Table of Contents

As filed with the Securities and Exchange Commission on February 22, 2011

Securities Act Registration No. 333-169726

Investment Company Registration No. 811-22481

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933     x

Pre-Effective Amendment No. 5

and/or

REGISTRATION STATEMENT

UNDER

THE INVESTMENT COMPANY ACT OF 1940   x

Amendment No. 5

Apollo Senior Floating Rate Fund Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

9 West 57 th Street

43 rd Floor

New York, New York 10019

(Address of Principal Executive Offices)

(212) 515-3200

(Registrant’s Telephone Number, Including Area Code)

John J. Suydam, Esq.

Joseph D. Glatt, Esq.

Apollo Senior Floating Rate Fund Inc.

9 West 57 th Street

43 rd Floor

New York, New York 10019

(212) 515-3200

(Name and Address of Agent for Service)

 

 

Copies to:

Barry P. Barbash, Esq.

Willkie Farr & Gallagher LLP

787 Seventh Avenue

New York, NY 10019

 

Leonard B. Mackey, Jr., Esq.

Clifford Chance US LLP

31 West 52nd Street

New York, NY 10019

 

 

 

Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement.

If any of the 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, other than securities offered in connection with a dividend reinvestment plan, check the following box.     ¨

It is proposed that this filing will become effective (check appropriate box)

¨     when declared effective pursuant to section 8(c)

 

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 
Title of Securities Being Registered  

Amount

Being

Registered

  Proposed
Maximum
Offering Price
per Unit
 

Proposed
Maximum
Aggregate

Offering Price (1) (2)

 

Amount of

Registration Fee (3)

Common Stock, ($0.001 par value per share)

  15,000,000 shares   $20.00   $300,000,000   $34,785.20
 
 
(1) Estimated solely for purpose of calculating the registration fee.
(2) Includes the underwriters’ over-allotment.
(3) $71.30 was previously paid with the initial 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 the 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 dates as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.

 

Subject to Completion

Preliminary Prospectus dated February 22, 2011

PROSPECTUS

             Shares

Apollo Senior Floating Rate Fund Inc.

Common Stock

$20.00 per Share

 

 

Apollo Senior Floating Rate Fund Inc. (the “Fund”) is a newly organized, non-diversified, closed-end management investment company.

Investment Objective. The Fund’s investment objective is to seek current income and preservation of capital. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investment portfolio as anticipated. The Fund will seek to achieve its investment objective by investing primarily in senior, secured loans made to companies whose debt is rated below investment grade (“Senior Loans”) and investments with similar economic characteristics.

Investment Policies. Under normal market conditions, at least 80% of the Fund’s Managed Assets (as defined in this prospectus) will be invested in floating rate Senior Loans and investments with similar economic characteristics. Senior Loans typically pay interest at rates that are determined periodically on the basis of a floating base lending rate, primarily the London-Interbank Offered Rate, plus a premium. Senior Loans are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities that operate in various industries and geographical regions. Senior Loans typically are rated below investment grade. Securities rated below investment grade are often referred to as “junk bonds,” “leveraged loans” or “high yield” securities. Securities of this type are often high risk and have speculative characteristics.

Leverage. The Fund may seek to enhance the level of its current distributions to holders of common stock through the use of leverage. The Fund may use leverage through borrowings, including loans from certain financial institutions and/or the issuance of debt securities, as well as through the issuance of preferred stock. The Fund expects to initially incur leverage in an aggregate amount of approximately 33% of the Fund’s Managed Assets (as defined herein) immediately after such borrowings and/or issuances of preferred stock. The use of leverage is a speculative technique that involves special risks associated with the leveraging of common stock. There can be no assurance that any leveraging strategy the Fund employs will be successful during any period in which it is employed. See “Leverage,” and “Risk Factors—Principal Risks Relating to Fund Operations—Leverage Risk.”

No Prior History. The Fund is a newly formed entity and has no previous operating or trading history upon which you can evaluate the Fund’s performance. Shares of closed-end management investment companies that are listed on an exchange, such as those of the Fund, frequently trade at prices that reflect a discount from their net asset values. If you purchase the Fund’s shares in its initial public offering or otherwise and sell the shares on an exchange or otherwise, you may receive an amount that is less than: (1) the amount you paid for the shares; and/or (2) the net asset value of the Fund’s shares at the time of sale.

Listing. The Fund’s common shares have been approved for listing on the New York Stock Exchange, subject to notice of issuance, under the symbol “AFT.”

Investing in the Fund’s common shares involves certain risks. See “ Risk Factors ” beginning on page 39 of this prospectus.

 

     Per Share      Total (1)  

Public offering price

   $ 20.00       $                        

Sales load (2)

   $ 0.90       $     

Proceeds, after expenses, to the Fund (3)

   $ 19.06       $     

(notes on following page)

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common shares to purchasers on or about             , 2011.

 

 

Morgan Stanley   Citi   BofA Merrill Lynch   Wells Fargo Securities
Janney Montgomery Scott                   Ladenburg Thalmann & Co.  Inc.   Maxim Group LLC
Oppenheimer & Co.   RBC Capital Markets   Stifel Nicolaus Weisel   Wunderlich Securities

 

 

The date of this prospectus is             , 2011.


Table of Contents

(notes from previous page)

 

 

(1) The underwriters named in this prospectus have an option to purchase up to          additional common shares at the public offering price, less the sales load, within 45 days of the date of this prospectus solely to cover overallotments, if any. If such overallotment option is exercised in full, the total public offering price, sales load, estimated offering expenses and proceeds, after expenses, to the Fund will be $            , $            , $             and $            , respectively. See “Underwriters.”
(2) The Fund’s investment adviser (and not the Fund) has agreed to pay from its own assets upfront structuring fees to each of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC. Because these fees are paid by the adviser, they are not reflected under sales load in the table above. The Fund’s investment adviser also may pay certain qualifying underwriters a structuring fee, additional compensation or a sales incentive fee in connection with the offering. See “Underwriters—Additional Compensation to Be Paid by the Adviser.”
(3) The Fund’s investment adviser has agreed to pay all of the Fund’s organizational expenses. Offering expenses to be incurred by the Fund are estimated to be $700,000. The Fund’s investment adviser has agreed to pay the amount by which the offering costs (other than the sales load) exceed $0.04 per share of common stock (0.20% of the offering price). If the Fund issues preferred shares and/or notes or other forms of indebtedness, the Fund’s common shareholders will also bear the expenses of such an offering. The total offering expenses for any offering of preferred shares and/or notes or other forms of indebtedness are estimated to be approximately $0.07 per share. See “Summary of Fund Expenses.”

(continued from cover page)

This prospectus provides information that you should know about the Fund before investing. Please read this prospectus carefully and keep it for future reference. Information required to be in the Fund’s statement of additional information is found in this prospectus. Additional information about the Fund has been filed with the Securities and Exchange Commission (“SEC”) and is available upon written or oral request and without charge. Information about the Fund can be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the public reference room. This information also is available on the SEC’s Internet site at http://www.sec.gov and copies may be obtained upon payment of a duplicating fee by writing the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549-0102. You may also email requests for these documents to publicinfo @ sec.gov . For a free copy of the Fund’s annual or semi-annual report (following the Fund’s completion of an annual or semi-annual period, as applicable) or to request other information or ask questions about the Fund, please write to the Fund at 9 West 57th Street, New York, NY 10019 or call toll free at (888) 301-3838 or visit the Fund’s website at                                 . This reference to the website does not incorporate the contents of the website into this prospectus.

The Fund’s common shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

 

i


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1   

Summary of Fund Expenses

     23   

The Fund

     25   

The Offering

     25   

Who May Wish to Invest

     25   

Use of Proceeds

     25   

The Fund’s Investments

     26   

Leverage

     36   

Risk Factors

     39   

Listing of Shares

     55   

Investment Restrictions

     55   

Management of the Fund

     57   

Agreements with the Adviser

     63   

The Portfolio Managers

     64   

Control Persons

     69   

Net Asset Value

     69   

Distributions

     70   

Dividend Reinvestment Plan

     71   

Portfolio Transactions

     72   

Conflicts of Interest

     73   

Code of Ethics

     75   

Proxy Voting Policies

     76   

Description of Securities

     76   

Closed-End Fund Structure

     80   

Repurchase of Common Shares

     81   

Tax Matters

     81   

Underwriters

     86   

Administrative, Custodian and Transfer Agent Services

     89   

Legal Opinions

     90   

Fiscal Year

     90   

Independent Registered Public Accounting Firm

     91   

Appendix A: Description of S&P, Moody’s and Fitch Ratings

     A-1   

Appendix B: Proxy Voting Policies and Procedures

     B-1   

You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the Underwriters 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, and the Underwriters 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 in this prospectus is accurate only as of the date of this prospectus. The Fund’s business, financial condition and prospects may have changed since the date of this prospectus.

 

ii


Table of Contents

PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. You should read carefully the more detailed information set forth under “Risk Factors” on page 39 of this prospectus and the other information included in this prospectus. The information below is qualified in all respects by the more detailed information included elsewhere in this prospectus and in the appropriate Registration Statements filed with the U.S. Securities and Exchange Commission.

 

The Fund

Apollo Senior Floating Rate Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “Investment Company Act”) as a closed-end, non-diversified management investment company. Apollo Credit Management, LLC (the “Adviser”) serves as the Fund’s investment adviser.

