other issues will be addressed by us to the extent necessary in order to seek to ensure that
we distribute sufficient income that we do not become subject to U.S. federal income or excise tax.
Some of
the CLOs in which we invest may constitute PFICs for U.S. federal income tax purposes. Because we acquire interests treated as equity
for U.S. federal income tax purposes in PFICs (including equity tranche investments and certain debt tranche investments in CLOs that
are PFICs), we may be subject to federal income tax on a portion of any “excess distribution” or gain from the disposition
of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of
interest may be imposed on us in respect of deferred taxes arising from any such excess distributions or gains. If we invest in a PFIC
and elect to treat the PFIC as a QEF in lieu of the foregoing requirements, we will be required to include in income each tax year our
proportionate share of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively,
we can elect to mark-to-market at the end of each tax year (as well as on certain other dates described in the Code) our shares in a PFIC;
in this case, we will recognize as ordinary income any increase in the value of such shares, and as an ordinary loss any decrease in such
value to the extent it does not exceed prior increases included in our ordinary income. Under either election, we may be required to recognize
in a tax year taxable income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that tax
year, and we may be required to distribute such taxable income in order to satisfy the 90% Gross Income Test, the Excise Tax Distribution
Requirement or the 90% Distribution Requirement. In 2019, the IRS issued final regulations that generally treat our income inclusion with
respect to a PFIC with respect to which we have made a qualified electing fund, or “QEF,” election, as qualifying income for
purposes of determining our ability to be subject to tax as a RIC if (i) there is a current distribution out of the earnings and profits
of the PFIC that are attributable to such income inclusion or (ii) such inclusion is derived with respect to our business of investing
in stock, securities, or currencies. As such, we may be restricted in our ability to make QEF elections with respect to our holdings in
issuers that could be treated as PFICs in order to limit our tax liability or maximize our after-tax return from these investments.
If we
hold 10% or more of the interests treated as equity (by vote or value) for U.S. federal income tax purposes in a foreign corporation that
is treated as a CFC (including equity tranche investments and certain debt tranche investments in a CLO treated as CFC), we may be treated
as receiving a deemed distribution (taxable as ordinary income) each tax year from such foreign corporation in an amount equal to our
pro rata share of the corporation’s income for the tax year (including both ordinary earnings and capital gains), whether or not
the corporation makes an actual distribution during such tax year. In general, a foreign corporation will be classified as a CFC if more
than 50% of the shares of the corporation, measured by reference to combined voting power or value, is owned (directly, indirectly or
by attribution) by U.S. Shareholders. A “U.S. Shareholder,” for this purpose, is any U.S. person that possesses (actually
or constructively) (a) 10% or more of the combined voting power of all classes of shares of a foreign corporation, or (b) 10% or more
of the total value of all classes of stock of a foreign corporation. If we are treated as receiving a deemed distribution from a CFC,
we will be required to include such deemed distribution in our investment company taxable income regardless of whether we receive any
actual distributions from such CFC, and we must distribute such income in order to satisfy the Excise Tax Distribution Requirement or
the 90% Distribution Requirement. In 2019, the IRS issued final regulations that generally treat our income inclusion with respect to
a CFC as qualifying income for purposes of determining our ability to be subject to tax as a RIC either if (i) there is a distribution
out of the earnings and profits of the CFC that are attributable to such income inclusion or (ii) such inclusion is derived with respect
to our business of investing in stock, securities, or currencies. As such, we may limit
and/or manage our holdings in issuers
that could be treated as CFCs in order to limit our tax liability or maximize our after-tax return from these investments.
FATCA
generally imposes a U.S. federal withholding tax of 30% on U.S. source periodic payments, including interest and dividends to certain
non-U.S. entities, including certain non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain
reporting requirements regarding its United States account holders and its United States owners. Most CLOs in which we invest will be
treated as non-U.S. financial entities for this purpose, and therefore will be required to comply with these reporting requirements to
avoid the 30% withholding. If a CLO in which we invest fails to properly comply with these reporting requirements, it could reduce the
amounts available to distribute to equity and junior debt holders in such CLO, which could materially and adversely affect our operating
results and cash flows.
Under
Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time we accrue income, expenses or
other liabilities denominated in a foreign currency and the time we actually collect such income or pay such expenses or liabilities are
generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward, futures and options contracts, similar
financial instruments as well as upon the disposition of debt securities denominated in a foreign currency, to the extent attributable
to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss. Any such
transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency
derivatives not used for hedging purposes) also could, under future Treasury Regulations, produce income not among the types of “qualifying
income” for purposes of the 90% Gross Income test.
Gain
or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants
generally will be treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term will depend on how long
we held a particular warrant. Upon the exercise of a warrant acquired by us, our tax basis in the stock purchased under the warrant will
equal the sum of the amount paid for the warrant plus the strike price paid on the exercise of the warrant.
Our transactions
in futures contracts and options will be subject to special provisions of the Code that, among other things, may affect the character
of our realized gains and losses realized (i.e., may affect whether gains or losses are ordinary or capital, or short-term or long-term),
may accelerate recognition of income to us and may defer our losses. These rules could, therefore, affect the character, amount and timing
of distributions to stockholders. These provisions also (a) will require us to mark-to-market certain types of the positions in our portfolio
(i.e., treat them as if they were closed out), and (b) may cause us to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% Distribution Requirement for qualifying to be taxed as a RIC or the Excise Tax Distribution Requirement.
We will monitor our transactions, will make the appropriate tax elections and will make the appropriate entries in our books and records
when we acquire any futures contract, option or hedged investment in order to mitigate the effect of these rules and prevent our disqualification
from being taxed as a RIC.
Generally,
our hedging transactions (including certain covered call options) may result in “straddles” for U.S. federal income tax purposes.
The straddle rules may affect the character of our realized gains (or losses). In addition, our realized losses on positions that are
part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for
the taxable year in which the losses are realized. Because only a few regulations implementing the straddle rules have been promulgated,
the tax consequences to us of engaging in hedging transactions are not entirely clear. Hedging transactions may increase the amount of
our realized short-term capital gain which is taxed as ordinary income when distributed to stockholders.
We may
make one or more of the elections available under the Code which are applicable to straddles. If we make any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected straddle positions will be determined under rules that vary
according to the election(s) made. The rules applicable under certain of the elections may operate to accelerate the recognition of gains
or losses from the affected straddle positions.
Because
the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which may be distributed to
stockholders, and which will be taxed
to them as ordinary income or long-term capital gain, may be increased or decreased as compared to a fund that did not engage in such
hedging transactions.
Certain
of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (i) convert
dividends that would otherwise constitute qualified dividend income into ordinary income, (ii) treat dividends that would otherwise be
eligible for deductions available to certain U.S. corporations under the Code as ineligible for such treatment, (iii) disallow, suspend
or otherwise limit the allowance of certain losses or deductions, (iv) convert long-term capital gains into short-term capital gains or
ordinary income, (v) convert an ordinary loss or deduction into a capital loss (the deductibility of which is more limited), (vi) cause
us to recognize income or gain without a corresponding receipt of cash, (vii) adversely alter the characterization of certain complex
financial transactions, and (viii) produce income that will not qualify as good income for purposes of the 90% Gross Income Test. While
we may not always be successful in doing so, we will seek to avoid or minimize the adverse tax consequences of our investment practices.
We may
recognize gain (but not loss) from a constructive sale of certain “appreciated financial positions” if we enter into a short
sale, offsetting notional principal contract, or forward contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive sale treatment include interests (including options and
forward contracts and short sales) in stock and certain other instruments. Constructive sale treatment does not apply if the transaction
is closed out not later than thirty days after the end of the tax year in which the transaction was initiated, and the underlying appreciated
securities position is held unhedged for at least the next sixty days after the hedging transaction is closed.
Gain or
loss from a short sale of property is generally considered as capital gains or loss to the extent the property used to close the short
sale constitutes a capital asset in our hands. Except with respect to certain situations where the property used to close a short sale
has a long-term holding period on the date the short sale is entered into, gains on short sales generally are short-term capital gains.
A loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, “substantially identical property”
has been held by us for more than one year. In addition, entering into a short sale may result in suspension of the holding period of
“substantially identical property” held by us.
Gain or
loss on a short sale will generally not be realized until such time as the short sale is closed. However, as described above in the discussion
of constructive sales, if we hold a short sale position with respect to securities that have appreciated in value, and we then acquire
property that is the same as or substantially identical to the property sold short, we generally will recognize gain on the date we acquire
such property as if the short sale were closed on such date with such property. Similarly, if we hold an appreciated financial position
with respect to securities and then enter into a short sale with respect to the same or substantially identical property, we generally
will recognize gain as if the appreciated financial position were sold at its fair market value on the date we enter into the short sale.
The subsequent holding period for any appreciated financial position that is subject to these constructive sale rules will be determined
as if such position were acquired on the date of the constructive sale.
Taxation of Stockholders
Taxation
of U.S. Resident Holders of Our Stock. Dividends and distributions on our shares are generally
subject to federal income tax as described herein, even though such dividends and distributions may economically represent a return of
a particular stockholder’s investment. Such distributions are likely to occur in respect of shares purchased at a time when our
NAV reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed
even when our NAV also reflects unrealized losses. Certain dividends and distributions declared by us in October, November or December
to stockholders of record of such month of a calendar year and paid by us in January of the following calendar year will be treated by
stockholders as if received on December 31 of the calendar year in which they were declared. In addition, certain other distributions
made after the close of our tax year may be “spilled back” and treated as paid by us (except for purposes of the nondeductible
4% federal excise tax) during such tax year. In such case, stockholders will be treated as having received such dividends in the tax year
in which the distributions were actually made.
Stockholders receiving
any distribution from us in the form of additional shares pursuant to the DRIP will be treated as receiving a taxable distribution in
an amount generally equal to the cash that would have been received if they had elected to receive the distribution in cash, unless we
issue new shares that are trading at or above NAV, in which case such stockholders will be treated as receiving a distribution equal to
the fair market value of the shares received, determined as of the reinvestment date.
We will
inform stockholders of the source and tax status of all distributions promptly after the close of each calendar year.
For
federal income tax purposes, distributions paid out of our current or accumulated earnings and profits will, except in the case of distributions
of qualified dividend income and capital gain dividends described below, be taxable as ordinary dividend income. Certain income distributions
paid by us (whether paid in cash or reinvested in additional shares of our stock) to individual taxpayers are taxed at rates applicable
to net long-term capital gains. This tax treatment applies only if certain holding period requirements and other requirements are satisfied
by the stockholder and the dividends are attributable to qualified dividend income received by us, and there can be no assurance as to
what portion of our dividend distributions will qualify for favorable treatment. For this purpose, “qualified dividend income”
means dividends received from United States corporations and “qualified foreign corporations,” provided that we satisfy certain
holding period and other requirements in respect of the stock of such corporations. The maximum individual rate applicable to qualified
dividend income is either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts. Given our
investment strategies, it is not anticipated that a significant portion of our dividends will be eligible to be treated as qualified dividend
income.
Dividends
distributed from our investment company taxable income which have been designated by us and received by certain of our corporate stockholders
will qualify for the DRD to the extent of the amount of qualifying dividends received by us from certain domestic corporations for the
tax year. A dividend received us will not be treated as a qualifying dividend (i) to the extent the stock on which the dividend is paid
is considered to be “debt-financed” (generally, acquired with borrowed funds), (ii) if we fail to meet certain holding
period requirements for the stock on which the dividend is paid or (iii) to the extent we are under an obligation (pursuant to a short
sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Moreover, the DRD
may be disallowed or reduced if an otherwise eligible corporate stockholder fails to satisfy the foregoing requirements with respect to
shares of our stock or by application of the Code. Given our investment strategies, it is not anticipated that a significant portion of
our dividends will be eligible for the DRD.
Capital
gain dividends distributed to a stockholder are characterized as long-term capital gains, regardless of how long the stockholder has held
our shares. A distribution of an amount in excess of our current and accumulated earnings and profits will be treated by a stockholder
as a return of capital which is applied against and reduces the stockholder’s tax basis in our shares. To the extent that the amount
of any such distribution exceeds a stockholder’s tax basis in our shares, the excess will be treated by the stockholder as gain
from a sale or exchange of the shares. Distributions of gains from the sale or other disposition of our investments that we owned for
one year or less are characterized as ordinary income.
We may
elect to retain our net capital gains or a portion thereof for investment and be subject to tax at corporate rates on the amount retained.
In such case, we may designate the retained amount as undistributed net capital gains in a notice to our stockholders who will be treated
as if each received a distribution of the pro rata share of such net capital gain, with the result that each stockholder will: (i) be
required to report the pro rata share of such net capital gain on the applicable tax return as long-term capital gains; (ii) receive a
refundable tax credit for the pro rata share of tax paid by us on the net capital gain; and (iii) increase the tax basis for the shares
of our stock held by an amount equal to the deemed distribution less the tax credit.