 

The Offering

The Fund is offering             shares of its common stock at an initial offering price of $20.00 per share through a group of underwriters (the “Underwriters”) led by Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, which price includes a sales load of 4.5% per share. These shares have been registered for sale with the SEC under the Securities Act of 1933 (the “Securities Act”). An investor buying common stock (often referred to as “shares” in this prospectus) during the Fund’s initial public offering generally must purchase at least 100 shares. The Underwriters have an option to purchase up to an additional             shares of the Fund within 45 days of the date of this prospectus to cover any overallotments. See “Underwriters.”

 

Who May Wish to Invest

The Fund may be an appropriate investment for:

 

   

Long-term investors seeking current income and preservation of capital.

 

   

Fixed income investors seeking the potential for additional diversification through investment in a low duration fixed income portfolio.

 

   

Investors who believe interest rates and inflation may rise in the future and want the benefits that floating rate fixed income investments may offer.

 

   

Investors seeking access to the investment acumen of the Adviser and its affiliates.

 

  Investors should consider their investment goals, time horizons and risk tolerance before investing in the Fund. An investment in the Fund is not appropriate for all investors, and the Fund is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.


Table of Contents

Investment Objective

The Fund’s investment objective is to seek current income and preservation of capital. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investment portfolio as anticipated.

 

  The Fund’s investment objective may be changed on 60 days’ prior written notice to shareholders.

 

Investment Strategies

The Fund will seek to achieve its investment objective by investing primarily in senior, secured loans made to companies whose debt is rated below investment grade (“Senior Loans”) and investments with similar economic characteristics. Senior Loans hold a first lien priority and typically pay interest at rates that are determined periodically on the basis of a floating base lending rate, primarily the London-Interbank Offered Rate (“LIBOR”), plus a premium. Senior Loans are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities (“Borrowers”) which operate in various industries and geographical regions. Borrowers may obtain Senior Loans to, among other reasons, refinance existing debt and for acquisitions, dividends, leveraged buyouts and general corporate purposes.

 

  The Fund plans to initially target investments in recently issued Senior Loans that have structural characteristics, including stronger lender protections, that are more favorable for investors. These Senior Loans provide a minimum coupon (called a “LIBOR floor”) that helps protect the Fund’s income in falling or flat-rate environments.

 

  Senior Loans typically are rated below investment grade. Securities and other instruments rated below investment grade (including Senior Loans) are those that, at the time of investment, are rated Ba1 or lower by Moody’s Investors Service, Inc. (“Moody’s”), BB+ or lower by Standard & Poor’s Corporation Ratings Group (“S&P”) or BB+ or lower by Fitch Ratings, Inc. (“Fitch”), or if unrated are determined by the Adviser to be of comparable quality. Below investment grade securities, commonly referred to as “junk bonds,” “leveraged loans” or “high yield” securities, often are regarded as having predominately speculative characteristics with respect to an issuer’s capacity to pay interest and repay principal. Although many of the Fund’s investments may consist of securities rated below investment grade, the Fund reserves the right to invest in debt securities, including Senior Loans, of any credit quality, maturity and duration. The Fund may invest in U.S. dollar and non-U.S. dollar denominated securities of issuers located anywhere in the world, and of issuers that operate in any industry. The Fund may also seek to gain exposure to Senior Loans by investing in swaps, including single name credit default swaps, single name loan credit default swaps, total return swaps, collateralized loan obligations (including synthetic collateralized loan obligations), reverse repurchase agreements and other similar transactions.

 

 

2


Table of Contents
  The Fund may invest in subordinated loans and corporate bonds. Subordinated loans generally have the same characteristics as Senior Loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders (“Subordinated Loans”). A corporate bond issuer generally pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain corporate bonds have no maturity and are thus “perpetual.”

 

  In addition to the types of securities and investments listed above, the Fund also may invest in (i) loan interests that are not secured by any collateral of the Borrower; (ii) other income producing securities (including, without limitation, U.S. Government debt securities and investment and non-investment grade, subordinated and unsubordinated corporate debt securities); (iii) rights, warrants and equity securities issued by a Borrower or its affiliates as part of a package of investments in the Borrower or its affiliates; and (iv) structured products. The Fund may also invest in asset-backed securities, repurchase agreements, cash and cash equivalents, options, futures contracts, options on futures contracts, options on swaps, forward contracts or other derivatives or financial instruments (including, but not limited to, credit-linked notes, commodity-linked notes, indexed and inverse floating rate securities, convertible instruments and preferred stocks), shares of money market mutual funds or other investment companies or other pooled investment vehicles. Although the Fund does not currently expect to invest significantly in these types of investments, it may do so for, among other reasons, cash management, financing activities or to hedge its positions.

 

  The Fund may invest in debt securities of any maturity, including perpetual securities, and does not manage its portfolio seeking to maintain a targeted dollar-weighted average maturity level. The Fund, however, does seek to manage its portfolio’s average duration. Specifically, under normal market conditions, the Adviser expects to maintain an average duration of less than one year (including the effect of anticipated leverage). In comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the instrument’s expected principal and interest payments. Duration differs from maturity in that it considers a security’s yield, coupon payments, principal payments and call features in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations.

 

 

In seeking to achieve the Fund’s investment objective, the Adviser will actively construct and manage a portfolio of Senior Loans and

 

 

3


Table of Contents
 

other investments utilizing the strategies discussed below. The Adviser’s investment process is rigorous, proactive and continuous. Close monitoring of each investment in the portfolio provides foresight for making buy, sell and hold decisions. The Adviser utilizes what it believes to be a conservative approach that focuses on credit fundamentals, collateral coverage and structural seniority. The Adviser may also employ a sector analysis to assess industry trends and characteristics that may impact a Borrower’s potential future ability to generate cash, as well as profitability, asset values, financial needs and potential liabilities. The Adviser takes a disciplined approach to its credit investment selection process in which the credit ratings of a Borrower are evaluated but are not considered to be the sole or determinative factor of selection. The criteria used by the Adviser in credit selection may include an evaluation of whether a Senior Loan is adequately collateralized or over-collateralized and whether it is covered by sufficient earnings and cash flow to service the Borrower’s indebtedness on a timely basis. The Adviser expects to gain exposure to Borrowers across a broad range of industries and of varying characteristics and return profiles.

 

  When identifying prospective investment opportunities, the Adviser currently intends to focus primarily on the following attributes:

 

   

Leading, defensible market positions . When identifying potential investment opportunities, the Adviser favors well-established companies with leading, defensible market positions and proven management teams. The Adviser intends to invest in Borrowers that it believes have developed strong positions within their markets and exhibit the potential to maintain sufficient cash flows and profitability to service their obligations in a range of economic environments. The Adviser will seek Borrowers that it believes possess advantages in scale, scope, customer loyalty, product pricing or product quality versus their competitors.

 

   

Investing in stable Borrowers with positive cash flow . The Adviser intends to invest in Borrowers believed to be stable and well established with strong cash flows and profitability. The Adviser believes these attributes evidence Borrowers that may be well positioned to maintain consistent cash flow to service and repay their obligations and maintain growth in their businesses or market share. The Adviser currently does not expect to invest significantly in start-up companies, companies in turnaround situations or companies with speculative business plans, although the Fund is permitted to do so.

 

   

Proven management teams . The Adviser intends to focus on investments in which the Borrower has an experienced management team with an established track record of success.

 

   

Private equity sponsorship . The Adviser may seek to cause the Fund to participate in transactions sponsored by what it believes to be high-quality private equity firms; however, the Adviser

 

 

4


Table of Contents
 

will not cause the Fund to invest in companies in which the Adviser or its affiliates own a controlling equity interest. The Adviser believes that a private equity sponsor’s willingness to invest significant sums of equity capital into a company generally is an implicit endorsement of the quality of the investment. Further, private equity sponsors of Borrowers with significant investments at risk may have the ability, and a strong incentive, to contribute additional capital in difficult economic times should operational issues arise.

 

   

Investments in different Borrowers and industries . The Adviser will seek to invest the Fund’s assets broadly among Borrowers and industries, thereby potentially reducing the risk that a downturn in any one company or industry will have a disproportionate effect on the value of the Fund’s portfolio.

 

  In managing the Fund’s portfolio, the Adviser will engage in regular and periodic monitoring of credit risk with a goal toward the early identification, and sale, of Senior Loans and other investments with potential credit problems. This monitoring process may include reviewing (i) a Borrower’s financial resources and operating history; (ii) a comparison of a Borrower’s current operating results with the Adviser’s initial investment thesis for the investment and initial expectations for the performance of the obligation; (iii) a Borrower’s sensitivity to economic conditions; (iv) the performance of a Borrower’s management; (v) a Borrower’s debt maturities and borrowing requirements; (vi) a Borrower’s interest and asset coverage; and (vii) the relative value of an investment based on a Borrower’s anticipated cash flow or where other comparable assets are trading in the market.

 

  Under normal market conditions, at least 80% of the Fund’s Managed Assets will be invested in floating rate Senior Loans and investments with similar economic characteristics. This policy is not fundamental and may be changed by the board of directors of the Fund (the “Board of Directors” or the “Board”) with at least 60 days’ prior written notice provided to shareholders. “Managed Assets” means the total assets of the Fund (including any assets attributable to any preferred shares that may be issued or to money borrowed or notes issued by the Fund) minus the sum of the Fund’s accrued liabilities, including accrued interest and accumulated dividends (other than liabilities for money borrowed (including the liquidation preference of preferred shares) or notes issued).

 

 

Part of the Fund’s investment objective is to seek preservation of capital. The ability of the Fund to achieve this part of its investment objective is limited due to the Fund’s investment policy of investing primarily in Senior Loans and investments with similar economic characteristics, which may be speculative. The Adviser seeks to achieve preservation of capital through a disciplined approach to its

 

 

5


Table of Contents
 

credit investment selection process and its evaluation of Borrowers. The Adviser also expects to gain exposure to Borrowers across a broad range of industries and of varying characteristics and return profiles, as well as active management of such investments in light of current economic developments and trends. The Fund is classified as “non-diversified” under the Investment Company Act and its investment portfolio may be more heavily invested in a smaller number of companies than the portfolios of other issuers. The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the Fund’s use of leverage, if any, begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative effect of leverage on common shareholders, the Fund may shorten the average maturity of its investment portfolio (by investing in short-term securities), may reduce its indebtedness or unwind other leveraged transactions, or may engage in interest rate hedging arrangements. The Fund may attempt to reduce the utilization of leverage by redeeming or otherwise purchasing outstanding preferred shares, if any, or prepaying debt or other borrowings.

 

  For a more complete discussion of the Fund’s portfolio composition, see “The Fund’s Investments.”

 

Leverage

The Fund currently anticipates utilizing leverage. The Fund may engage in leverage to the maximum extent permitted by law for investment and other general corporate purposes. The Fund expects to initially incur leverage in an aggregate amount of approximately 33 % of the Fund’s Managed Assets. The Fund may issue preferred shares and/or notes or other forms of indebtedness, and it may also borrow funds from banks and other financial institutions. The Fund may also gain leverage synthetically through swaps and other derivatives. The issuance of preferred shares or the use of borrowings to leverage the common shares can create risks, including increased variability of the Fund’s net income, distributions and/or net asset value in relation to market changes. Changes in the value of the Fund’s portfolio, including securities bought with the proceeds of leverage, will be borne entirely by common shareholders. All costs and expenses related to any form of leverage used by the Fund will be borne entirely by common shareholders. Increases and decreases in the value of the Fund’s portfolio will be magnified if the Fund uses leverage. In particular, leverage may magnify interest rate risk, which is the risk that the prices of portfolio securities will fall (or rise) if market interest rates for those types of securities rise (or fall). During periods when the Fund is using leverage, the fees paid to the Adviser for advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund’s Managed Assets, which includes the assets purchased through leverage. In such case, the Adviser may have a financial incentive to increase the Fund’s use of leverage, which constitutes an inherent conflict of interest. In addition, the fees paid to the Adviser are borne

 

 

6


Table of Contents
 

exclusively by common shareholders. It is expected that preferred shareholders, noteholders and any lenders to the Fund will not bear any expenses of the Fund. The Fund’s leveraging strategy, if utilized, may not be successful.

 

  The Fund may negotiate with one or more large commercial banks to arrange a floating rate credit facility (the “Credit Facility”) pursuant to which the Fund would be entitled to borrow funds from time to time in accordance with the terms of the Credit Facility. Any such borrowings, as well as the issuance of notes or other forms of indebtedness, would constitute financial leverage and would be subject to the asset coverage requirements imposed by the Investment Company Act with respect to the amount of the borrowings and the Fund’s ability to declare dividends and distributions or repurchase its capital stock. The Fund may choose not to enter into a Credit Facility. See “Leverage.”

 

Risk Factors

General . Investing in the Fund involves certain risks and the Fund may not be able to achieve its intended results for a variety of reasons, including, among others, the possibility that the Fund may not be able to structure its investments as anticipated. Because the value of your investment in the Fund will fluctuate, there is a risk that you will lose money. Your investment will decline in value if, among other things, the value of the Fund’s investments decreases. The value of your shares also will be affected by the Fund’s ability to successfully implement its investment strategy, as well as by market, economic and other conditions. As with any security, complete loss of investment is possible.

 

  Investment and Market Risk . An investment in the Fund’s common shares is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in the Fund’s common shares represents an indirect investment in the portfolio of Senior Loans and other securities owned by the Fund, and the value of these securities may fluctuate, sometimes rapidly and unpredictably. At any point in time, an investment in the Fund’s common shares may be worth less than the original amount invested, even after taking into account distributions paid by the Fund, if any, and the ability of shareholders to reinvest dividends. The Fund anticipates using leverage, which will magnify the Fund’s risks.

 

 

Senior Loans Risk . Senior Loans are usually rated below investment grade or may also be unrated. As a result, the risks associated with Senior Loans are similar to the risks of below investment grade fixed income instruments, although Senior Loans are senior and secured in contrast to other below investment grade fixed income instruments, which are often subordinated or unsecured. Investment in Senior Loans rated below investment grade is considered speculative because of the credit risk of their issuers. Such issuers are more likely than investment grade issuers to default on their payments of interest

 

 

7


Table of Contents
 

and principal owed to the Fund, and such defaults could reduce the Fund’s net asset value and income distributions. An economic downturn would generally lead to a higher non-payment rate, and a Senior Loan may lose significant market value before a default occurs. Moreover, any specific collateral used to secure a Senior Loan may decline in value or become illiquid, which would adversely affect the Senior Loan’s value. Senior Loans are subject to a number of risks described elsewhere in this prospectus, including liquidity risk and the risk of investing in below investment grade fixed income instruments.

 

  Senior Loans are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to the Fund, a reduction in the value of the investment and a potential decrease in the net asset value of the Fund. There can be no assurance that the liquidation of any collateral securing a Senior Loan would satisfy the Borrower’s obligation in the event of non-payment of scheduled interest or principal payments, or that the collateral could be readily liquidated. In the event of bankruptcy or insolvency of a Borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of the collateral securing a Senior Loan. The collateral securing a Senior Loan may lose all or substantially all of its value in the event of the bankruptcy or insolvency of a Borrower. Some Senior Loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate such Senior Loans to presently existing or future indebtedness of the Borrower or take other action detrimental to the holders of Senior Loans including, in certain circumstances, invalidating such Senior Loans or causing interest previously paid to be refunded to the Borrower.

 

  There may be less readily available and reliable information about most Senior Loans than is the case for many other types of securities, including securities issued in transactions registered under the Securities Act, or registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result, the Adviser will rely primarily on its own evaluation of a Borrower’s credit quality rather than on any available independent sources. Therefore, the Fund will be particularly dependent on the analytical abilities of the Adviser.

 

  In general, the secondary trading market for Senior Loans is not well developed. No active trading market may exist for certain Senior Loans, which may make it difficult to value them. Illiquidity and adverse market conditions may mean that the Fund may not be able to sell Senior Loans quickly or at a fair price. To the extent that a secondary market does exist for certain Senior Loans, the market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods.

 

 

The Fund may acquire Senior Loans through assignments or participations. The purchaser of an assignment typically succeeds to

 

 

8


Table of Contents
 

all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchaser’s rights can be more restricted than those of the assigning institution, and the Fund may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. In general, a participation is a contractual relationship only with the institution participating out the interest, not with the Borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In purchasing participations, the Fund generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement against the Borrower, and the Fund may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the Fund will be exposed to the credit risk of both the Borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, the Fund will not be able to conduct the due diligence on the Borrower or the quality of the Senior Loan with respect to which it is buying a participation that the Fund would otherwise conduct if it were investing directly in the Senior Loan, which may result in the Fund being exposed to greater credit or fraud risk with respect to the Borrower or the Senior Loan.

 

  Subordinated Loans Risk . Subordinated Loans generally are subject to similar risks as those associated with investments in Senior Loans, except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. In the event of default on a Subordinated Loan, the first priority lien holder has first claim to the underlying collateral of the loan. Subordinated Loans are subject to the additional risk that the cash flow of the Borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior unsecured or senior secured obligations of the Borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Subordinated Loans generally have greater price volatility than Senior Loans and may be less liquid.

 

 

Below Investment Grade Securities Risk . The Fund anticipates that it will invest the majority of its assets in Senior Loans, Subordinated Loans and other debt instruments that are rated below investment grade. Non-investment grade fixed income or convertible securities, often referred to as “junk bonds,” “leveraged loans” or “high yield” securities, are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that the Adviser believes are of comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt securities and similar debt instruments may be subject to greater risks than securities or instruments that have higher credit ratings, including a high risk of default. The credit rating of a high yield security does not

 

 

9


Table of Contents
 

necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities and similar instruments often are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities. Lower grade securities and similar debt instruments may be particularly susceptible to economic downturns. It is likely that a prolonged or deepening economic recession could adversely affect the ability of Borrowers issuing such securities and similar debt instruments to repay principal and pay interest on the instrument, increase the incidence of default and severely disrupt the market value of the securities and similar debt instruments.

 

  New Adviser Risk . The Adviser is a newly organized entity with no operating history. The Adviser’s sole assets under management initially will be the assets raised in connection with the initial public offering of the Fund’s common stock.

 

  Credit Risk . Credit risk is the risk that one or more debt securities in the Fund’s portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. While a senior position in the capital structure of a Borrower may provide some protection with respect to the Fund’s investments in Senior Loans, losses may still occur because the market value of Senior Loans is affected by the creditworthiness of Borrowers and by general economic and specific industry conditions. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund that invests in investment grade securities. The prices of lower grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. In addition, the Fund may use credit derivatives that may expose it to additional risk in the event that the securities underlying the derivatives default.

 

 

Prepayment Risk . During periods of declining interest rates, Borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, which may require the Fund to reinvest in lower yielding securities, resulting in a possible decline in the Fund’s income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“Call Protection”). An issuer may redeem a below investment grade security if, for example, the issuer can refinance the debt at a lower cost due to declining interest

 

 

10


Table of Contents
 

rates or an improvement in the credit standing of the issuer. Subordinated Loans typically do not have Call Protection. For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced.