The benefits
of the reduced tax rates applicable to long-term capital gains and qualified dividend income may be impacted by the application of the
alternative minimum tax to noncorporate stockholders.
Selling
stockholders will generally recognize gain or loss in an amount equal to the difference between the amount realized on the sale and the
stockholder’s adjusted tax basis in the shares sold. The gain or loss will generally be a capital gain or loss. The current maximum
tax rate applicable to net capital gains recognized by individuals and other non-corporate taxpayers is: (i) the same as the maximum ordinary
income tax rate for
gain recognized on the sale of capital
assets held for one year or less; or (ii) generally 15% or 20% (depending on whether the stockholder’s income exceeds certain threshold
amounts) for gains recognized on the sale of capital assets held for more than one year (as well as certain capital gain dividends).
Any loss
realized upon the sale or exchange of shares of our stock with a holding period of six months or less will be treated as a long-term capital
loss to the extent of any capital gain dividends received (or amounts designated as undistributed capital gains) with respect to such
shares. In addition, all or a portion of a loss realized by a stockholder on a sale or other disposition of shares of our stock may be
disallowed under “wash sale” rules to the extent the stockholder acquires other shares of our stock (whether through the reinvestment
of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of disposition of
our shares. Any disallowed loss will result in an adjustment to the stockholder’s tax basis in some or all of the other shares of
our stock acquired.
Certain
commissions or other sales charges paid upon a purchase of our shares cannot be taken into account for purposes of determining gain or
loss on a sale of the shares before the 91st day after their purchase to the extent a sales charge is reduced or eliminated in a subsequent
acquisition of our shares, during the period beginning on the date of such sale and ending on January 31 of the calendar year following
the calendar year in which the sale is made, pursuant to a reinvestment right. Any disregarded amounts will result in an adjustment to
a stockholder’s tax basis in some or all of any other shares of our stock acquired.
Medicare
Tax on Net Investment Income. A 3.8% tax is imposed under Section 1411 of the Code on the “net
investment income” of certain U.S. citizens and residents and on the undistributed net investment income of certain estates and
trusts. Among other items, net investment income generally includes payments of interest or dividends on, and net gains recognized from
the sale, exchange, redemption, retirement or other taxable disposition of our securities (unless the securities are held in connection
with certain trades or businesses), less certain deductions. Prospective investors in our securities should consult their own tax advisors
regarding the effect, if any, of this tax on their ownership and disposition of our stock.
Taxation
of Non-U.S. Holders of Our Stock. Whether an investment in the shares of our stock is appropriate
for a non-U.S. holder will depend upon that person’s particular circumstances. An investment in the shares by a non-U.S. holder
may have adverse tax consequences. Non-U.S. holders should consult their tax advisors before investing in our stock.
Subject
to the discussions below, distributions of our “investment company taxable income” to non-U.S. holders (including interest
income and net short-term capital gain) are generally expected to be subject to withholding of U.S. federal taxes at a 30% rate (or lower
rate provided by an applicable treaty) to the extent of our current and accumulated earnings and profits. If the distributions are effectively
connected with a U.S. trade or business of the non-U.S. holder, we will not be required to withhold U.S. federal tax if the non-U.S. holder
complies with applicable certification and disclosure requirements, although the distributions will be subject to U.S. federal income
tax at the rates applicable to U.S. persons. Special certification requirements apply to a non-U.S. holder that is a foreign partnership
or a foreign trust, and such entities are urged to consult their own tax advisors. Backup withholding will not be applied to payments
that have been subject to the 30% (or lower applicable treaty rate) withholding tax described in this paragraph.
In addition,
with respect to certain distributions made by RICs to non-U.S. holders, no withholding is required and the distributions generally are
not subject to U.S. federal income tax if (i) the distributions are properly designated in a notice timely delivered to our stockholders
as “interest-related dividends” or “short-term capital gain dividends,” (ii) the distributions are derived
from sources specified in the Code for such dividends and (iii) certain other requirements are satisfied. Depending on the circumstances,
we may designate all, some or none of our potentially eligible dividends as derived from such qualified net interest income or as qualified
short-term capital gain, and a portion of our distributions, which may be significant (e.g., interest from non-U.S. sources or any foreign
currency gains) would be ineligible for this potential exemption from withholding. Moreover, in the case of shares of our stock held through
an intermediary, the intermediary may have withheld U.S. federal income tax even if we designated the payment as derived from such qualified
net interest income or qualified short-term capital gain. Hence, no assurance can be provided as to whether any amount of our dividends
or distributions will be eligible for this exemption from withholding or if eligible, will be reported as such by us.
Actual or deemed distributions
of our net long-term capital gains to a non-U.S. holder, and gains realized by a non-U.S. holder upon the sale of our stock, will not
be subject to federal withholding tax and generally will not be subject to U.S. federal income tax unless, (i) the distributions or gains,
as the case may be, are effectively connected with a U.S. trade or business of the Non-U.S. holder and, if an income tax treaty applies,
are attributable to a permanent establishment maintained by the non-U.S. holder in the United States or (ii) in the case of an individual
stockholder, the stockholder is present in the United States for a period or periods aggregating 183 days or more during the year of the
sale or the receipt of the distributions or gains and certain other conditions are met.
If we
distribute our net capital gains in the form of deemed rather than actual distributions (which we may do in the future), a non-U.S. holder
will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay
on the capital gains deemed to have been distributed. In order to obtain the refund, the non-U.S. holder would be required to obtain a
U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S. holder would not otherwise be required
to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return. For a corporate non-U.S. holder, distributions
(both actual and deemed), and gains realized upon the sale of our stock that are effectively connected with a U.S. trade or business may,
under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate (or at a lower rate if provided
for by an applicable treaty). Accordingly, investment in the shares may not be appropriate for a non-U.S. holder.
A non-U.S.
holder who is a non-resident alien individual, and who is otherwise subject to withholding of U.S. federal income tax, may be subject
to information reporting and backup withholding of U.S. federal income tax on distributions unless the non-U.S. holder provides us or
the distribution paying agent with an IRS Form W-8BEN, IRS Form W-8BEN-E, or an acceptable substitute form, or otherwise meets documentary
evidence requirements for establishing that it is a non-U.S. holder or otherwise establishes an exemption from backup withholding.
Non-U.S.
holders may also be subject to U.S. estate tax with respect to their investment in our shares. Non-U.S. persons should consult their own
tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment
in the shares.
Tax
Shelter Reporting Regulations. Under applicable Treasury Regulations, if a U.S. holder recognizes
a loss with respect to our securities of $2 million or more for a non-corporate U.S. holder or $10 million or more for a corporate U.S.
holder in any single tax year (or a greater loss over a combination of tax years), the U.S. holder may be required to file with the IRS
a disclosure statement on IRS Form 8886. The fact that a loss is reportable under these regulations does not affect the legal determination
of whether the taxpayer’s treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this
reporting requirement. States may also have a similar reporting requirement. U.S. holders of our stock should consult their own tax advisors
to determine the applicability of these Treasury Regulations in light of their individual circumstances.
U.S. holders
of a RIC are not excepted. Future guidance may extend the current exception from this reporting requirement to U.S. holders of most or
all RICs. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper. Significant monetary penalties apply to a failure to comply with this reporting requirement. States may
also have a similar reporting requirement. U.S. holders of our stock should consult their own tax advisors to determine the applicability
of these Treasury Regulations in light of their individual circumstances.
Information
Reporting and Backup Withholding. A U.S. holder (other than an “exempt recipient,”
including a “C” corporation and certain other persons who, when required, demonstrate their exempt status) may be subject
to backup withholding at a rate of 24% on, and will be subject to information reporting requirements with respect to distributions in
respect of, and proceeds from the sale, exchange, redemption or retirement of, our stock. In general, if a non-corporate U.S. holder subject
to information reporting fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup
withholding requirements, backup withholding at the applicable rate may apply.
You should
consult your own tax advisor regarding the application of information reporting and backup withholding in your particular circumstance
and the availability of and procedure for obtaining an exemption
from backup withholding. Backup withholding
is not an additional tax, and any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against your
U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
FATCA
Withholding on Payments to Certain Foreign Entities. FATCA generally imposes a U.S. federal
withholding tax of 30% on payments of dividends made with respect to shares of our stock to certain non-U.S. entities (including, in some
circumstances, where such an entity is acting as an intermediary) that fail to comply (or be deemed compliant) with certain certification
and information reporting requirements. FATCA withholding taxes apply to all withholdable payments without regard to whether the beneficial
owner of the payment would otherwise be entitled to an exemption from withholding taxes pursuant to an applicable tax treaty with the
United States or under U.S. domestic law. Stockholders may be requested to provide additional information to enable the applicable withholding
agent to determine whether withholding is required. The U.S. Treasury Department has released proposed U.S. Treasury regulations which,
if finalized in their present form, would eliminate the application of withholding imposed under FATCA with respect to payments of gross
proceeds. Pursuant to these proposed U.S. Treasury regulations, the Company and any other applicable withholding agent may (but is not
required to) rely on this proposed change to FATCA withholding until final regulations are issued or until such proposed U.S. Treasury
regulations are rescinded. Prospective holders of in our securities should consult their own tax advisors regarding the effect, if any,
of the FATCA rules for them based on their particular circumstances.
The
preceding discussion of material U.S. federal income tax considerations is for general information only and is not tax advice. We urge
you to consult your own tax advisor with respect to the particular tax consequences to you of an investment in our securities, including
the possible effect of any pending legislation or proposed regulations.
PLAN OF DISTRIBUTION
The
shares of our common stock offered by this prospectus are being offered by BRPC II. The shares may be sold or distributed from time to
time by BRPC II directly to one or more purchasers or through brokers, dealers, or underwriters who may act solely as agents at market
prices prevailing at the time of sale, at prices related to the prevailing market prices, at negotiated prices, or at fixed prices, which
may be changed. The sale of the shares of our common stock offered by this prospectus could be effected in one or more of the following
methods:
•
ordinary
brokers’ transactions;
•
transactions
involving cross or block trades;
•
through
brokers, dealers, or underwriters who may act solely as agents;
•
“at
the market” into an existing market for our common stock;
•
in
other ways not involving market makers or established business markets, including direct sales to purchasers or sales effected through
agents;
•
in
privately negotiated transactions; or
•
any
combination of the foregoing.
In order
to comply with the securities laws of certain states, if applicable, the shares may be sold only through registered or licensed brokers
or dealers.
BRPC II
is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
BRPC
II has informed us that it presently anticipates using, but is not required to use, B. Riley Securities, Inc. (“BRS”), a registered
broker-dealer and FINRA member and an affiliate of BRPC II, as an executing broker to effectuate resales, if any, of our common stock
that it may acquire from us pursuant to the Purchase Agreement, and that it may also engage one or more other registered broker-dealers
to effectuate resales, if any, of such common stock that it may acquire from us. Such resales will be made at prices and at terms then
prevailing or at prices related to the then current market price. Each such registered broker-dealer will be an underwriter within the
meaning of Section 2(a)(11) of the Securities Act. BRPC II has informed us that each such broker-dealer it engages to effectuate resales
of our common stock on its behalf, excluding BRS, may receive commissions from BRPC II for executing such resales for BRPC II and, if
so, such commissions will not exceed customary brokerage commissions.
Except
as set forth above, we know of no existing arrangements between BRPC II and any other stockholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the shares of our common stock offered by this prospectus.
Brokers,
dealers, underwriters or agents participating in the distribution of the shares of our common stock offered by this prospectus may receive
compensation in the form of commissions, discounts, or concessions from the purchasers, for whom the broker-dealers may act as agent,
of the shares sold by BRPC II through this prospectus. The compensation paid to any such particular broker-dealer by any such purchasers
of shares of our common stock sold by BRPC II may be less than or in excess of customary commissions. Neither we nor BRPC II can presently
estimate the amount of compensation that any agent will receive from any purchasers of shares of our common stock sold by BRPC II.
We may
from time to time file with the SEC one or more supplements to this prospectus or amendments to the registration statement of which this
prospectus forms a part to amend, supplement or update information contained in this prospectus, including, if and when required under
the Securities Act, to disclose certain information relating to a particular sale of shares offered by this prospectus by BRPC II, including
with respect to any compensation paid or payable by BRPC II to any brokers, dealers, underwriters or agents that participate in the distribution
of such shares by BRPC II, and any other related information required to be disclosed under the Securities Act.