 

  Senior Loans are subject to prepayment risk and typically do not have Call Protection. The degree to which Borrowers prepay Senior Loans, whether as a contractual requirement or at their election, may be affected by general business conditions, the financial condition of the Borrower and competitive conditions among Senior Loan investors, among others. For these reasons, prepayments cannot be predicted with accuracy. Upon a prepayment, either in part or in full, the outstanding debt on which the Fund derives interest income will be reduced. The Fund may not be able to reinvest the proceeds received on terms as favorable as the prepaid loan.

 

  Interest Rate Risk . Because Senior Loans with floating or variable rates reset their interest rates periodically, changes in prevailing interest rates can be expected to cause some fluctuations in the Fund’s net asset value. Similarly, a sudden and significant increase in market interest rates (which are currently considered low by historic standards) may cause a decline in the Fund’s net asset value. In addition, Senior Loans or similar securities may allow the Borrower to opt between LIBOR-based interest rates and interest rates based on bank prime rates, which may have an effect on the Fund’s net asset value.

 

  Liquidity Risk . The Fund generally considers “illiquid securities” to be securities that cannot be sold within seven days in the ordinary course of business at approximately the value used by the Fund in determining its net asset value. The Fund may not be able to readily dispose of such securities at prices that approximate those at which the Fund could sell the securities if they were more widely-traded and, as a result of that illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price of securities, thereby adversely affecting the Fund’s net asset value and ability to make dividend distributions.

 

  Some Senior Loans are not readily marketable and may be subject to restrictions on resale. Senior Loans generally are not listed on any national securities exchange and no active trading market may exist for the Senior Loans in which the Fund may invest. When a secondary market exists, if at all, the market for some Senior Loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. The Fund has no limitation on the amount of its assets that may be invested in securities that are not readily marketable or are subject to restrictions on resale.

 

 

11


Table of Contents
  Distressed and Defaulted Securities Risk . The Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or at risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund (“Distressed Securities”). Investment in these Distressed Securities is speculative and involves significant risks.

 

  Structured Products Risk. Investments in structured notes involve risks, including credit risk and market risk. Where the Fund’s investments in structured notes are based upon the movement of one or more factors, including currency exchange rates, interest rates, reference bonds and stock indices, depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of the factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the structured note to be reduced to zero, and any further changes in the reference instrument may then reduce the principal amount payable on maturity. Structured notes may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the note.

 

  Inflation/Deflation Risk . Inflation risk is the risk that the value of certain assets or income from the Fund’s investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of investments and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund’s use of leverage would likely increase, which would tend to further reduce returns to shareholders. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of the Fund’s portfolio.

 

  General Risks Associated with Derivatives . The Fund may use derivative instruments (“Derivatives”) including, in particular, swaps, synthetic collateralized loan obligations, reverse repurchase agreements and other similar transactions, in seeking to achieve its investment objective or for other reasons, such as cash management, financing activities or to hedge its positions. The use of Derivatives may subject the Fund to the following risks, including, but not limited to:

 

   

Credit Risk — the risk that the counterparty in a Derivative transaction will be unable to honor its financial obligation to the Fund, 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 recently experienced significant financial hardship and deteriorating credit conditions.

 

 

12


Table of Contents
 

If the Fund’s 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 be substantially increased.

 

   

Currency Risk — the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.

 

   

Leverage Risk — the risk associated with certain types of Derivative strategies that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

 

   

Liquidity Risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. This risk is heightened to the extent the Fund engages in over-the-counter Derivative transactions.

 

   

Correlation Risk — the risk that changes in the value of a Derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Fund seeks exposure.

 

   

Index Risk — if the Derivative is linked to the performance of an index, it will be subject to the risks associated with changes in that index. If the index changes, the Fund could receive lower interest payments or experience a reduction in the value of the Derivative to below what the Fund paid. Certain indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.

 

 

Leverage Risk . The Fund intends to utilize leverage and may utilize leverage to the maximum extent permitted by law for investment and other general corporate purposes. The Fund may obtain leverage by issuing preferred shares and/or notes and it may also borrow funds from banks and other financial institutions. The Fund may also gain leverage synthetically through swaps and other Derivatives. The use of leverage to purchase additional securities creates an opportunity for increased common share dividends, but also creates risks for common shareholders, including increased variability of the Fund’s net income, distributions and/or net asset value in relation to market changes. Leverage is a speculative technique that exposes the Fund to greater risk and increased costs than if it were not implemented. Increases and decreases in the value of the Fund’s portfolio will be magnified if the Fund uses leverage. In particular, leverage may

 

 

13


Table of Contents
 

magnify interest rate risk, which is the risk that the prices of portfolio securities will fall (or rise) if market interest rates for those types of securities rise (or fall). As a result, leverage may cause greater changes in the Fund’s net asset value, which will be borne entirely by the Fund’s common shareholders. To the extent that the Fund makes investments in Senior Loans or other debt instruments structured with LIBOR floors, the Fund will not realize additional income if rates increase to levels below the LIBOR floor but the Fund’s cost of financing is expected to increase, resulting in the potential for a decrease in the level of income available for dividends or distributions made by the Fund. If the Fund issues preferred shares and/or notes or engages in other borrowings, it will have to pay dividends on its shares or interest on its notes or borrowings, which will increase expenses and may reduce the Fund’s return. These dividend payments or interest expenses (which will be borne entirely by common shareholders) may be greater than the Fund’s return on the underlying investments. The Fund’s leveraging strategy, if utilized, may not be successful.

 

  The Fund may issue preferred shares and/or notes or other forms of indebtedness as a form of leverage. These means of obtaining leverage would be senior to the Fund’s common shares, such that holders of preferred shares and/or notes or other Fund indebtedness would have priority over the common shareholders in the distribution of the Fund’s assets, including dividends, distributions of principal and liquidating distributions. If preferred shares are issued and outstanding, holders of the preferred shares would elect two directors of the Fund, and would vote separately as a class on certain matters which may at times give holders of preferred shares disproportionate influence over the Fund’s affairs. If the preferred shares were limited in their term, redemptions of such preferred shares would require the Fund to liquidate its investments and would reduce the Fund’s use of leverage, which could negatively impact common shareholders. In addition, if the Fund elects to issue preferred stock and/or notes (or other forms of indebtedness) its ability to make distributions to its common shareholders or to repurchase its stock will be limited by the asset coverage requirements and other limitations imposed by the Investment Company Act and the Fund’s lenders.

 

  The Fund will pay (and common shareholders will bear) all costs and expenses relating to the issuance and ongoing maintenance of any preferred shares and/or notes or other forms of indebtedness issued by the Fund, including higher advisory fees. As a result, the Fund cannot assure you that the issuance of preferred shares and/or notes or other forms of indebtedness will provide a higher yield or return to the holders of the common shares. If the Fund offers and/or issues preferred shares and/or notes or other forms of indebtedness, the costs of the offering will be borne immediately by the Fund’s common shareholders and result in a reduction of the net asset value of the common shares.

 

 

14


Table of Contents
  There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for common shareholders, including:

 

   

the likelihood of greater volatility of net asset value, market price and dividend rate of common shares than a comparable portfolio without leverage;

 

   

the risk that fluctuations in interest rates on borrowings and short-term debt or in dividend payments on, principal proceeds distributed to, or redemption of any preferred shares and/or notes or other forms of indebtedness that the Fund has issued will reduce the return to the common shareholders;

 

   

the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares;

 

   

when the Fund uses financial leverage, the investment advisory fees payable to the Adviser will be higher than if the Fund did not use leverage, and may provide a financial incentive to the Adviser to increase the Fund’s use of leverage and create an inherent conflict of interest; and

 

   

leverage may increase expenses (which will be borne entirely by common shareholders), which may reduce total return.

  If the Fund issues preferred stock and/or notes or other forms of indebtedness, the Fund may be subject to certain restrictions on investments imposed by the guidelines of one or more rating agencies, which may issue ratings for the preferred shares and/or notes or short-term debt securities issued by the Fund, or may be subject to loan covenants or other restrictions imposed by its lenders. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage and portfolio composition requirements. These covenants and restrictions may negatively affect the Fund’s ability to achieve its investment objective.

 

 

Key Personnel . The Adviser depends on the diligence, skill and network of business contacts of its senior management. For a description of the senior management team, see “The Portfolio Managers.” The Adviser will also depend, to a significant extent, on its access to the investment professionals and partners of its affiliates and the information and deal flow generated by the investment professionals of its affiliates in the course of their investment and portfolio management activities. The senior management of the Adviser will, among other things, evaluate, negotiate, structure and monitor Fund investments. The Fund’s future success will depend on the continued service of the senior management team of the Adviser. The

 

 

15


Table of Contents
 

departure of any of the senior managers of the Adviser, or of a significant number of the investment professionals or partners of the Adviser’s affiliates, could have a material adverse effect on the Fund’s ability to achieve its investment objective. In addition, there is no assurance that the Adviser will remain the Fund’s investment adviser or that the Adviser will continue to have access to the investment professionals and partners of its affiliates and the information and deal flow generated by the investment professionals of its affiliates.

 

  Potential Conflicts of Interest Risk-Allocation of Personnel . The Fund’s executive officers and directors, and the employees of the Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Fund or of investment funds or accounts managed by the Adviser or its affiliates. As a result, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of the Fund or its shareholders. Additionally, certain personnel of the Adviser and its management may face conflicts in their time management and commitments.

 

  Potential Conflicts of Interest Risk-Allocation of Investment Opportunities . The Adviser and its affiliates (“Apollo”) have adopted allocation procedures that are intended to ensure that each fund or account managed by Apollo (“Apollo-advised funds”) is treated in a manner that, over time, is fair and equitable. These allocation procedures have been developed taking into account the fact that (i) the Apollo-advised funds tend to have broad investment mandates, but each Apollo-advised fund has one or more primary investment mandates, and (ii) the Apollo-advised funds may have overlapping primary investment mandates. In operating under these procedures, Apollo generally allocates investment opportunities first to the Apollo-advised funds whose primary investment mandates are consistent with the investment being allocated. When more than one Apollo-advised fund has a primary investment mandate that is consistent with an investment being allocated, the allocation is generally made on a pro rata basis. As a result, in situations where a security is appropriate for the Fund but is limited in availability, the Fund may receive a lower allocation than may be desired by its portfolio managers or no allocation if Apollo believes the investment is more appropriate for a different Apollo-advised fund because of its investment mandate. Investment opportunities may be allocated on a basis other than pro rata to the extent it is done in good faith and does not, or is not reasonably expected to, result in an improper disadvantage or advantage to one participating Apollo-advised fund as compared to another participating Apollo-advised fund.

 

 

In the event investment opportunities are allocated among the Fund and the other Apollo-advised funds, the Fund may not be able to structure its investment portfolio in the manner desired. Although Apollo endeavors to allocate investment opportunities in a fair and

 

 

16


Table of Contents
 

equitable manner, it is possible that the Fund may not be given the opportunity to participate in certain investments made by the other Apollo-advised funds or portfolio managers affiliated with the Adviser. Furthermore, the Fund and the other Apollo-advised funds may make investments in securities where the prevailing trading activity may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold by the Fund and the other Apollo-advised funds. When this occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the Fund may not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.

  It is possible that the other Apollo-advised funds may make investments in the same or similar securities at different times and on different terms than the Fund. From time to time, the Fund and the other Apollo-advised funds may make investments at different levels of an issuer’s capital structure or otherwise in different classes of an issuer’s securities. Such investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by such entities. Conflicts may also arise because portfolio decisions regarding the Fund may benefit the other Apollo-advised funds. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) one or more Apollo-advised funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) one or more Apollo-advised funds.

 

  Potential Conflicts of Interest Risk-Lack of Information Barriers . There are no information barriers among the Adviser and certain of its affiliates. If the Adviser or its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, the Fund may be prevented from investing or liquidating an investment in such company. This risk may affect the Fund more than it does other investment vehicles, as the Adviser generally does not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. The Adviser’s decision not to implement these barriers could prevent its investment professionals from undertaking certain transactions such as advantageous investments or dispositions that would be permissible for them otherwise. In addition, the Adviser could in the future decide to establish information barriers, particularly as its business expands and diversifies. See “Conflicts of Interest” for an additional discussion of the types of conflicts of interest to which the operations of the Fund may be subject.

 

 

17


Table of Contents
  Non-Diversification Risk . The Fund is classified as “non-diversified” under the Investment Company Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence. The Fund intends to qualify for the special tax treatment available to “regulated investment companies” under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and thus intends to satisfy the diversification requirements of Subchapter M, including its less stringent diversification requirements that apply to the percentage of the Fund’s total assets that are represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and certain other securities.

 

  Risks Associated with Fund Distribution Policy . The Fund intends to make regular distributions. Currently, in order to maintain a relatively stable level of distributions, the Fund may pay out less than all of its net investment income, pay out undistributed income from prior months, return capital in addition to current period net investment income or borrow money to fund distributions. The distributions for any full or partial calendar year might not be made in equal amounts, and one distribution may be larger than the other. The Fund will make a distribution only if authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available for these distributions. This distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital, which would reduce the Fund’s net asset value and, over time, potentially increase the Fund’s expense ratio. If the Fund distributes a return of capital, it means that the Fund is returning to shareholders a portion of their investment rather than making a distribution that is funded from the Fund’s earned income or other profits. The Fund’s distribution policy may be changed at any time by the Board of Directors.

 

  If the Fund elects to issue preferred stock and/or notes or other forms of indebtedness, its ability to make distributions to its common shareholders will be limited by the asset coverage requirements and other limitations imposed by the Investment Company Act and the Fund’s lenders.

 

  No Operating History . The Fund is a recently formed entity and has no previous operating or trading history upon which a potential investor can evaluate the Fund’s performance. Special risks apply during a fund’s start-up period, including the risk of failing to achieve the desired portfolio composition within the time period expected and the risk of commencing operations under inopportune market conditions. The Fund’s shares have no history of public trading.

 

 

Inadequate Return . No assurance can be given that the returns on the Fund’s investments will be commensurate with the risk of investment

 

 

18


Table of Contents
 

in the Fund nor can the Fund assure you that the Adviser will be able to find enough appropriate investments that meet the Fund’s investment criteria. Fund investments may be highly speculative and aggressive, therefore, an investment in Fund securities may not be suitable for someone with a low risk tolerance. Investors should not commit money to the Fund unless they have the resources to sustain the loss of their entire investment in the Fund.

 

  Closed-End Structure; Market Discount from Net Asset Value . Shares of closed-end investment companies that trade in a secondary market frequently trade at market prices that are lower than their net asset values. This is commonly referred to as “trading at a discount.” This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. As a result, the Fund is designed primarily for long-term investors. The Fund’s total assets will be reduced following this offering by the amount of offering and related expenses to be paid by the Fund.

 

  Although the value of the Fund’s net assets is generally considered by market participants in determining whether to purchase or sell shares, whether an investor will realize gains or losses upon the sale of the shares will depend entirely upon whether the market price of the shares at the time of sale is above or below the investor’s purchase price for the shares. Because the market price of the shares will be determined by factors such as relative supply of and demand for the shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot predict whether the shares will trade at, below or above net asset value or at, below or above the initial public offering price. The net asset value of the shares, however, is expected to be reduced immediately following the initial public offering as a result of the payment of offering costs. As with any security, complete loss of investment is possible.

 

  Anti-Takeover Provisions . The Fund’s charter and Bylaws contain provisions that may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of the shareholders. Such provisions may discourage outside parties from seeking control of the Fund or seeking to change the composition of its Board of Directors, which could result in shareholders not having the opportunity to realize a price greater than the current market price for their shares at some time in the future.

 

 

The Fund’s charter classifies the Fund’s Board of Directors into three classes, serving staggered three-year terms, and authorizes the Board of Directors to cause the Fund to issue additional shares of common stock. The Board of Directors also may classify or reclassify any unissued shares of common stock into one or more series of stock, including preferred stock, may set the terms of each class or series and may authorize the Fund to issue the newly-classified or reclassified shares. The Board of Directors may, without any action

 

 

19


Table of Contents
 

by the Fund’s shareholders, amend the Fund’s charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Fund has the authority to issue.

 

Listing of Shares

The Fund’s common shares have been approved for listing on the New York Stock Exchange (“NYSE”), subject to notice of issuance, under the ticker symbol “AFT” and will be required to meet the NYSE’s listing requirements.

 

Board of Directors

The Board of Directors is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the directors of investment companies by the Investment Company Act and applicable Maryland law. The directors of the Fund (the “Directors”) are divided into three classes, serving staggered three-year terms. Any vacancy on the Board of Directors may be filled only by a majority of the remaining Directors, except to the extent that the Investment Company Act requires the election of directors by shareholders.

 

Investment Adviser

Apollo Credit Management, LLC serves as the Fund’s investment adviser. The Adviser provides certain investment advisory, management and administrative services to the Fund pursuant to an investment advisory and management agreement with the Fund (the “Investment Advisory Agreement”). The Adviser is newly formed and has no operating history. For its services, the Fund pays the Adviser a monthly fee at the annual rate of 1% of the average daily value of the Fund’s Managed Assets.

 

  During periods when the Fund is using leverage, if any, the fees paid to the Adviser will be higher than if the Fund did not use leverage because the fees paid are calculated on the basis of the Fund’s Managed Assets, which includes the assets purchased through leverage.

 

  The Fund and the Adviser have also entered into an Administrative Services and Expense Reimbursement Agreement pursuant to which the Adviser will provide certain administrative services, personnel and facilities to the Fund and perform operational services necessary for the operation of the Fund not otherwise provided by other Fund service providers. Pursuant to this agreement, the Fund will reimburse the Adviser at cost, at the Adviser’s request, for certain costs and expenses incurred by the Adviser that are necessary for the administration and operation of the Fund.

 

  The Adviser may elect from time to time, in its sole discretion, to waive its right to reimbursement or its receipt of the advisory fee. If the Adviser elects to waive its compensation, such action may have a positive effect on the Fund’s performance or yield. The Adviser is under no obligation to waive its fees or rights to reimbursement, may elect not to do so, or may decide to waive its compensation periodically.

 

 

20


Table of Contents

Distributions

Commencing with the Fund’s initial dividend, the Fund intends to make regular monthly cash distributions of all or a portion of its net investment income to common shareholders. The Fund expects to declare the initial monthly dividend on the Fund’s common shares within approximately 45 days after completion of this offering and to pay that initial monthly dividend approximately 60 to 90 days after completion of this offering. The Fund intends to pay common shareholders at least annually all or substantially all of its net investment income after the payment of dividends and interest, if any, owed with respect to any outstanding preferred shares and/or notes or other forms of leverage utilized by the Fund. The Fund intends to pay any capital gains distributions at least annually. If the Fund makes a long-term capital gain distribution, it will be required to allocate such gain between the common shares and any preferred shares issued by the Fund in proportion to the total dividends paid to each class for the year in which the income is realized.