We will
pay the expenses incident to the registration under the Securities Act of the offer and sale of the shares of our common stock covered
by this prospectus by BRPC II. In addition, we have agreed to reimburse
BRPC II for the reasonable legal fees
and disbursements of BRPC II’s legal counsel in an amount not to exceed (i) $125,000, in connection with the transactions contemplated
by the Purchase Agreement and the Registration Rights Agreement and (ii) $5,000 per semi-annual period in connection with BRPC II’s
ongoing due diligence and review of deliverables subject to the Purchase Agreement. In accordance with FINRA Rule 5110 these reimbursed
fees and expenses are deemed to be underwriting compensation in connection with sales of our common stock by BRPC II to the public. The
total underwriting compensation to be received in connection with sales of our common stock by BRPC II to the public, as determined under
FINRA Rule 5110, including the 3.0% fixed discount to current market prices of our common stock reflected in the purchase prices payable
by BRPC II for our common stock that we may require it to purchase from us from time to time under the Purchase Agreement, will not exceed
8% of the maximum $20,000,000 of shares of our common stock to be sold to the public.
We also
have agreed to indemnify BRPC II and certain other persons against certain liabilities in connection with the offering of shares of our
common stock offered hereby, including liabilities arising under the Securities Act or, if such indemnity is unavailable, to contribute
amounts required to be paid in respect of such liabilities. BRPC II has agreed to indemnify us against liabilities under the Securities
Act that may arise from certain written information furnished to us by BRPC II specifically for use in this prospectus or, if such indemnity
is unavailable, to contribute amounts required to be paid in respect of such liabilities. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers, and controlling persons, we have been advised that in the opinion
of the SEC this indemnification is against public policy as expressed in the Securities Act and is therefore, unenforceable.
We estimate
that the total expenses for the offering will be approximately $455,000.
BRPC II
has represented to us that at no time prior to the date of the Purchase Agreement has BRPC II, its sole member, any of their respective
officers, or any entity managed or controlled by BRPC II or its sole member, engaged in or effected, in any manner whatsoever, directly
or indirectly, for its own account or for the account of any of its affiliates, any short sale (as such term is defined in Rule 200 of
Regulation SHO of the Exchange Act) of our common stock or any hedging transaction, which establishes a net short position with respect
to our common stock. BRPC II has agreed that during the term of the Purchase Agreement, none of BRPC II, its sole member, any of their
respective officers, or any entity managed or controlled by BRPC II or its sole member, will enter into or effect, directly or indirectly,
any of the foregoing transactions for its own account or for the account of any other such person or entity.
We have
advised BRPC II that it is required to comply with Regulation M promulgated under the Exchange Act. With certain exceptions, Regulation
M precludes BRPC II, any affiliated purchasers, and any broker-dealer or other person who participates in the distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subject of the distribution until
the entire distribution is complete. Regulation M also prohibits any bids or purchases made in order to stabilize the price of a security
in connection with the distribution of that security. All of the foregoing may affect the marketability of the securities offered by this
prospectus.
This offering
will terminate on the date that all shares of our common stock offered by this prospectus have been sold by BRPC II.
Our
common stock is currently listed on the New York Stock Exchange under the symbol “EIC”.
BRPC II
and/or one or more of its affiliates has provided, currently provides and/or from time to time in the future may provide various investment
banking and other financial services for us and/or one or more of our affiliates that are unrelated to the transactions contemplated by
the Purchase Agreement and the offering of shares for resale by BRPC II to which this prospectus relates, for which investment banking
and other financial services they have received and may continue to receive customary fees, commissions and other compensation from us,
aside from any discounts, fees and other compensation that BRPC II has received and may receive in connection with the transactions contemplated
by the Purchase Agreement, including the 3.0% fixed discount to current market prices of our common stock reflected in the purchase prices
payable by BRPC II for our common stock that we may require it to purchase from us from time to time under the Purchase Agreement, and
our reimbursement of (i) up to $125,000 of BRPC II’s legal fees in connection with the transactions contemplated by the Purchase
Agreement and the Registration Rights Agreement and (ii) $5,000 per semi-annual period in connection with BRPC II’s ongoing due
diligence and review of deliverables subject to the Purchase Agreement.
DESCRIPTION
OF OUR SECURITIES
The
following are our authorized classes of securities as of November 30, 2022:
| |
(1) Title of Class |
| |
(2) Amount Authorized |
| |
(3) Amount Held by Us or for Our Account |
| |
(4) Amount Outstanding Exclusive of Amounts Shown Under (3) |
|
| |
Common
stock, par value $0.001 per share |
| |
150,000,000
shares |
| |
—
|
| |
7,598,949
shares |
|
| |
Preferred
stock, par value $0.001 per share |
| |
20,000,000
shares |
| |
—
|
| |
1,521,649
shares |
|
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DESCRIPTION OF OUR CAPITAL
STOCK
The
following description is based on relevant portions of the DGCL and on our certificate of incorporation and bylaws. This summary is not
necessarily complete, and we refer you to the DGCL, our certificate of incorporation and our bylaws for a more detailed description of
the provisions summarized below.
Capital Stock
Our
authorized stock consists of 150,000,000 shares of common stock, par value $0.001 per share, and 20,000,000 shares of preferred stock,
par value $0.001 per share. There are no outstanding options or warrants to purchase our stock. No stock has been authorized for issuance
under any equity compensation plans. Under Delaware law, our stockholders generally are not personally liable for our debts or obligations.
Common
Stock
All
shares of our common stock have equal rights as to earnings, assets, dividends and voting and, when they are issued, will be duly authorized,
validly issued, fully paid and nonassessable. Distributions may be paid to holders of our common stock if, as and when authorized by the
board of directors and declared by us out of funds legally available therefrom. Such distributions may be payable in cash, shares of our
common stock or a combination thereof. Shares of our common stock have no preemptive, exchange, conversion or redemption rights and are
freely transferable, except when their transfer is restricted by U.S. federal and state securities laws or by contract. In the event of
our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that
are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders
of our preferred stock, if any preferred stock is outstanding at such time. Each share of common stock is entitled to one vote on all
matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or
series of stock, holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election of directors.
Preferred
Stock
Our
certificate of incorporation authorizes our board of directors to classify and reclassify any unissued shares of preferred stock into
other classes or series of preferred stock without stockholder approval. If we issue preferred stock, costs of the offering will be borne
immediately at such time by the holders of our common stock and result in a reduction of the NAV per share of our common stock at that
time. We may issue preferred stock at any time. Prior to issuance of shares of each class or series, our board of directors is required
by the DGCL and by our certificate of incorporation to set the terms, preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus,
our board of directors could authorize the issuance of shares of preferred stock with terms and conditions that could have the effect
of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common
stock or otherwise be in their best interest.
For
any series of preferred stock that we may issue, our board of directors will determine and the certificate of designation and the offering
documents relating to such series will describe:
•
the
designation and number of shares of such series;
•
the
rate and time at which, and the preferences and conditions under which, any dividends or other distributions will be paid on shares of
such series, as well as whether such dividends or other distributions are participating or non-participating;
•
any
provisions relating to convertibility or exchange ability of the shares of such series, including adjustments to the conversion price
of such series;
•
the
rights and preferences, if any, of holders of shares of such series upon our liquidation, dissolution or winding up of our affairs;
•
the
voting powers, if any, of the holders of shares of such series;
•
any
provisions relating to the redemption of the shares of such series;
•
any limitations on our ability to
pay dividends or make distributions on, or acquire or redeem, other securities while shares of such series are outstanding;
•
any
conditions or restrictions on our ability to issue additional shares of such series or other securities;
•
if
applicable, a discussion of certain U.S. federal income tax considerations; and
•
any
other relative powers, preferences and participating, optional or special rights of shares of such series, and the qualifications, limitations
or restrictions thereof.
All
shares of preferred stock that we may issue will be of equal rank and identical except as to the particular terms thereof that may be
fixed by our board of directors, and all shares of each series of preferred stock will be identical except as to the dates from which
dividends or other distributions, if any, thereon will be cumulative. You should note, however, that any issuance of preferred stock must
comply with the requirements of the 1940 Act. The 1940 Act requires that (1) immediately after issuance and before any dividend or other
distribution is made with respect to our common stock and before any purchase of our common stock is made, we maintain an asset coverage
ratio of at least 200%, as measured at the time of the issuance of any such shares of preferred stock and calculated as the ratio of our
total assets (less all liabilities and indebtedness not represented by senior securities) over the aggregate amount our outstanding senior
securities representing indebtedness plus the aggregate liquidation preference of any outstanding shares of preferred stock, after deducting
the amount of such dividend, distribution or purchase price, as the case may be, (2) the holders of shares of preferred stock, if any
are issued, must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such
preferred stock are in arrears by two years or more (3) such class of stock have complete priority over any other class of stock as to
distribution of assets and payment of dividends or other distributions, which shall be cumulative. Some matters under the 1940 Act require
the separate vote of the holders of any issued and outstanding preferred stock. We believe that the availability for issuance of preferred
stock will provide us with increased flexibility in structuring future financings and acquisitions.
Provisions of the DGCL
and Our Certificate of Incorporation and Bylaws
Limitation
on Liability of Directors and Officers; Indemnification and Advance of Expenses. The indemnification
of our officers and directors is governed by Section 145 of the DGCL, our certificate of incorporation and bylaws. Subsection (a) of DGCL
Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or
in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by the person in connection with such action, suit or proceeding if (1) such person acted in good faith,
(2) in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and (3) with respect
to any criminal action or proceeding, such person had no reasonable cause to believe the person’s conduct was unlawful.
Subsection
(b) of DGCL Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of
the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner the person reasonably believed to be in, or not opposed to,
the best interests of the corporation, and except that no indemnification may be made in respect of any claim, issue or matter as to which
such person has been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the
court in which such action or suit was brought determines upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court
of Chancery or such other court deems proper.
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DGCL Section 145 further
provides that to the extent that a present or former director or officer is successful, on the merits or otherwise, in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein,
such person will be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in
connection with such action, suit or proceeding. In all cases in which indemnification is permitted under subsections (a) and (b) of Section
145 (unless ordered by a court), it will be made by the corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the applicable standard
of conduct has been met by the party to be indemnified. Such determination must be made, with respect to a person who is a director or
officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, (2) by a committee of such directors designated by majority vote of such directors, even though less than
a quorum, (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (4)
by the stockholders. The statute authorizes the corporation to pay expenses incurred by an officer or director in advance of the final
disposition of a proceeding upon receipt of an undertaking by or on behalf of the person to whom the advance will be made, to repay the
advances if it is ultimately determined that he or she was not entitled to indemnification. DGCL Section 145 also provides that indemnification
and advancement of expenses permitted under such Section are not to be exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. DGCL
Section 145 also authorizes the corporation to purchase and maintain liability insurance on behalf of its directors, officers, employees
and agents regardless of whether the corporation would have the statutory power to indemnify such persons against the liabilities insured.
Our
certificate of incorporation provides that our directors will not be liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director to the fullest extent permitted by the current DGCL or as the DGCL may hereafter be amended. DGCL Section
102(b)(7) provides that the personal liability of a director to a corporation or its stockholders for breach of fiduciary duty as a director
may be eliminated except for liability (1) for any breach of the director’s duty of loyalty to the corporation or its stockholders,
(2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174
of the DGCL, relating to unlawful payment of dividends or unlawful stock purchases or redemption of stock or (4) for any transaction from
which the director derives an improper personal benefit.
Our
certificate of incorporation provides for the indemnification of any person to the full extent permitted, and in the manner provided,
by the current DGCL or as the DGCL may hereafter be amended. In addition, we have entered into indemnification agreements with each of
our directors and officers in order to effect the foregoing.
Delaware
Anti-Takeover Law. The DGCL and our certificate of incorporation and bylaws contain provisions
that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise. These
provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of us to negotiate first with our board of directors. These measures may delay, defer or prevent a transaction or a
change in control that might otherwise be in the best interests of our stockholders. These provisions could have the effect of depriving
stockholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking
to obtain control over us. Such attempts could have the effect of increasing our expenses and disrupting our normal operations. We believe
that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because the
negotiation of such proposals may improve their terms. Our board of directors has considered these provisions and has determined that
the provisions are in the best interests of us and our stockholders generally.
We are
subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. In general, these provisions prohibit a Delaware
corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
•
prior
to such time, the board of directors approved either the business combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
99
•
upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced; or
•
on
or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders, by at least
two-thirds of the outstanding voting stock that is not owned by the interested stockholder.
•
Section
203 defines “business combination” to include the following:
•
any
merger or consolidation involving the corporation and the interested stockholder;
•
any
sale, transfer, pledge or other disposition (in one transaction or a series of transactions) of 10% or more of either the aggregate market
value of all the assets of the corporation or the aggregate market value of all the outstanding stock of the corporation involving the
interested stockholder;
•
subject
to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
•
any
transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of
the corporation owned by the interested stockholder; or
•
the
receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation.