 

  Various factors will affect the level of the Fund’s income, including the asset mix, the average maturity of the Fund’s portfolio and default rates, the amount of leverage utilized by the Fund, if any, and any use of hedging activities by the Fund. To permit the Fund to maintain a more stable monthly distribution, the Fund may from time to time distribute less than the entire amount of income earned in a particular period. The undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of income actually earned by the Fund during that period. Undistributed income will add to the Fund’s net asset value (and indirectly benefits the Adviser by increasing its fees) and, correspondingly, distributions from undistributed income will reduce the Fund’s net asset value.

 

  The distributions for any full or partial year might not be made in equal amounts, and one distribution may be larger than the other. The Fund will make a distribution only if authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available for these distributions. The Fund may pay a special distribution at the end of each calendar year, if necessary, to comply with U.S. federal income tax requirements. This distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital to shareholders, which would reduce the Fund’s net asset value and, over time, potentially increase the Fund’s expense ratio. If the Fund distributes a return of capital, it means that the Fund is returning to shareholders a portion of their investment rather than making a distribution that is funded from the Fund’s earned income or other profits. The Board of Directors may elect to change the Fund’s distribution policy at any time.

 

 

The Fund has adopted a dividend reinvestment plan that allows for reinvestment of dividend distributions on behalf of shareholders. As a result, if the Board of Directors authorizes, and the Fund declares, a

 

 

21


Table of Contents
 

cash dividend, then shareholders who have “opted in” to the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of common stock, rather than receiving the cash dividends.

 

Administrative, Custodian and Transfer Agent Services

BNY Mellon Investment Servicing (US) Inc., located at 301 Bellevue Parkway, Wilmington, DE 19089, serves as administrator to the Fund. Under the Administration and Accounting Services Agreement, BNY Mellon Investment Servicing (US) Inc. provides certain administrative services necessary for the operation of the Fund, including maintaining certain Fund books and records, providing accounting services and preparing regulatory filings. BNY Mellon Investment Servicing (US) Inc. will receive an estimated monthly fee of approximately $23,000 for the provision of administrative services; however, this fee could vary depending on, among other things, the total amount of assets of the Fund, the amount and type of leverage used by the Fund and the types of transactions in which the Fund engages.

The Bank of New York Mellon Corporation, located at One Wall Street, New York, NY 10286, serves as the Fund’s custodian pursuant to a Custody Agreement. BNY Mellon Investment Servicing (US) Inc., located at 301 Bellevue Parkway, Wilmington, DE 19089, will serve as the Fund’s transfer agent and dividend paying agent with respect to the common shares.

 

Independent Registered Public Accounting Firm

The Fund has selected Deloitte & Touche LLP as its independent registered public accounting firm.

 

Tax Considerations

The Fund intends to elect to be treated as a regulated investment company (a “RIC”) for U.S. federal income tax purposes. To satisfy the distribution requirements applicable to RICs, the Fund intends to distribute all or substantially all of its net investment income and realized gains, if any, to its shareholders at least annually. Distributions of net investment income and net short-term capital gains generally will be taxable to the shareholders as ordinary income. The Fund’s distributions also may include other amounts that are taxable to shareholders as long-term capital gains. A portion of the Fund’s distributions may be nontaxable returns of capital, which would reduce a shareholder’s tax basis in his or her shares (and, to the extent in excess of such basis, would generally be long-term or short-term capital gains to the shareholders, depending on the shareholder’s holding period for such shares). The Fund will provide shareholders with a notice indicating the estimated character of the distributions from the Fund. Please refer to the “Tax Matters” section of this prospectus for additional information on the potential U.S. federal income tax effects of an investment in the Fund, including the potential U.S. federal income tax effects of any distributions by the Fund. Consult your own tax advisor on any potential state income tax effects of an investment in the Fund.

 

 

22


Table of Contents

SUMMARY OF FUND EXPENSES

The following table is intended to assist you in understanding the costs and expenses that an investor in shares of the Fund’s common stock will bear directly or indirectly. Shareholders should understand that some of the percentages indicated in the table below are estimates and may vary. The expenses shown in the table under “Other Expenses” and “Total Annual Expenses” are based on estimated amounts for the Fund’s annual operations and assume that the Fund issues approximately 17,500,000 common shares. The following table also assumes the Fund issues preferred shares and/or notes or other forms of indebtedness with an aggregate liquidation value and/or principal amount in an amount approximately equal to 33% of the Fund’s Managed Assets (after the leverage is incurred) and shows Fund expenses as a percentage of net assets attributable to common shares. If the Fund issues fewer common shares, all other things being equal, these expenses would increase as a percentage of net assets attributable to common shares.

 

Shareholder Transaction Expenses

  

Sales Load (as a percentage of common share offering price)

     4.50% (1)  

Offering Expenses borne by the Fund (as a percentage of common share offering price)

     0.20% (2)  

Dividend Reinvestment Plan Fees

     None (3)  

Preferred Shares and/or Notes Offering Expenses borne by the Fund (as a percentage of
common share offering price) . . . . . . . . . . . . . . . .

     0.36% (4)  

 

     Percentage
of Net Assets
Attributable
to Common
Shares (5)(6)
 

Annual Expenses

  

Advisory Fees

     1.49 % (7)  

Dividends on Preferred Shares and/or Interest Payments on Borrowed Funds

     1.14

Other Expenses

     0.67 % (8)  
        

Total Annual Expenses

     3.30
        

 

(1) For a description of the sales load and of other compensation paid to the Underwriters by the Fund and the Adviser, see “Underwriters.”
(2) The Adviser has agreed to pay all of the Fund’s organizational expenses and the amount by which the Fund’s offering costs (other than the sales load) exceed $0.04 per share of common stock (0.20% of the offering price). See “Underwriters.” Based on an estimated asset size of 17,500,000 shares of common stock ($350,000,000), offering costs are estimated at approximately $1.7 million, of which the Adviser will pay approximately $1,000,000 and the Fund will pay approximately $700,000. However, if the Fund issues more than the assumed 17,500,000 shares of common stock, or if the Fund’s offering expenses are less than currently estimated, the amount of the Fund’s offering costs paid by the Adviser is expected to decrease or may be zero. The offering costs to be paid by the Fund are not included in the Total Annual Expenses amount shown in the table. Offering costs borne by the Fund’s shareholders will result in a reduction of capital of the Fund attributable to the Fund’s common shares.
(3) You will be charged a fee if you direct the plan administrator to sell your shares held in a dividend reinvestment account.
(4) If the Fund offers and/or issues preferred shares and/or notes, costs of the offering are estimated to be approximately 0.8% of the total offering price of the preferred shares and/or notes, all of which will be borne immediately by the Fund’s common shareholders and result in a reduction of the net asset value of the common shares. Based on an offering of 17,500,000 common shares and further assuming an offering and/or issuance of preferred shares and/or notes with an aggregate liquidation value and/or principal amount of $163,673,000, the total offering costs of preferred shares and/or notes are estimated to be $1,243,367 or $0.07 per share (0.36% of the common share offering price).

 

23


Table of Contents
(5) For purposes of this table, we have assumed that the Fund has issued preferred shares and/or notes with an aggregate liquidation value or principal amount of 33% of its Managed Assets (after the issuance of preferred shares and/or notes).
(6) The table presented below in this footnote sets forth the estimate of what the Fund’s expected annual expenses would be stated as percentages of the Fund’s net assets attributable to common shares, assuming that the Fund is the same size as in the table above but that no leverage is incurred. In accordance with these assumptions, the Fund’s expected expenses would be estimated to be as follows:

 

     Percentage
of Net Assets
Attributable
to Common
Shares
(Assumes No
Leverage
Incurred)
 

Annual Expenses

  

Advisory Fees

     1.00

Other Expenses

     0.45

Total Net Annual Expenses

     1.45

 

(7) The Adviser will receive a monthly fee at the annual rate of 1% of the average daily value of the Fund’s Managed Assets. For the purposes of this table, it is assumed that the Fund has issued preferred shares and/or notes or other indebtedness with an aggregate liquidation value or principal amount of approximately 33% of its Managed Assets (after the leverage is incurred). The Adviser may elect from time to time, in its sole discretion, to waive its right to reimbursement or its receipt of the advisory fee. If the Adviser elects to waive its compensation, such action may have a positive affect on the Fund’s performance or yield. The Adviser is under no obligation to waive its fees or rights to reimbursement, may elect not to do so, or may decide to waive its compensation periodically.
(8) Other Expenses have been estimated based on estimated asset levels and expenses for the Fund’s first year of operations. These amounts include estimated payments of approximately $525,000 by the Fund to the Adviser under an Administrative Services and Expense Reimbursement Agreement between the Fund and the Adviser. See “Agreements with the Adviser.”

Example

While the example assumes, as required by the SEC, a 5% annual return, the Fund’s performance will vary and may result in a return greater or less than 5%. An investor would pay the following expenses (including the sales load of $45, estimated offering expenses of this offering of $2 on a $1,000 investment and estimated offering expenses related to the issuance of preferred shares and/or notes or other forms of indebtedness of $3.55) assuming total annual expenses of 3.30% and a 5% annual return throughout the periods.

 

     1
Year
     3
Years
     5
Years
     10
Years
 

Total Expenses Incurred

   $ 82       $ 146       $ 213       $ 389   

If dividends and/or interest paid on preferred shares and/or notes are not included, the total expenses incurred for 1, 3, 5 and 10 years will be $71, $114, $159 and $284, respectively.