In general,
Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons.
The
statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire
us.
Election
of Directors. Our bylaws provide that the affirmative vote of a plurality of
all votes cast by stockholders present in person or by proxy at an annual or special meeting of the stockholders and entitled to vote
thereat will be sufficient to elect a director. Under our certificate of incorporation, our board of directors may amend the bylaws to
alter the vote required to elect directors.
For
so long as any series of our preferred stock are outstanding, the holders of our preferred stock, voting as a class, will be entitled
to elect two of our directors.
Classified
Board of Directors. Our board of directors is divided into three classes of
directors serving staggered three-year terms, with the term of office of only one of the three classes expiring each year. A classified
board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer
time required to elect a majority of a classified board of directors helps to ensure the continuity and stability of our management and
policies.
Number
of Directors; Removal; Vacancies. Our certificate of incorporation provides
that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide that a majority
of our entire board of directors may at any time increase or decrease the number of directors.
However,
unless our bylaws are amended, the number of directors may never be less than four nor more than eight. Under the DGCL, unless the certificate
of incorporation provides otherwise (which our certificate of incorporation does not), directors on a classified board such as our board
of directors may be removed only for cause, by the affirmative vote of stockholders. Under our certificate of incorporation and bylaws
and subject to applicable stockholder election requirements of the 1940 Act, any vacancy on the board of directors, including a vacancy
resulting from an enlargement of the board of directors, may be filled only by vote of a majority of the directors then in office. The
limitations on the ability of our stockholders to remove directors and fill vacancies could make it more difficult for a third-party to
acquire, or discourage a third-party from seeking to acquire, control of us.
Action
by Stockholders. Under our certificate of incorporation, stockholder action
can be taken only at an annual or special meeting of stockholders or by unanimous written consent in lieu of a meeting. This may have
the effect of delaying consideration of a stockholder proposal until the next annual meeting.
100
Advance
Notice Provisions for Stockholder Nominations and Stockholder Proposals. Our
bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and
the proposal of business to be considered by stockholders may be made only (1) by or at the direction of the board of directors, (2) pursuant
to our notice of meeting or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures
of the bylaws. Nominations of persons for election to the board of directors at a special meeting may be made only (1) by or at the direction
of the board of directors or (2) provided that the board of directors has determined that directors will be elected at the meeting, by
a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
The purpose
of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful
opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent
deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or
business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our
board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action,
they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper
procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own
slate of directors or to approve its own proposal without regard to whether consideration of such nominees or proposals might be harmful
or beneficial to us and our stockholders.
Stockholder
Meetings. Our bylaws provide that any action required or permitted to be taken
by stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting.
In addition, our certificate of incorporation provides that, in lieu of a meeting, any such action may be taken by unanimous written consent
of our stockholders. In addition, our bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual
meeting of stockholders, including proposed nominations of candidates for election to the board of directors. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction
of the board of directors, or by a stockholder of record on the record date for the meeting who is entitled to vote at the meeting and
who has delivered timely written notice in proper form to the secretary of the stockholder’s intention to bring such business before
the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored
by the holders of a majority of our outstanding voting securities.
Calling
of Special Meetings of Stockholders. Our bylaws provide that, except as required
by law, special meetings of stockholders may be called by the secretary at the request of our board of directors, the chairperson of the
board and our chief executive officer.
Conflict
with the 1940 Act. Our bylaws provide that, if and to the extent that any provision
of the DGCL or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
Exclusive
Forum. Our bylaws provide that, unless the Company consents to the selection
of an alternative forum in writing, the Court of Chancery, or if that court does not have jurisdiction, the United States District Court
for the District of Delaware shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the
Company, (b) any action asserting a claim of breach of any duty owed by any director or officer or other agent of the Company to the Company
or to the stockholders of the Company, (c) any action asserting a claim against the Company or any Director or officer or other agent
of the Company arising pursuant to any provision of the DGCL or our certificate of incorporation or our Bylaws, or (d) any action asserting
a claim against the Company or any Director or officer or other agent of the Company that is governed by the internal affairs doctrine.
This choice
of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with
us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims. Alternatively,
if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may
incur additional
101
costs associated with resolving such
action in other jurisdictions, which could harm our business, operating results and financial condition.
Potential Conversion to
Open-End Fund
We may
be converted to an open-end management investment company at any time if approved by each of the following: (i) a majority of our directors
then in office, (ii) the holders of not less than 75% of our outstanding shares entitled to vote thereon and (iii) such vote or votes
of the holders of any class or classes or series of shares as may be required by the 1940 Act. In considering whether to vote on any proposal
to convert us to an open-end management investment company, our board of directors may consider any potential benefits to stockholders
that may potentially be achieved based on the circumstances and related risks, and whether it would be in the long-term best interests
of stockholders to do so in light of any necessary changes in our investment policies and other factors. The composition of our portfolio
likely could prohibit us from complying with regulations of the SEC applicable to open-end management investment companies. Accordingly,
conversion likely would require significant changes in our investment policies and may require liquidation of a substantial portion of
relatively illiquid portions of its portfolio, to the extent such positions are held. In the event of conversion, the shares of our common
stock would cease to be listed on the NYSE or other national securities exchange or market system. Any outstanding shares of our preferred
stock would be redeemed by us prior to such conversion. Our board of directors believes, however, that the closed-end structure is desirable,
given our investment objectives and policies. Investors should assume, therefore, that it is unlikely that the board of directors would
vote to convert us to an open-end management investment company. Stockholders of an open-end management investment company may require
the open-end management investment company to redeem their shares at any time (except in certain circumstances as authorized by or under
the 1940 Act) at their NAV, less such redemption charge, if any, as might be in effect at the time of a redemption. We would expect to
pay all such redemption requests in cash, but intends to reserve the right to pay redemption requests in a combination of cash or securities.
If such partial payment in securities were made, investors may incur brokerage costs in converting such securities to cash. If we were
converted to an open-end fund, it is likely that new shares of our common stock would be sold at NAV plus a sales load.
Repurchase of Shares and
Other Discount Measures
In recognition
of the possibility that shares of our common stock might trade at a discount to the NAV of such shares and that any such discount may
not be in the interest of the holders of our common stock, the board of directors, in consultation with the Adviser, from time to time
will review possible actions to reduce any such discount, including open market repurchases and/or tender offers for shares of our common
stock. In this respect, if, shares of our common stock trade at an average discount to NAV of more than 7.5% based on the average daily
closing stock price over any six month period, subject to (1) approval of the board of directors and (2) compliance with any applicable
1940 Act restrictions (including any applicable asset coverage requirement) and with contractual obligations under any applicable debt
financing, including any credit facilities which we may have at such time, we currently intend to announce a stock repurchase program
pursuant to which we would repurchase in the open market a specified percentage (up to 10%) of our then-outstanding shares of common stock
over a three-month period. We refer to such a program in this prospectus as a “Repurchase Program.” If initiated, we currently
expect that we would halt a Repurchase Program once shares of our common stock cease to trade at a discount to NAV of more than 7.5% based
on the average daily stock price over any two week period during the operation of such Repurchase Program. We expect that repurchases
of shares of our common stock pursuant to a Repurchase Program will be funded with our available cash or proceeds from asset liquidations.
If we announce a Repurchase Program during a calendar year as described above, we do not currently intend to announce a subsequent Repurchase
Program in the same calendar year or within the following six months.
While
it is our current intention to implement a Repurchase Program in the circumstances described above, there are no assurances that the board
of directors will approve any Repurchase Program or that, if initiated, a Repurchase Program will reduce or eliminate any discount to
NAV per share. The factors that the board of directors may consider in determining whether to approve a Repurchase Program or any other
action intended to reduce a discount in the trading price of our common stock include, but are not limited to, the market price of shares
of our common stock, the NAV per share of our common stock, the liquidity of our assets, the effect on our expenses, whether such transactions
would impair our status as a RIC or result in
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a
failure to comply with applicable asset coverage requirements, whether the use of cash or sale of portfolio securities is desirable under
current market conditions, any restrictions in or other impacts on our contractual arrangements, compliance with applicable law, any potential
other courses of action, any applicable conflicts of interest, general economic conditions and such other events or conditions that may
have a material effect on our ability to consummate such transactions. There are no assurances that the board of directors will, in fact,
decide to undertake either of these actions or, if undertaken, that such actions will result in shares of our common stock trading at
a price which is equal to or approximates their NAV.
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SELLING
STOCKHOLDER
This
prospectus relates to the offer and sale by BRPC II of up to 1,398,973 shares of our common stock that may be issued by us to BRPC II
under the Purchase Agreement. For additional information regarding the shares of our common stock included in this prospectus, see the
section titled “Committed Equity Financing” above. We are registering the shares of our common stock included in this prospectus
pursuant to the provisions of the Registration Rights Agreement we entered into with BRPC II on August 16, 2022 in order to permit BRPC
II to offer the shares included in this prospectus for resale from time to time. Except for the transactions contemplated by the Purchase
Agreement and the Registration Rights Agreement and as set forth in the section titled “Plan of Distribution” in this prospectus,
BRPC II has not had any material relationship with us within the past three years.
The
table below presents information regarding BRPC II and the shares of our common stock that may be resold by BRPC II from time to time
under this prospectus. This table is prepared based on information supplied to us by BRPC II, and reflects holdings as of September 30,
2022. The number of shares in the column “Maximum Number of Shares of Common Stock to be Offered Pursuant to this Prospectus”
represents all of the shares of our common stock being offered for resale by BRPC II under this prospectus. BRPC II may sell some, all
or none of the shares being offered for resale in this offering. We do not know how long BRPC II will hold the shares before selling them
and, except as set forth in the section titled “Plan of Distribution” in this prospectus, we are not aware of any existing
arrangements between BRPC II and any other stockholder, broker, dealer, underwriter or agent relating to the sale or distribution of the
shares of our common stock being offered for resale by this prospectus.
Beneficial
ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act, and includes shares of our common
stock with respect to which BRPC II has sole or shared voting and investment power. The percentage of shares of our common stock beneficially
owned by BRPC II prior to the offering shown in the table below is based on an aggregate of 6,999,578 shares of our common stock outstanding
on September 30, 2022. Because the purchase price to be paid by BRPC II for shares of our common stock, if any, that we may elect to sell
to BRPC II in one or more VWAP Purchases and one or more Intraday VWAP Purchases from time to time under the Purchase Agreement will be
determined on the applicable Purchase Dates therefor, the actual number of shares of our common stock that we may sell to BRPC II under
the Purchase Agreement may be fewer than the number of shares being offered for resale under this prospectus. The fourth column assumes
the resale by BRPC II of all of the shares of our common stock being offered for resale pursuant to this prospectus.
(1)
In
accordance with Rule 13d-3(d) under the Exchange Act, we have excluded from the number of shares beneficially owned prior to the offering
all of the shares of our common stock that BRPC II may be required to purchase under the Purchase Agreement, because the issuance of such
shares is solely at our discretion and is subject to conditions contained in the Purchase Agreement, the satisfaction of which are entirely
outside of BRPC II’s control, including the registration statement that includes this prospectus becoming and remaining effective.
Furthermore, the VWAP Purchases and the Intraday VWAP Purchases of common stock under the Purchase Agreement are subject to certain agreed
upon maximum amount limitations set forth in the Purchase Agreement. Also, the Purchase Agreement prohibits us from issuing and selling
any shares of our common stock to BRPC II to the extent such shares, when aggregated with all other shares of our common stock then beneficially
owned by BRPC II, would cause BRPC II’s beneficial ownership of our common stock to exceed the 4.99% Beneficial Ownership Limitation.
The Purchase Agreement also prohibits us from issuing or selling shares of our common stock under the Purchase Agreement in excess of
the 19.99% Exchange Cap, unless we obtain stockholder approval to do so, or unless sales of our common stock are made by us to BRPC II
at a price equal to or greater than the applicable “minimum price” (as defined in the applicable listing rules of the
NYSE) of our common
stock,
calculated at the time such purchases are effected by us under the Purchase Agreement, if any, such that the Exchange Cap limitation would
not apply under applicable NYSE rules. Neither the Beneficial Ownership Limitation nor the Exchange Cap (to the extent applicable under
NYSE rules) may be amended or waived under the Purchase Agreement.
(2)
Applicable
percentage ownership is based on 7,598,949 shares of our common stock outstanding as of November 30, 2022.
(3)
Assumes
the sale of all shares of our common stock being offered pursuant to this prospectus.