This Example and the expenses in the table above should not be considered a representation of future Fund expenses; actual expenses may be greater or less than those shown. The example assumes reinvestment of all dividends and distributions at net asset value.

 

24


Table of Contents

THE FUND

Apollo Senior Floating Rate Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland on September 30, 2010 and registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “Investment Company Act”) as a closed-end, non-diversified management investment company. The Fund has claimed an exclusion from the term “commodity pool operator” (“CPO”) under the Commodity Exchange Act (the “CEA”), and, as a result, is not subject to registration as a CPO under the CEA. The Fund expects to commence its investment operations on or after March 1, 2011, depending on market conditions. The Fund’s principal office, including its office for service of process, is located at 9 West 57th Street, 43rd Floor, New York, New York 10019. Apollo Credit Management, LLC (the “Adviser”) serves as the investment adviser to the Fund.

THE OFFERING

The Fund is offering             shares of its common stock at an initial offering price of $20.00 per share through a group of underwriters (the “Underwriters”) led by Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, which price includes a sales load of 4.5% per share. These shares have been registered for sale with the SEC under the Securities Act of 1933 (the “Securities Act”). An investor buying common stock (often referred to as “shares” in this prospectus) during the Fund’s initial public offering generally must purchase at least 100 shares. The Underwriters have an option to purchase up to an additional              shares of the Fund within 45 days of the date of this prospectus to cover any overallotments.

WHO MAY WISH TO INVEST

The Fund may be an appropriate investment for:

 

   

Long-term investors seeking current income and preservation of capital.

 

   

Fixed income investors seeking the potential for additional diversification through investment in a low duration fixed income portfolio.

 

   

Investors who believe interest rates and inflation may rise in the future and want the benefits that floating rate fixed income investments may offer.

 

   

Investors seeking access to the investment acumen of the Adviser and its affiliates.

Investors should consider their investment goals, time horizons and risk tolerance before investing in the Fund. An investment in the Fund is not appropriate for all investors, and the Fund is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.

USE OF PROCEEDS

The net proceeds of this offering of common shares will be approximately $             ($             if the Underwriters exercise the overallotment option in full) after payment of organizational costs and offering expenses. The Fund will pay all of its offering expenses up to $0.04 per common share and the Adviser has agreed to pay (i) all of the Fund’s organizational expenses and (ii) the Fund’s offering expenses (other than the sales load) in excess of $0.04 per share. In general, the Fund intends to use the net proceeds of this offering to seek its investment objective and for other general corporate purposes, which may include the payment of Fund expenses. The Fund will invest the net proceeds of this offering in accordance with the Fund’s investment objective and policies as stated below. It is currently anticipated that the Fund will be able to invest substantially all of the net proceeds of this offering in securities that meet the Fund’s investment objective and policies within approximately three months after the completion of this offering. Pending such investment, it is anticipated that all or a portion of the proceeds will be invested in U.S. Government securities or high grade, short-term money market instruments. A relatively long initial investment period may have a negative impact on the Fund’s performance and its return to shareholders.

 

25


Table of Contents

THE FUND’S INVESTMENTS

Investment Objective

The Fund’s investment objective is to seek current income and preservation of capital. There can be no assurance that the Fund will achieve its investment objective or be able to structure its investment portfolio as anticipated.

Investment Strategies

The Fund will seek to achieve its investment objective by investing primarily in senior, secured loans made to companies whose debt is rated below investment grade (“Senior Loans”) and investments with similar economic characteristics. Senior Loans hold a first lien priority and typically pay interest at rates that are determined periodically on the basis of a floating base lending rate, primarily the London-Interbank Offered Rate (“LIBOR”), plus a premium. Senior Loans are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities (“Borrowers”) which operate in various industries and geographical regions. Borrowers may obtain Senior Loans to, among other reasons, refinance existing debt and for acquisitions, dividends, leveraged buyouts and general corporate purposes.

The Fund plans to initially target investments in recently issued Senior Loans that have structural characteristics, including stronger lender protections, that are more favorable for investors. These Senior Loans provide a minimum coupon (called a “LIBOR floor”) that helps protect the Fund’s income in falling or flat-rate environments.

Senior Loans typically are rated below investment grade. Securities and other instruments rated below investment grade (including Senior Loans) are those that, at the time of investment, are rated Ba1 or lower by Moody’s Investors Service, Inc. (“Moody’s”), BB+ or lower by Standard & Poor’s Corporation Ratings Group (“S&P”) or BB+ or lower by Fitch Ratings, Inc. (“Fitch”), or if unrated are determined by the Adviser to be of comparable quality. Below investment grade securities, commonly referred to as “junk bonds,” “leveraged loans” or “high yield” securities, often are regarded as having predominately speculative characteristics with respect to an issuer’s capacity to pay interest and repay principal. Although many of the Fund’s investments may consist of securities rated below investment grade, the Fund reserves the right to invest in debt securities, including Senior Loans, of any credit quality, maturity and duration. The Fund may invest in U.S. dollar and non-U.S. dollar denominated securities of issuers located anywhere in the world, and of issuers that operate in any industry. The Fund may also seek to gain exposure to Senior Loans by investing in swaps, including single name credit default swaps, single name loan credit default swaps, total return swaps, collateralized loan obligations (including synthetic collateralized loan obligations), reverse repurchase agreements and other similar transactions as described below.

As further described below, the Fund may invest in subordinated loans and corporate bonds. Subordinated loans generally have the same characteristics as Senior Loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders (“Subordinated Loans”). A corporate bond issuer generally pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain corporate bonds have no maturity and are thus “perpetual.”

In addition to the types of securities and investments listed above, the Fund also may invest in (i) loan interests that are not secured by any collateral of the Borrower; (ii) other income producing securities (including, without limitation, U.S. Government debt securities and investment and non-investment grade, subordinated and unsubordinated corporate debt securities); (iii) rights, warrants and equity securities issued by a Borrower or its affiliates as part of a package of investments in the Borrower or its affiliates and (iv) structured products. The Fund may also invest in asset-backed securities, repurchase agreements, cash and cash equivalents, options, futures contracts, options on futures contracts, options on swaps, forward contracts or other derivatives or financial instruments (including, but not limited to, credit-linked notes, commodity-linked notes, indexed and

 

26


Table of Contents

inverse floating rate securities, convertible instruments and preferred stocks), shares of money market mutual funds or other investment companies or other pooled investment vehicles. Although the Fund does not currently expect to invest significantly in these types of investments, it may do so for, among other reasons, cash management, financing activities or to hedge its positions.

The Fund may invest in debt securities of any maturity, including perpetual securities, and does not manage its portfolio seeking to maintain a targeted dollar-weighted average maturity level. The Fund, however, does seek to manage its portfolio’s average duration. Specifically, under normal market conditions, the Adviser expects to maintain an average duration of less than one year (including the effect of anticipated leverage). In comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated to repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result of changes in market rates of interest, based on the weighted average timing of the instrument’s expected principal and interest payments. Duration differs from maturity in that it considers a security’s yield, coupon payments, principal payments and call features in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate changes than securities with shorter durations.

In seeking to achieve the Fund’s investment objective, the Adviser will actively construct and manage a portfolio of Senior Loans and other investments utilizing the strategies discussed below. The Adviser’s investment process is rigorous, proactive and continuous. Close monitoring of each investment in the portfolio provides foresight for making buy, sell and hold decisions. The Adviser utilizes what it believes to be a conservative approach that focuses on credit fundamentals, collateral coverage and structural seniority. The Adviser may also employ a sector analysis to assess industry trends and characteristics that may impact a Borrower’s potential future ability to generate cash, as well as profitability, asset values, financial needs and potential liabilities. The Adviser takes a disciplined approach to its credit investment selection process in which the credit ratings of a Borrower are evaluated but are not considered to be the sole or determinative factor of selection. The criteria used by the Adviser in credit selection may include an evaluation of whether a Senior Loan is adequately collateralized or over-collateralized and whether it is covered by sufficient earnings and cash flow to service the Borrower’s indebtedness on a timely basis. The Adviser expects to gain exposure to Borrowers across a broad range of industries and of varying characteristics and return profiles.

When identifying prospective investment opportunities, the Adviser currently intends to focus primarily on the following attributes:

 

   

Leading, defensible market positions . When identifying potential investment opportunities, the Adviser favors well-established companies with leading, defensible market positions and proven management teams. The Adviser intends to invest in Borrowers that it believes have developed strong positions within their markets and exhibit the potential to maintain sufficient cash flows and profitability to service their obligations in a range of economic environments. The Adviser will seek Borrowers that it believes possess advantages in scale, scope, customer loyalty, product pricing or product quality versus their competitors.

 

   

Investing in stable Borrowers with positive cash flow . The Adviser intends to invest in Borrowers believed to be stable and well established with strong cash flows and profitability. The Adviser believes these attributes evidence Borrowers that may be well positioned to maintain consistent cash flow to service and repay their obligations and maintain growth in their businesses or market share. The Adviser currently does not expect to invest significantly in start-up companies, companies in turnaround situations or companies with speculative business plans, although the Fund is permitted to do so.

 

   

Proven management teams . The Adviser intends to focus on investments in which the Borrower has an experienced management team with an established track record of success.