(4)
The
business address of BRPC II is 11100 Santa Monica Blvd., Suite 800, Los Angeles, California 90025. BRPC II’s principal business
is that of a private investor. The sole member of BRPC II is B. Riley Principal Investments, LLC (“BRPI”), which is an indirect
subsidiary of B. Riley Financial, Inc. (“BRF”). An Investment Committee of BRPC II (the “BRPC II Investment Committee”),
which is composed of three members appointed by BRPI, has sole voting power and sole investment power over securities beneficially owned,
directly, by BRPC II. All decisions with respect to the voting and disposition of securities beneficially owned, directly, by BRPC II
are made exclusively by majority vote of the BRPC II Investment Committee, each member of the BRPC II Investment Committee having one
vote, and no single member of the BRPC II Investment Committee has any ability to make any such decisions unilaterally or any veto power
with respect to decisions that are made by the vote of a majority of the members of the BRPC II Investment Committee. The sole voting
and investment powers of the BRPC II Investment Committee over securities beneficially owned, directly, by BRPC II are exercised independently
from all other direct and indirect subsidiaries of BRF, and the voting and investment powers over securities beneficially owned directly
or indirectly by all other direct and indirect subsidiaries of BRF are exercised independently from BRPC II. We have been advised that
neither BRPI nor BRPC II is a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) or an independent broker-dealer,
however, each of BRPI and BRPC II is an affiliate of BRS, a registered broker-dealer and FINRA member, and certain officers of BRPC II
and certain of the BRPC II Investment Committee members are associated persons of BRS. BRS will act as an executing broker that will effectuate
resales of our common stock that have been and may be acquired by BRPC II from us pursuant to the Purchase Agreement to the public in
this offering. See “Plan of Distribution” for more information about the relationship between BRPC II and BRS.
REGULATION AS A CLOSED-END
MANAGEMENT INVESTMENT COMPANY
General
As a
registered closed-end management investment company, we are subject to regulation under the 1940 Act. Under the 1940 Act, unless authorized
by vote of a majority of our outstanding voting securities, we may not:
•
change
our classification to an open-end management investment company;
•
alter
any of our fundamental policies, which are set forth below in “—
Investment Restrictions”; or
•
change
the nature of our business so as to cease to be an investment company.
A majority
of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s
voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented
by proxy, or (b) more than 50% of the outstanding voting securities of such company.
As with
other companies regulated by the 1940 Act, a registered closed-end management investment company must adhere to certain substantive regulatory
requirements. A majority of our directors must be persons who are not “interested persons” of us, as that term is defined
in the 1940 Act. We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the closed-end
management investment company. Furthermore, as a registered closed-end management investment 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 person’s office. We may also be prohibited under the 1940 Act
from knowingly participating in certain transactions with our affiliates absent exemptive relief or other prior approval by the SEC.
We will
generally not be able to issue and sell shares of our common stock at a price below the then current NAV per share (exclusive of any distributing
commission or discount). See “Risk Factors — Risks
Relating to Our Business and Structure — Regulations governing our operation as a registered closed-end management investment
company affect our ability to raise additional capital and the way in which we do so. The raising of debt capital may expose us to risks,
including the typical risks associated with leverage.” We may, however, sell shares of
our common stock at a price below the then current NAV per share if our board of directors determines that such sale is in our best interests
and the best interests of our stockholders, and the holders of a majority of the shares of our common stock, approves such sale. In addition,
we may generally issue new shares of our common stock at a price below NAV in rights offerings to existing stockholders, in payment of
dividends and in certain other limited circumstances.
As a
registered closed-end management investment company, we may use leverage as and to the extent permitted by the 1940 Act. We are permitted
to obtain leverage using any form of financial leverage instruments, including funds borrowed from banks or other financial institutions,
margin facilities, notes or preferred stock and leverage attributable to reverse repurchase agreements or similar transactions. Over the
long term, management expects us to operate under normal market conditions generally with leverage within a range of 25% to 35% of total
assets, although the actual amount of our leverage will vary over time. Certain instruments that create leverage are considered to be
senior securities under the 1940 Act. With respect to senior securities representing indebtedness (i.e., borrowing or deemed borrowing),
other than temporary borrowings as defined under the 1940 Act, we are required under current law to have an asset coverage of at least
300%, as measured at the time of borrowing and calculated as the ratio of our total assets (less all liabilities and indebtedness not
represented by senior securities) over the aggregate amount of our outstanding senior securities representing indebtedness. With respect
to senior securities that are stocks (i.e., shares of preferred stock), we are required under current law to have an asset coverage of
at least 200%, as measured at the time of the issuance of any such shares of preferred stock and calculated as the ratio of our total
assets (less all liabilities and indebtedness not represented by senior securities) over the aggregate amount our outstanding senior securities
representing indebtedness plus the aggregate liquidation preference of any outstanding shares of preferred stock. If our asset coverage
declines below 300% (or 200%, as applicable), we would not be able to incur additional debt or issue additional preferred stock under
current law, and could be required by law to sell a portion of our investments to repay some debt or redeem preferred stock when it is
disadvantageous
to do so, which could have a material adverse effect on our operations, and we may not be able to make certain distributions or pay dividends.
In
addition, we may borrow for temporary or other purposes as permitted under the 1940 Act, which indebtedness would be in addition to the
asset coverage requirements described above.
As
of September 30, 2022, our leverage, including the outstanding amount under the BNP Credit Facility, represented approximately 40.4% of
our total assets (less current liabilities). As of September 30, 2022, we had one series of preferred stock outstanding, our 5.00% Series
A Term Preferred Stock due 2026, or the “Series A Term Preferred Stock”. As of September 30, 2022, our asset coverage ratio
in respect of senior securities representing indebtedness as calculated pursuant to Section 18 of the 1940 Act was 688% and our asset
coverage ratio in respect to our senior securities representing preferred stock as calculated pursuant to Section 18 of the 1940 Act was
247%. Over the long term, management expects us to operate under normal market conditions generally with leverage within a range of 25%
to 35% of total assets, although the actual amount of our leverage will vary over time. We expect that we will, or that we may need to,
raise additional capital in the future to fund our continued growth, and we may do so by issuing additional shares of preferred stock
or debt securities or through other leveraging instruments.
Investments in Derivative
and Leveraged Transactions
Under
the provisions of the 1940 Act, we are permitted to issue senior securities, including debt securities and preferred stock, and borrow
from banks or other financial institutions, provided that we satisfy certain asset coverage requirements. With respect to senior securities
that are stocks, such as preferred stock, we are required to have asset coverage of at least 200%, as measured at the time of the issuance
of any such senior securities that are stocks and calculated as the ratio of our total consolidated assets, less all liabilities and indebtedness
not represented by senior securities, over the aggregate amount of our outstanding senior securities representing indebtedness plus the
aggregate liquidation preference of any outstanding shares of senior securities that are stocks. With respect to senior securities representing
indebtedness, such as the BNP Credit Facility or any bank borrowings (other than temporary borrowings as defined under the 1940 Act),
we are required to have asset coverage of at least 300%, as measured at the time of borrowing and calculated as the ratio of our total
consolidated assets, less all liabilities and indebtedness not represented by senior securities, over the aggregate amount of our outstanding
senior securities representing indebtedness. If our asset coverage declines below 300% (or 200%, as applicable), we would be prohibited
under the 1940 Act from incurring additional debt or issuing additional preferred stock and from declaring certain distributions to its
stockholders. In addition, the terms of the BNP Credit Facility require us to cure any breach of the applicable asset coverage if we fail
to maintain the applicable asset coverage. As of December 31, 2021, our asset coverage of senior securities representing indebtedness
was 873%, which is above the minimum requirement of 300%. As of December 31, 2021, our asset coverage of senior securities representing
stocks was 313%, which is above the minimum requirement of 200%. Asset coverage is calculated in accordance with Section 18(h) of the
1940 Act, as generally described above. See “Risk
Factors — Risks Relating to Our Business and Structure — We are subject to the risk of legislative
and regulatory changes impacting our business or the markets in which we invest — Derivative Investments.”
Investment Restrictions
Our investment
objectives and our investment policies and strategies described in this prospectus, except for the eight investment restrictions designated
as fundamental policies under this caption, are not fundamental and may be changed by the board of directors without stockholder approval.
As referred
to above, the following eight investment restrictions are designated as fundamental policies and, as such, cannot be changed without the
approval of the holders of a majority of our outstanding voting securities:
(1)
We
may not borrow money, except as permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other authority
with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority with appropriate
jurisdiction;
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(2)
We may not engage in the business
of underwriting securities issued by others, except to the extent that we may be deemed to be an underwriter in connection with the disposition
of portfolio securities;
(3)
We
may not purchase or sell physical commodities or contracts for the purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices, currency or other financial instruments;
(4)
We
may not purchase or sell real estate, which term does not include securities of companies which deal in real estate or mortgages or investments
secured by real estate or interests therein, except that we reserve freedom of action to hold and to sell real estate acquired as a result
of our ownership of securities;
(5)
We
may not make loans, except to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, SEC staff or other
authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority with
appropriate jurisdiction. For purposes of this investment restriction, the purchase of debt obligations (including acquisitions of loans,
loan participations or other forms of debt instruments) shall not constitute loans by us;
(6)
We
may not issue senior securities, except to the extent permitted by (i) the 1940 Act, or interpretations or modifications by the SEC, the
SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or
other authority with appropriate jurisdiction;
(7)
We
may not invest in any security if as a result of such investment, 25% or more of the value of our total assets, taken at market value
at the time of each investment, are in the securities of issuers in any particular industry or group of industries except (a) securities
issued or guaranteed by the U.S. government and its agencies and instrumentalities or tax-exempt securities of state and municipal governments
or their political subdivisions (however, not including private purpose industrial development bonds issued on behalf of non-government
issuers), or (b) as otherwise provided by the 1940 Act, as amended from time to time, and as modified or supplemented from time to time
by (i) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, and (ii) any exemption or other
relief applicable to us from the provisions of the 1940 Act, as amended from time to time. For purposes of this restriction, in the case
of investments in loan participations between us and a bank or other lending institution participating out the loan, we will treat both
the lending bank or other lending institution and the borrower as “issuers.” For purposes of this restriction, an investment
in a CLO, CBO, CDO or a swap or other derivative will be considered to be an investment in the industry or group of industries (if any)
of the underlying or reference security, instrument or asset; and
(8)
We
may not engage in short sales, purchases on margin, or the writing of put or call options, except as permitted by (i) the 1940 Act, or
interpretations or modifications by the SEC, SEC staff or other authority with appropriate jurisdiction or (ii) exemptive or other relief
or permission from the SEC, SEC staff or other authority with appropriate jurisdiction.
The latter
part of certain of our fundamental investment restrictions (i.e., the references to “except to the extent permitted by (i) the 1940
Act, or interpretations or modifications by the SEC, the SEC staff or other authority with appropriate jurisdiction, or (ii) exemptive
or other relief or permission from the SEC, SEC staff or other authority with appropriate jurisdiction”) provides us with flexibility
to change our limitations in connection with changes in applicable law, rules, regulations or exemptive relief. The language used in these
restrictions provides the necessary flexibility to allow our board of directors to respond efficiently to these kinds of developments
without the delay and expense of a stockholder meeting.
Whenever
an investment policy or investment restriction set forth in this prospectus states a maximum percentage of assets that may be invested
in any security or other asset or describes a policy regarding quality standards, such percentage limitation or standard shall be determined
immediately after and as a result of our acquisition of such security or asset. Accordingly, any later increase or decrease resulting
108
from a change in values, assets or other
circumstances or any subsequent rating change made by a rating agency (or as determined by the Adviser if the security is not rated by
a rating agency) will not compel us to dispose of such security or other asset. Notwithstanding the foregoing, we must always be in compliance
with the borrowing policies set forth above.
Proxy Voting Policies and
Procedures
We have
delegated our proxy voting responsibility to the Adviser. The Proxy Voting Policies and Procedures of the Adviser are set forth below.
The guidelines will be reviewed periodically by the Adviser and our independent directors, and, accordingly, are subject to change. For
purposes of these Proxy Voting Policies and Procedures described below, “we,” “our” and “us” refers
to the Adviser.
Introduction
An investment
adviser registered under the Advisers Act has a fiduciary duty to act solely in the best interests of its clients. As part of this duty,
we recognize that we must vote client securities in a timely manner free of conflicts of interest and in the best interests of our clients.
These
policies and procedures for voting proxies for our investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6
under, the Advisers Act.
Proxy
Policies
Based
on the nature of our investment strategy, we do not expect to receive proxy proposals but may from time to time receive amendments, consents
or resolutions applicable to investments held by us. It is our general policy to exercise our voting or consent authority in a manner
that serves the interests of the Company’s stockholders. We may occasionally be subject to material conflicts of interest in voting
proxies due to business or personal relationships we maintain with persons having an interest in the outcome of certain votes. If at any
time we become aware of a material conflict of interest relating to a particular proxy proposal, our chief compliance officer will review
the proposal and determine how to vote the proxy in a manner consistent with interests of the Company’s stockholders.
Proxy
Voting Records
Information
regarding how we voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without
charge: (1) upon request, by calling toll free (844) 810-6501; and (2) on the SEC’s website at You may also obtain information about
how we voted proxies by making a written request for proxy voting information to: Eagle Point Income Management LLC, 600 Steamboat Road,
Suite 202, Greenwich, CT 06830.
Privacy Policy
We are
committed to protecting your privacy. This privacy notice explains our privacy policies and those of our affiliated companies. The terms
of this notice apply to both current and former stockholders. We will safeguard, according to strict standards of security and confidentiality,
all information we receive about you. With regard to this information, we maintain procedural safeguards that are reasonably designed
to comply with federal standards. We have implemented procedures that are designed to restrict access to your personal information to
authorized employees of the Adviser, the Administrator and their affiliates who need to know your personal information to perform their
jobs, and in connection with servicing your account. Our goal is to limit the collection and use of information about you. While we may
share your personal information with our affiliates in connection with servicing your account, our affiliates are not permitted to share
your information with non-affiliated entities, except as permitted or required by law.
When you
purchase shares of our common stock and in the course of providing you with products and services, we and certain of our service providers,
such as a transfer agent, may collect personal information about you, such as your name, address, social security number or tax identification
number. This information may come from sources such as account applications and other forms, from other written, electronic or verbal
109
correspondence, from your transactions,
from your brokerage or financial advisory firm, financial adviser or consultant, and/or information captured on applicable websites.
We do
not disclose any personal information provided by you or gathered by us to non-affiliated third parties, except as permitted or required
by law or for our everyday business purposes, such as to process transactions or service your account. For example, we may share your
personal information in order to send you annual and semiannual reports, proxy statements and other information required by law, and to
send you information we believe may be of interest to you. We may disclose your personal information to unaffiliated third party financial
service providers (which may include a custodian, transfer agent, accountant or financial printer) who need to know that information in
order to provide services to you or to us. These companies are required to protect your information and use it solely for the purpose
for which they received it or as otherwise permitted by law. We may also provide your personal information to your brokerage or financial
advisory firm and/or to your financial adviser or consultant, as well as to professional advisors, such as accountants, lawyers and consultants.
We reserve
the right to disclose or report personal or account information to non-affiliated third parties in limited circumstances where we believe
in good faith that disclosure is required by law, such as in accordance with a court order or at the request of government regulators
or law enforcement authorities or to protect our rights or property. We may also disclose your personal information to a non-affiliated
third party at your request or if you consent in writing to the disclosure.
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ADDITIONAL INVESTMENTS
AND TECHNIQUES
Our
primary investment strategies are described elsewhere in this prospectus. The following is a description of the various investment policies
that may be engaged in, whether as a primary or secondary strategy, and a summary of certain attendant risks. The Adviser may not buy
any of the following instruments or use any of the following techniques unless it believes that doing so will help to achieve our investment
objectives.
Investment in Debt
Securities, Other Types of Credit Instruments and Other Credit Investments
Loan
Accumulation Facilities. We may invest capital in loan accumulation facilities, which are short-
to medium-term facilities often provided by the bank that will serve as the placement agent or arranger on a CLO transaction and which
acquire loans on an interim basis that are expected to form part of the portfolio of such future CLO. Investments in loan accumulation
facilities have risks that are similar to those applicable to investments in CLOs as described in this prospectus. In addition, there
typically will be no assurance that the future CLO will be consummated or that the loans held in such a facility are eligible for purchase
by the CLO. Furthermore, we likely will have no consent rights in respect of the loans to be acquired in such a facility and in the event
we do have any consent rights, they will be limited. In the event a planned CLO is not consummated, or the loans are not eligible for
purchase by the CLO, we may be responsible for either holding or disposing of the loans. This could expose us primarily to credit and/or
mark-to-market losses, and other risks. Loan accumulation facilities typically incur leverage from four to six times prior to a CLO’s
closing and as such the potential risk of loss will be increased for such facilities that employ leverage.
Debt
Securities. We may invest in debt securities, including debt securities rated below investment
grade, or “junk” securities. Debt securities of corporate and governmental issuers in which we may invest are subject to the
risk of an issuer’s inability to meet principal and interest payments on the obligations (credit risk) and also may be subject to
price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk).
Senior
Secured Loans. This category of investments primarily includes Assignments of performing senior
secured loans to corporate borrowers. Senior secured loans are typically acquired through both primary bank syndications and in the secondary
market. In most cases, a senior secured loan will be secured by specific collateral of the issuer. Historically, many of these investments
have traded at or near par (i.e., 100% of face value), although they more recently have traded at greater discounts on the current market
environment, the Adviser may also purchase stressed and distressed senior secured loans at a material discount to par, if the Adviser
believes that there are attractive opportunities to generate capital appreciation by making such investments.
Senior
secured loans are loans that are typically made to business borrowers to finance leveraged buy-outs, recapitalizations, mergers, stock
repurchases, or internal growth. Senior secured loans generally are negotiated between a borrower and several financial institution lenders
represented by one or more lenders acting as agent of all the lenders. The agent is responsible for negotiating the loan agreement that
establishes the terms and conditions of the senior secured loan and the rights of the borrower and the lenders. We will primarily purchase
Assignments of portions of senior secured loans from third parties and may invest in participations in senior secured loans. Senior secured
loans have the most senior position in a borrower’s capital structure or share the senior position with other senior debt securities
of the borrower. This capital structure position generally gives holders of senior secured loans a priority claim on some or all of the
borrower’s assets in the event of default and therefore the lenders will be paid before certain other creditors of the borrower.
Senior
secured loans also have contractual terms designed to protect lenders. These covenants may include mandatory prepayment out of excess
cash flows, restrictions on dividend payments, the maintenance of minimum financial ratios, limits on indebtedness and other financial
tests. Breach of these covenants generally is an event of default and, if not waived by the lenders, may give lenders the right to accelerate
principal and interest payments. Other senior secured loans may be issued with less restrictive covenants which are often referred to
as “covenant-lite” transactions. In a “covenant-lite” loan, the covenants that require the borrower to “maintain”
certain financial ratios are eliminated altogether, and the lenders are left to rely only on covenants that restrict a company from “incurring”
or actively engaging certain action. But a covenant that
only restricts a company from incurring
new debt cannot be violated simply by a deteriorating financial condition, the company has to take affirmative action to breach it. The
impact of these covenant-lite transactions may be to retard the speed with which lenders will be able to take control over troubled deals.
We generally acquire senior secured loans of borrowers that, among other things, in the Adviser’s judgment, can make timely payments
on their senior secured loans and that satisfy other credit standards established by the Adviser.
When
we purchase first and second lien senior floating rate loans and other floating rate debt securities, coupon rates are floating, not fixed
and are tied to a benchmark lending rate, the most popular of which is LIBOR. The interest rates of these floating rate debt securities
vary periodically based upon a benchmark indicator of prevailing interest rates.
When
we purchase an Assignment, we succeed to all the rights and obligations under the loan agreement of the assigning lender and becomes a
lender under the loan agreement with the same rights and obligations as the assigning lender. These rights include the ability to vote
along with the other lenders on such matters as enforcing the terms of the loan agreement (e.g., declaring defaults, initiating collection
action, etc.). Taking such actions typically requires a vote of the lenders holding at least a majority of the investment in the loan,
and may require a vote by lenders holding two-thirds or more of the investment in the loan. Because we typically do not hold a majority
of the investment in any loan, we will not be able by ourselves to control decisions that require a vote by the lenders.
High
Yield Securities. We may invest in high yielding, fixed income securities rated below investment
grade (e.g., rated below “Baa3”
by Moody’s or below “BBB-” by S&P or Fitch). Below investment grade and unrated securities are also sometimes referred
to as “junk” securities.
Ratings
are based largely on the historical financial condition of the issuer. Consequently, the rating assigned to any particular security is
not necessarily a reflection of the issuer’s current financial condition, which may be better or worse than the rating would indicate.
We may invest in comparable quality unrated securities that, in the opinion of the Adviser, offer comparable yields and risks to those
securities which are rated.
Debt
obligations rated in the lower ratings categories, or which are unrated, involve greater volatility of price and risk of loss of principal
and income. In addition, lower ratings reflect a greater possibility of an adverse change in financial condition affecting the ability
of the issuer to make payments of interest and principal.
The
market price and liquidity of lower rated fixed income securities generally respond to short-term corporate and market developments to
a greater extent than do the price and liquidity of higher rated securities because such developments are perceived to have a more direct
relationship to the ability of an issuer of such lower rated securities to meet its ongoing debt obligations.
Reduced
volume and liquidity in the high yield bond market or the reduced availability of market quotations will make it more difficult to dispose
of the bonds and to value accurately our assets. The reduced availability of reliable, objective data may increase our reliance on management’s
judgment in valuing high yield bonds. In addition, our investments in high yield securities may be susceptible to adverse publicity and
investor perceptions, whether or not justified by fundamental factors. Our investments, and consequently our NAV, will be subject to the
market fluctuations and risks inherent in all securities.
Synthetic
Securities Risk. We may acquire loans through investment in synthetic securities or interests
in lease agreements that have the general characteristics of loans and are treated as loans for withholding tax purposes. In addition
to the credit risks associated with directly or indirectly holding senior secured loans and high-yield debt securities, with respect to
synthetic strategy, we will usually have a contractual relationship only with the counterparty of such synthetic security, and not with
the reference obligor of the reference obligation. We generally will have no right to directly enforce compliance by the reference obligor
with the terms of the reference obligation nor will it have any rights of setoff against the reference obligor or rights with respect
to the reference obligation. We will not directly benefit from the collateral supporting the reference obligation and will not have the
benefit of the remedies that would normally be available to a holder of such reference obligation. In addition, in the event of the insolvency
of the counterparty, we may be treated as a general creditor of such counterparty, and will not have any claim with respect to the reference
obligation.
Consequently, we will
be subject to the credit risk of the counterparty as well as that of the reference obligor. As a result, concentrations of synthetic securities
in any one counterparty subject us to an additional degree of risk with respect to defaults by such counterparty as well as by the reference
obligor.
Defaulted
Securities. We may invest in defaulted securities. The risk of loss due to default may be considerably
greater with lower-quality securities because they are generally unsecured and are often subordinated to other debt of the issuer. Investing
in defaulted debt securities involves risks such as the possibility of complete loss of the investment where the issuer does not restructure
to enable it to resume principal and interest payments. If the issuer of a security in our portfolio defaults, we may have unrealized
losses on the security, which may lower our NAV. Defaulted securities tend to lose much of their value before they default. Thus, our
NAV may be adversely affected before an issuer defaults. In addition, we may incur additional expenses if it must try to recover principal
or interest payments on a defaulted security.
Certificates
of Deposit, Bankers’ Acceptances and Time Deposits. We may acquire certificates of deposit,
bankers’ acceptances and time deposits. Certificates of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning
in effect that the bank unconditionally agrees to pay the face value of the instrument on maturity. Certificates of deposit and bankers’
acceptances acquired by us will be dollar-denominated obligations of domestic banks, savings and loan associations or financial institutions
at the time of purchase, have capital, surplus and undivided profits in excess of $100 million (including assets of both domestic and
foreign branches), based on latest published reports, or less than $100 million if the principal amount of such bank obligations are fully
insured by the U.S. government. In addition to purchasing certificates of deposit and bankers’ acceptances, to the extent permitted
under our investment objectives and policies stated in this prospectus, we may make interest-bearing time or other interest-bearing deposits
in commercial or savings banks. Time deposits are non-negotiable deposits maintained at a banking institution for a specified period of
time at a specified interest rate.
Commercial
Paper and Short-Term Notes. We may invest a portion of our assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by corporations. Issues of commercial paper and short-term notes
will normally have maturities of less than nine months and fixed rates of return, although such instruments may have maturities of up
to one year. Commercial paper and short-term notes will consist of issues rated at the time of purchase “A-2” or higher by
S&P, “Prime-1” or “Prime-2” by Moody’s, or similarly rated by another nationally recognized statistical
rating organization or, if unrated, will be determined by the Adviser to be of comparable quality.
CLO
Class M Notes, Fee Notes and Participation Agreements. We may acquire CLO Class M notes, fee
notes and participation agreements with CLO collateral managers. There is not an active secondary market for CLO Class M notes, fee notes
and participation agreements. Further, CLO Class M notes, fee notes and participation agreements may have significant restrictions on
transfer and require continued ownership of certain amounts of CLO equity in the related CLO for the instrument to be valid. CLO Class
M notes, fee notes and participation agreements are also subject to the risk of early call of the CLO, and may have no make-whole or other
yield protection provisions.
Zero
Coupon Securities. Among the debt securities in which we may invest are zero coupon securities.
Zero coupon securities are debt obligations that do not entitle the holder to any periodic payment of interest prior to maturity or a
specified date when the securities begin paying current interest. They are issued and traded at a discount from their face amount or par
value, which discount varies depending on the time remaining until cash payments begin, prevailing interest rates, liquidity of the security
and the perceived credit quality of the issuer. The market prices of zero coupon securities generally are more volatile than the prices
of securities that pay interest periodically and in cash and are likely to respond to changes in interest rates to a greater degree than
do other types of debt securities having similar maturities and credit quality. Original issue discount earned on zero coupon securities
must be included in our income. Thus, to quality for tax treatment as a RIC and to avoid a certain excise tax on undistributed income,
we may be required to distribute as a dividend an amount that is greater than the total amount of cash we actually receive. These distributions
must be made from our cash assets or, if necessary, from the proceeds of sales of portfolio securities. We will not be able to purchase
additional income-producing securities with cash used to make such distributions, and our current income ultimately could be reduced as
a result.
U.S.
Government Securities. We may invest in debt securities issued or guaranteed by agencies, instrumentalities
and sponsored enterprises of the U.S. Government. Some U.S. government securities, such as U.S. Treasury bills, notes and bonds, and mortgage-related
securities guaranteed by the Government National Mortgage Association, are supported by the full faith and credit of the U.S.; others,
such as those of the Federal Home Loan Banks, or “FHLBs,” or the Federal Home Loan Mortgage Corporation, or “FHLMC,”
are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those of the Federal National Mortgage Association,
or “FNMA,” are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations;
and still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the issuing agency, instrumentality
or enterprise. Although U.S. Government-sponsored enterprises, such as the FHLBs, FHLMC, FNMA and the Student Loan Marketing Association,
may be chartered or sponsored by Congress, they are not funded by Congressional appropriations, and their securities are not issued by
the U.S. Treasury or supported by the full faith and credit of the U.S. Government and involve increased credit risks. Although legislation
has been enacted to support certain government sponsored entities, including the FHLBs, FHLMC and FNMA, there is no assurance that the
obligations of such entities will be satisfied in full, or that such obligations will not decrease in value or default. It is difficult,
if not impossible, to predict the future political, regulatory or economic changes that could impact the government sponsored entities
and the values of their related securities or obligations. In addition, certain governmental entities, including FNMA and FHLMC, have
been subject to regulatory scrutiny regarding their accounting policies and practices and other concerns that may result in legislation,
changes in regulatory oversight and/or other consequences that could adversely affect the credit quality, availability or investment character
of securities issued by these entities.
U.S.
Government debt securities generally involve lower levels of credit risk than other types of debt securities of similar maturities, although,
as a result, the yields available from U.S. Government debt securities are generally lower than the yields available from such other securities.
Like other debt securities, the values of U.S. government securities change as interest rates fluctuate. Fluctuations in the value of
portfolio securities will not affect interest income on existing portfolio securities but will be reflected in our NAV.
Distressed Securities
We may
invest in distressed investments including loans, loan participations, or bonds, many of which are not publicly traded and which may involve
a substantial degree of risk. In certain periods, there may be little or no liquidity in the markets for these securities or instruments.
In addition, the prices of such securities or instruments may be subject to periods of abrupt and erratic market movements and above-average
price volatility. It may be more difficult to value such securities and the spread between the bid and asked prices of such securities
may be greater than normally expected. If the Adviser’s evaluation of the risks and anticipated outcome of an investment in a distressed
security should prove incorrect, we may lose a substantial portion or all of our investment or we may be required to accept cash or securities
with a value less than our original investment.
Equity Securities
We may
hold long and short positions in common stocks, preferred stocks and convertible securities of U.S. and non-U.S. issuers. We also may
invest in depositary receipts or shares relating to non-U.S. securities. Equity securities fluctuate in value, often based on factors
unrelated to the fundamental economic condition of the issuer of the securities, including general economic and market conditions, and
these fluctuations can be pronounced. We may purchase securities in all available securities trading markets and may invest in equity
securities without restriction as to market capitalization, such as those issued by smaller capitalization companies, including microcap
companies.
Investment in Other Investment
Companies
We may
invest in securities of other investment companies subject to statutory limitations prescribed by the 1940 Act. These limitations include
in certain circumstances a prohibition on us acquiring more than 3% of the voting shares of any other investment company, and a prohibition
on investing more than 5% of our total assets in securities of any one investment company or more than 10% of our total assets in securities
of all investment companies.
We will indirectly
bear our proportionate share of any management fees and other expenses paid by such other investment companies, in addition to the fees
and expenses that we regularly bear. Although we do not expect to do so in the foreseeable future, we are authorized to invest substantially
all of our assets in a single open-end investment company or series thereof that has substantially the same investment objectives, policies
and fundamental restrictions as us.
Exchange-Traded Notes (“ETNs”)
We may
invest in ETNs. ETNs are a type of senior, unsecured, unsubordinated debt security issued by financial institutions that combines both
aspects of bonds and Exchange-Traded Funds, or “ETFs.” An ETN’s returns are based on the performance of a market index
minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an ETF, an
ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to the performance of the market index
to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments and principal is not
protected. ETNs are subject to credit risk and the value of an ETN may drop due to a downgrade in the issuer’s credit rating, despite
the underlying market benchmark or strategy remaining unchanged. The value of an ETN may also be influenced by time to maturity, level
of supply and demand for the ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes
in the issuer’s credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset.
When we invest in ETNs we will bear our proportionate share of any fees and expenses borne by the ETN. Our decision to sell our ETN holdings
may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange, the issuer may not
be required to maintain the listing and there can be no assurance that a secondary market will exist for an ETN.
Preferred Securities
Preferred
securities in which we may invest include trust preferred securities, monthly income preferred securities, quarterly income bond securities,
quarterly income debt securities, quarterly income preferred securities, corporate trust securities, traditional preferred stock, contingent-capital
securities, hybrid securities (which have characteristics of both equity and fixed-income instruments) and public income notes. Preferred
securities are typically issued by corporations, generally in the form of interest-bearing notes or preferred securities, or by an affiliated
business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities.
The preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature in that
they have no maturity dates or have stated maturity dates.
Investment in Relatively
New Issuers
We may
invest in the securities of new issuers. Investments in relatively new issuers, i.e., those having continuous operating histories of less
than three years, may carry special risks and may be more speculative because such issuers are relatively unseasoned. Such issuers may
also lack sufficient resources, may be unable to generate internally the funds necessary for growth and may find external financing to
be unavailable on favorable terms or even totally unavailable. Certain issuers may be involved in the development or marketing of a new
product with no established market, which could lead to significant losses. Securities of such issuers may have a limited trading market
which may adversely affect their disposition and can result in their being priced lower than might otherwise be the case. If other investors
who invest in such issuers seek to sell the same securities when we attempt to dispose of our holdings, we may receive lower prices than
might otherwise be the case.
Demand Deposit Accounts
We may
hold a significant portion of our cash assets in interest-bearing or non-interest-bearing demand deposit accounts at our custodian or
another depository institution insured by the FDIC. The FDIC is an independent agency of the U.S. government, and FDIC deposit insurance
is backed by the full faith and credit of the U.S. government. We expect to hold cash that exceeds the amounts insured by the FDIC for
such accounts. As a result, in the event of a failure of a depository institution where we hold such cash, our cash is subject to the
risk of loss.
Simultaneous Investments
Investment
decisions, made by the Adviser on our behalf, are made independently from those of the other funds and accounts advised by the Adviser
and its affiliates. If, however, such other accounts wish to invest in, or dispose of, the same securities as us, available investments
will be allocated equitably between us and other accounts. This procedure may adversely affect the size of the position we obtain or dispose
of or the price we pay.
Short Sales
When we
engage in a short sale of a security, we must, to the extent required by law, borrow the security sold short and deliver it to the counterparty.
We may have to pay a fee to borrow particular securities and would often be obligated to pay over any payments received on such borrowed
securities.
If the
price of the security sold short increases between the time of the short sale and the time that we replace the borrowed security, we will
incur a loss; conversely, if the price declines, we will realize a capital gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above.
To the
extent we engage in short sales, we will comply with the applicable provisions of Rule 18f-4 with respect to such transactions.
CONTROL
PERSONS AND PRINCIPAL STOCKHOLDERS
A
control person is a person who beneficially owns more than 25% of the voting securities of a company. The following table sets forth certain
ownership information with respect to shares of our common stock held by (1) those persons who directly or indirectly own, control or
hold with the power to vote, 5% or more of the outstanding shares of our common stock, and (2) all of our officers and directors, as a
group. The table shows such ownership as of November 30, 2022 and is based on 7,598,949 shares of common stock and 1,521,649 shares of
Series A Term Preferred Stock outstanding as of such date.
| | | |
Common Stock Beneficially Owned(1) Immediately Prior to Offering |
| |
Preferred Stock Beneficially Owned(1) Immediately Prior to Offering |
| ||||||||||||||||||
|
Name and Address
|
| |
Number
|
| |
%
|
| |
Number
|
| |
%
|
| ||||||||||||
| 5% Owners | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Enstar Group Limited(2)
|
| | | | 3,764,580 | | | | | | 49.5% | | | | | | — | | | | | | — | | |
|
Karpus
Management, Inc.(3)
|
| | | | — | | | | | | | | | | | | 177,974 | | | | | | 11.7% | | |
(1)
Beneficial
ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities.
(2)
Enstar
Group Limited has shared voting power and shared dispositive power over 3,764,580 shares of our common stock. Enstar Holdings LLC, a wholly-owned
subsidiary, has sole voting power and sole dispositive power over 1,143,982 shares of our common stock. Yosemite Insurance Company, a
wholly-owned subsidiary, has sole voting power and sole dispositive power over 654,022 shares of our common stock. Clarendon National
Insurance Company, a wholly-owned subsidiary, has sole voting power and sole dispositive power over 1,731,290 shares of our common stock.
Cavello Bay Reinsurance Limited has sole voting power and sole dispositive power over 235,286 shares of our common stock. The address
of Enstar Group Limited is Windsor Place, 3rd Floor, 22 Queen Street, Hamilton, JM JX Bermuda.
(3)
The
number of shares beneficially owned is based on a Schedule 13G filed on February 14, 2022, reflecting sole voting and dispositive power
with respect to 177,974 shares. The address of Karpus Management, Inc. is 183 Sully’s Trail, Pittsford, NY 14534.
All
directors and officers as a group own less than 1.0% of each of our common stock and Series A Term Preferred Stock.
117
BROKERAGE ALLOCATION
Since
we acquire and dispose of most of our investments in privately negotiated transactions or in the over-the-counter markets, we are generally
not required to pay a stated brokerage commission. However, to the extent a broker-dealer is involved in a transaction, the price paid
or received by us may reflect a mark-up or mark-down. Subject to policies established by our board of directors, the Adviser will be primarily
responsible for selecting brokers and dealers to execute transactions with respect to the publicly traded securities portion of our portfolio
transactions and the allocation of brokerage commissions. The Adviser does not expect to execute transactions through any particular broker
or dealer but will seek to obtain the best net results for us under the circumstances, taking into account such factors as price (including
the applicable brokerage commission or dealer spread), size of order, difficulty of execution and operational facilities of the firm and
the firm’s risk and skill in positioning blocks of securities. The Adviser generally will seek reasonably competitive trade execution
costs but will not necessarily pay the lowest spread or commission available. Subject to applicable legal requirements and consistent
with Section 28(e) of the Exchange Act, the Adviser may select a broker based upon brokerage or research services provided. In return
for such services, we may pay a higher commission than other brokers would charge if the Adviser determines in good faith that such commission
is reasonable in relation to the services provided.
118
LEGAL
MATTERS
Certain
legal matters in connection with the securities offered by this prospectus will be passed upon for us by Kirkland & Ellis LLP, Washington,
D.C. Kirkland & Ellis LLP also represents the Adviser.
CUSTODIAN
AND TRANSFER AGENT
Our
portfolio securities are held pursuant to a custodian agreement between us and Wells Fargo Bank, National Association. The principal business
address of Wells Fargo Bank, National Association is 9062 Old Annapolis Road, Columbia, MD 21045.
American
Stock Transfer & Trust Company, LLC serves as our transfer agent, registrar, dividend disbursement agent and stockholder servicing
agent, as well as agent for our DRIP. The principal business address of American Stock & Transfer Company, LLC is 6201 15th Avenue,
Brooklyn, NY 11219.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
KPMG
LLP, an independent registered public accounting firm located at 345 Park Avenue, New York, NY 10154, provides audit services, tax return
preparation, and assistance and consultation with respect to the preparation of filings with the SEC.
ADDITIONAL
INFORMATION
We
file with or submit to the SEC annual and semi-annual reports, proxy statements and other information meeting the informational requirements
of the Exchange Act. The SEC maintains a website that contains reports, proxy and information statements and other information we file
with the SEC at www.sec.gov. This information is also available free of charge by writing us at Eagle Point Income Company Inc., 600 Steamboat
Road, Suite 202, Greenwich, CT 06830, Attention: Investor Relations, by telephone at (844) 810-6501, or on our website at www.eaglepointincome.com.
Information contained on our website is not incorporated into this prospectus and you should not consider such information to be part
of this prospectus.
INCORPORATION
BY REFERENCE
This
prospectus is part of a registration statement filed with the SEC. We are permitted to “incorporate by reference” certain
information that we file with the SEC, which means that we can disclose important information to you by referring you to those documents.
The information incorporated by reference is a part of this prospectus.
The
documents listed below are incorporated by reference into this prospectus and deemed to be part of this prospectus from the date of the
filing of such reports and documents, including the financial highlights contained in each of the following reports:
•
•
•
•
our
interim report filed pursuant to Rule 30b2-1 under the 1940 Act for the quarter ended September 30, 2022, filed with the SEC on November
15, 2022.
We
also incorporate by reference into this prospectus additional documents that we may file with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Exchange Act from the filing of this prospectus until all of the securities offered by this prospectus have been sold or
we otherwise terminate the offering of these securities, including all filings made after the date of the initial filing of the registration
statement of which this prospectus is a part and prior to the effectiveness of the registration statement.
To
obtain copies of these filings, see “Additional Information.”
119
1,398,973
Shares
Eagle
Point Income Company Inc.
Common
Stock
PROSPECTUS
, 2022
PART C - OTHER INFORMATION
| ITEM 25. | FINANCIAL STATEMENTS AND EXHIBITS |
1. Financial Statements:
The following financial statements of Eagle Point Income Company Inc. (the “Registrant”) have been incorporated by reference in Part A of the Registration Statement:
Financial Statements for the Period Ended September 30, 2022 (Unaudited)
Statement of Assets and Liabilities
Schedule of Investments
Statement of Operations
Statements of Operations
Statements of Changes in Net Assets
Statement of Cash Flows
Notes to Financial Statements
Financial Highlights
Supplemental Information
Financial Statements for the Period Ended June 30, 2022 (Unaudited)
Statement of Assets and Liabilities
Schedule of Investments
Statement of Operations
Statements of Operations
Statements of Changes in Net Assets
Statement of Cash Flows
Notes to Financial Statements
Financial Highlights
Supplemental Information
Financial Statements for the Period Ended March 31, 2022 (Unaudited)
Statement of Assets and Liabilities
Schedule of Investments
Statement of Operations
Statements of Operations
Statements of Changes in Net Assets
Statement of Cash Flows
Notes to Financial Statements
Financial Highlights
Supplemental Information
Financial Statements for the Period Ended December 31, 2021 (Audited)
Statement of Assets and Liabilities
Schedule of Investments
Statement of Operations
Statements of Changes in Net Assets
Statement of Cash Flows
Notes to Financial Statements
Financial Highlights Supplemental Information
Report of Independent Registered Public Accounting Firm
C-1
2. Exhibits:
| (a) | Certificate of Incorporation (incorporated by reference to Exhibit (a)(2) to the Registrant’s Registration Statement on Form N-2 (File Nos. 333-231921 and 811-23384) filed on June 3, 2019) |
| (b) | Form of Bylaws (incorporated by reference to Exhibit (b)(2) to the Registrant’s Registration Statement on Form N-2 (File Nos. 333-227716 and 811-23384) filed on October 5, 2018) |
| (c) | Not applicable |
| (f) | Not applicable |
| (i) | Not applicable |
| (l) | Opinion and Consent of Counsel (incorporated by reference to Exhibit (l) to the Registrant’s Registration Statement on Form N-2 (File Nos. 333-259029 and 811-23384) filed on August 16, 2022) |
C-2
| (m) | Not applicable |
| (n) | Consent of Independent Registered Public Accounting Firm (filed herewith) |
| (o) | Not applicable |
| (p) | Contribution Agreement (incorporated by reference to Exhibit (p) to the Registrant’s Registration Statement on Form N-2 (File Nos. 333-227716 and 811-23384) filed on October 5, 2018) |
| (q) | Not applicable |
| ITEM 26. | MARKETING ARRANGEMENTS |
The information contained under the heading “Selling Stockholder” in the prospectus that forms a part of this Registration Statement is incorporated herein by reference.
| ITEM 27. | OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION |
| SEC registration fee | $ | 1,854 | ||
| FINRA filing fee | $ | 3,500 | ||
| NYSE listing fee | $ | 7,000 | ||
| Rating Agency fee | $ | 0 | ||
| Printing and postage | $ | 15,000 | ||
| Legal fees and expenses | $ | 300,000 | ||
| Accounting fees and expenses | $ | 124,000 | ||
| Miscellaneous | $ | 3,646 | ||
| Total | $ | 455,000 |
| ITEM 28. | PERSONS CONTROLLED BY OR UNDER COMMON CONTROL |
None
| ITEM 29. | NUMBER OF HOLDERS OF SECURITIES |
The following table sets forth the number of record holders of each class of the Registrant’s securities as of December 15, 2022:
| Title of Class | Number of Record Holders |
|||
| Common stock, par value $0.001 per share | 10 | |||
| ITEM 30. | INDEMNIFICATION |
As permitted by Section 102 of the General Corporation Law of the State of Delaware (the “DGCL”), the Registrant has adopted provisions in its certificate of incorporation that limit or eliminate the personal liability of its directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to the Registrant or its stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: any breach of the director’s duty of loyalty to the Registrant or its stockholders; any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or any transaction from which the director derived an improper personal benefit. These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission.
C-3
The Registrant’s certificate of incorporation and bylaws provide that all directors, officers, employees and agents of the Registrant shall be entitled to be indemnified by the Registrant to the fullest extent permitted by the DGCL, subject to the requirements of the Investment Company Act of 1940, as amended (the “1940 Act”). Under Section 145 of the DGCL, the Registrant is permitted to offer indemnification to its directors, officers, employees and agents.
Section 145(a) of the DGCL provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), because the person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of any other enterprise. Such indemnity may be against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and if, with respect to any criminal action or proceeding, the person did not have reasonable cause to believe the person’s conduct was unlawful.
Section 145(b) of the DGCL provides, in general, that a corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor because the person is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of any other enterprise, against any expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.
Section 145(g) of the DGCL provides, in general, that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of any other enterprise, against any liability asserted against the person in any such capacity, or arising out of the person’s status as such, regardless of whether the corporation would have the power to indemnify the person against such liability under the provisions of the law. We have obtained liability insurance for the benefit of our directors and officers.
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Eagle Point Income Management LLC (the “Adviser”) and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Registrant for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Investment Advisory Agreement or otherwise as an investment adviser of the Registrant.
The Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Eagle Point Administration LLC (the “Administrator”) and its officers, managers, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from the Registrant for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Administrator’s services under the Administration Agreement or otherwise as administrator for the Registrant.
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The Purchase Agreement will provide that BRPC II agree to indemnify and hold harmless each of the Registrant, the Adviser and the Administrator, and each of their respective partners, directors, trustees, managers, members and stockholders (as the case may be), and each officer of the Registrant who signs the Registration Statement and each person, if any, who controls the Registrant, the Adviser and/or the Administrator within the meaning of either Section 15 of the Securities Act of 1933, as amended (the “Securities Act”), or Section 20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) insofar as such loss, claim, damage or liability arises out of or is based upon any written information relating to the underwriters furnished to the Registrant expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment hereof by the Registrant) or in the prospectus (or any supplement thereto) contained in this Registration Statement or any sales material.
The At Market Issuance Sales Agreement provides that the placement agent agrees to indemnify and hold harmless each of the Registrant, the Adviser and the Administrator, and each of their respective partners, directors, trustees, managers, members and stockholders (as the case may be), and each officer of the Registrant who signs the Registration Statement and each person, if any, who controls the Registrant, the Adviser and/or the Administrator within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) and expense whatsoever insofar as such loss, claim, damage, liability or expense arises out of or is based upon untrue statements or omissions or alleged untrue statements or omissions to written information relating to such placement agent furnished to the Registrant by such placement agent expressly for use in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment hereof by the Registrant) or in the prospectus (or any supplement thereto) contained in this Registration Statement.
The Registrant has entered into indemnification agreements with its officers and directors. The indemnification agreements are intended to provide the Registrant’s officers and directors the maximum indemnification permitted under Delaware law and the 1940 Act. Each indemnification agreement provides that the Registrant shall indemnify the director who is a party to the agreement (an “Indemnitee”), including the advancement of legal expenses, if, by reason of his or her corporate status, the Indemnitee is, or is threatened to be, made a party to or a witness in any threatened, pending, or completed proceeding, other than a proceeding by or in the right of the Registrant.
Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the U.S. Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
| ITEM 31. | BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER |
A description of any other business, profession, vocation or employment of a substantial nature in which the Adviser, and each managing director, director or executive officer of the Adviser, is or has been during the past two fiscal years, engaged in for his or her own account or in the capacity of director, officer, employee, partner or trustee, is set forth in Part A of this Registration Statement in the sections entitled “Management” and “The Adviser and the Administrator.” Additional information regarding the Adviser and its officers and directors is set forth in its Form ADV, as filed with the Securities and Exchange Commission (SEC File No. 801-77721), under the Investment Advisers Act of 1940, as amended, and is incorporated herein by reference.
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| ITEM 32. | LOCATION OF ACCOUNTS AND RECORDS |
All accounts, books, and other documents required to be maintained by Section 31(a) of the 1940 Act, and the rules thereunder are maintained at the offices of:
| (1) | the Registrant, Eagle Point Income Company Inc., 600 Steamboat Road, Suite 202, Greenwich, CT 06830; |
| (2) | the Transfer Agent, American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn, NY 11219; |
| (3) | the Custodian, Computershare Trust Company, N.A., 9062 Old Annapolis Rd, Columbia, MD 21045; and |
| (4) | the Adviser, Eagle Point Income Management LLC, 600 Steamboat Road, Suite 202, Greenwich, CT 06830 |
| ITEM 33. | MANAGEMENT SERVICES |
Not applicable.
| ITEM 34. | UNDERTAKINGS |
| 1. | Not applicable. |
| 2. | Not applicable. |
| 3. | The Registrant undertakes: |
| (a) | to file, during any period in which offers or sales are being made, a post-effective amendment to the registration statement: |
| (1) | to include any prospectus required by Section 10(a)(3) of the Securities Act; |
| (2) | to reflect in the prospectus any facts or events after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement. |
| (3) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (b) | that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of those securities at that time shall be deemed to be the initial bona fide offering thereof; |
| (c) | to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; |
| (d) | Not applicable. |
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| (e) | that, for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of securities: |
The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to the purchaser:
| (1) | any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424 under the Securities Act; |
| (2) | any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; |
| (3) | the portion of any other free writing prospectus or advertisement pursuant to Rule 482 under the Securities Act relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
| (4) | any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
| 4. | The Registrant undertakes that: |
| (a) | for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and |
| (b) | for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. |
| 5. | Not applicable. |
| 6. | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
| 7. | The Registrant hereby undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two but days of receipt of a written or oral request, any prospectus or Statement of Additional Information. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Pre-Effective Amendment No. 1 to its Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Greenwich, in the State of Connecticut, on the 15th day of December, 2022.
| EAGLE POINT INCOME COMPANY INC. | |||
| By: | /s/ Thomas P. Majewski | ||
| Name: | Thomas P. Majewski | ||
| Title: | Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, as amended, this Pre-Effective Amendment No. 1 to its Registration Statement on Form N-2 has been signed by the following persons in the capacities and on the dates indicated.
|
Signature |
Title |
Date |
|
/s/ Thomas P. Majewski Thomas P. Majewski |
Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) |
December 15, 2022 |
|
/s/ Kenneth P. Onorio Kenneth P. Onorio |
Chief Financial Officer (Principal Financial and Accounting Officer) |
December 15, 2022 |
|
/s/ * |
Director | December 15, 2022 |
| James R. Matthews | ||
|
/s/ * |
Director | December 15, 2022 |
| Scott W. Appleby | ||
|
/s/ * |
Director | December 15, 2022 |
| Kevin F. McDonald | ||
|
/s/ * |
Director | December 15, 2022 |
| Paul E. Tramontano | ||
|
/s/ * |
Director | December 15, 2022 |
| Jeffrey L. Weiss |
| * By: | /s/ Thomas P. Majewski | |
| Thomas P. Majewski | ||
| Attorney-in-Fact |
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