 

27


Table of Contents
   

Private equity sponsorship . The Adviser may seek to cause the Fund to participate in transactions sponsored by what it believes to be high-quality private equity firms; however, the Adviser will not cause the Fund to invest in companies in which the Adviser or its affiliates own a controlling equity interest. The Adviser believes that a private equity sponsor’s willingness to invest significant sums of equity capital into a company generally is an implicit endorsement of the quality of the investment. Further, private equity sponsors of Borrowers with significant investments at risk may have the ability, and a strong incentive, to contribute additional capital in difficult economic times should operational issues arise.

 

   

Investments in different Borrowers and industries . The Adviser will seek to invest the Fund’s assets broadly among Borrowers and industries, thereby potentially reducing the risk that a downturn in any one company or industry will have a disproportionate effect on the value of the Fund’s portfolio.

In managing the Fund’s portfolio, the Adviser will engage in regular and periodic monitoring of credit risk with a goal toward the early identification, and sale, of Senior Loans and other investments with potential credit problems. This monitoring process may include reviewing (i) a Borrower’s financial resources and operating history; (ii) a comparison of a Borrower’s current operating results with the Adviser’s initial investment thesis for the investment and initial expectations for the performance of the obligation; (iii) a Borrower’s sensitivity to economic conditions; (iv) the performance of a Borrower’s management; (v) a Borrower’s debt maturities and borrowing requirements; (vi) a Borrower’s interest and asset coverage; and (vii) the relative value of an investment based on a Borrower’s anticipated cash flow or where other comparable assets are trading in the market.

Similar to its investment in Senior Loans and other debt investments, the Adviser adheres to a disciplined approach with respect to the Fund’s investments in structured products, including collateralized loan obligations. The Adviser will seek to select structured products which are well structured and collateralized by portfolios of primarily Senior Loans that the Adviser believes to be of sufficient quality, diversity and amount to support the structure and fully collateralize the tranche purchased by the Fund. Likewise, the Adviser will evaluate the creditworthiness of counterparties and the investment characteristics of reference assets when causing the Fund to enter into swaps or other derivative transactions.

Under normal market conditions, at least 80% of the Fund’s Managed Assets (as defined below) will be invested in floating rate Senior Loans and investments with similar economic characteristics. This policy is not fundamental and may be changed by the board of directors of the Fund (the “Board of Directors” or the “Board”) with at least 60 days’ prior written notice provided to shareholders. “Managed Assets” means the total assets of the Fund (including any assets attributable to any preferred shares that may be issued or to money borrowed or notes issued by the Fund) minus the sum of the Fund’s accrued liabilities, including accrued interest and accumulated dividends (other than liabilities for money borrowed (including the liquidation preference of preferred shares) or notes issued).

Part of the Fund’s investment objective is to seek preservation of capital. The ability of the Fund to achieve this part of its investment objective is limited due to the Fund’s investment policy of investing primarily in Senior Loans and investments with similar economic characteristics, which may be speculative. The Adviser seeks to achieve preservation of capital through a disciplined approach to its credit investment selection process and its evaluation of Borrowers. The Adviser also expects to gain exposure to Borrowers across a broad range of industries and of varying characteristics and return profiles, as well as active management of such investments in light of current economic developments and trends. The Fund is classified as “non-diversified” under the Investment Company Act and its investment portfolio may be more heavily invested in a smaller number of companies than the portfolios of other issuers. The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the

 

28


Table of Contents

Fund’s use of leverage, if any, begins (or is expected) to adversely affect common shareholders. In order to attempt to offset such a negative effect of leverage on common shareholders, the Fund may shorten the average maturity of its investment portfolio (by investing in short-term securities), may reduce its indebtedness or unwind other leveraged transactions or may engage in interest rate hedging arrangements. The Fund may attempt to reduce the utilization of leverage by redeeming or otherwise purchasing outstanding preferred shares, if any, or prepaying debt or other borrowings.

To the extent Senior Loans have a floating or variable rate feature, investment in these types of Senior Loans may allow the Fund to have less significant interest rate-related fluctuations in its net asset value per share than investment companies investing primarily in fixed income securities (other than money market funds and short term bond funds). When interest rates decline, the value of a fixed income portfolio can normally be expected to rise. Conversely, when interest rates rise, the value of a fixed income portfolio can normally be expected to decline. Although the income available to the Fund will vary, the Adviser expects that acquiring interests in floating rate Senior Loans may minimize fluctuations in net asset value of the Fund resulting from changes in market interest rates. Because floating or variable rates on Senior Loans reset periodically, however, changes in prevailing interest rates can be expected to cause some fluctuations in the Fund’s net asset value. Similarly, a sudden and significant increase in market interest rates may cause a decline in the Fund’s net asset value. A significant decline in the Fund’s net asset value may impair the Fund’s ability to maintain required levels of asset coverage if leverage is utilized. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and demand of certain securities or market conditions that reduce liquidity) can reduce the value of Senior Loans and other debt obligations, impairing the Fund’s net asset value.

During temporary defensive periods or in order to reduce the Fund’s leverage exposure or to keep the Fund’s cash fully invested, including during the period when the net proceeds of the offering of common shares are being invested, or at other times deemed appropriate by the Adviser, the Fund may deviate from its investment strategies and objective. During such periods, the Fund may invest all or a portion of its Managed Assets in U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the Treasury or by U.S. Government agencies or instrumentalities; non-U.S. Government securities which have received the highest investment grade credit rating, certificates of deposit issued against funds deposited in a bank or a savings and loan association; commercial paper; bankers’ acceptances; bank time deposits; shares of money market funds; credit-linked notes; repurchase agreements with respect to any of the foregoing; asset-backed securities or any other fixed income securities that the Adviser considers consistent with this strategy. It is impossible to predict when, or for how long, the Fund will use these strategies. There can be no assurance that such strategies will be successful. The Fund is not required to adopt defensive positions or hedge its investments and may choose not to do so even in periods of extreme market volatility and economic uncertainty.

Portfolio Composition

Under normal circumstances, the Fund’s portfolio is expected to be comprised principally of the following types of investments:

Senior Loans

Senior Loans hold the most senior position in the capital structure of a Borrower, are secured with specific collateral and have a claim on the assets and/or stock of the Borrower that is senior to that held by unsecured creditors, subordinated debt holders and stockholders of the Borrower. Typically, in order to borrow money pursuant to a Senior Loan, a Borrower will, for the term of the Senior Loan, pledge collateral, including but not limited to (i) working capital assets, such as accounts receivable and inventory; (ii) tangible fixed assets, such as real property, buildings and equipment; (iii) intangible assets, such as trademarks and patent rights (but excluding goodwill); and (iv) security interests in shares of stock of subsidiaries or affiliates. In the case of Senior Loans made to non-public companies, the company’s shareholders or owners may provide collateral in the form of secured guarantees and/or security interests in assets that they own. In many instances, a Senior Loan may be

 

29


Table of Contents

secured only by stock in the Borrower or its subsidiaries. Collateral may consist of assets that may not be readily liquidated, and there is no assurance that the liquidation of such assets would satisfy fully a Borrower’s obligations under a Senior Loan.

A Borrower must comply with various restrictive covenants contained in a loan agreement or note purchase agreement between the Borrower and the holders of the Senior Loan (the “Loan Agreement”). In a typical Senior Loan, an agent (the “Agent”) administers the terms of the Loan Agreement. In such cases, the Agent is normally responsible for the collection of principal and interest payments from the Borrower and the apportionment of these payments to the credit of all institutions that are parties to the Loan Agreement. The Fund will generally rely upon the Agent or an intermediate participant to receive and forward to the Fund its portion of the principal and interest payments on the Senior Loan. Additionally, the Fund normally will rely on the Agent and the other loan investors to use appropriate credit remedies against the Borrower. The Agent is typically responsible for monitoring compliance with covenants contained in the Loan Agreement based upon reports prepared by the Borrower. The Agent may monitor the value of the collateral and, if the value of the collateral declines, may accelerate the Senior Loan, may give the Borrower an opportunity to provide additional collateral or may seek other protection for the benefit of the participants in the Senior Loan. The Agent is compensated by the Borrower for providing these services under a Loan Agreement, and such compensation may include special fees paid upon structuring and funding the Senior Loan and other fees paid on a continuing basis. With respect to Senior Loans for which the Agent does not perform such administrative and enforcement functions, the Adviser may perform such tasks on the Fund’s own behalf, although a collateral bank will typically hold any collateral on behalf of the Fund and the other loan investors pursuant to the applicable Loan Agreement.

Senior Loans typically have rates of interest that are determined daily, monthly, quarterly or semi-annually by reference to a base lending rate, plus a premium or credit spread. As a result, as short-term interest rates increase, interest payable to the Fund from its investments in Senior Loans should increase, and as short-term interest rates decrease, interest payable to the Fund from its investments in Senior Loans should decrease. These base lending rates are primarily LIBOR and secondarily the prime rate offered by one or more major U.S. banks and the certificate of deposit rate or other base lending rates used by commercial lenders.

Offerings of Senior Loans generally are not registered with the SEC, or any state securities commission, and are not listed on any national securities exchange. There is less readily available or reliable information about most Senior Loans than is the case for many other types of securities, including securities issued in transactions registered under the Securities Act or registered under the Securities Exchange Act of 1934, as amended (“the Exchange Act”). No active trading market may exist for some Senior Loans, and some loans may be subject to restrictions on resale. Any secondary market for Senior Loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability of a seller to realize full value and thus cause a material decline in the Fund’s net asset value. In addition, the Fund may not be able to readily dispose of its Senior Loans at prices that approximate those at which the Fund could sell such loans if they were more widely-traded and, as a result of such illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. A limited supply or relative illiquidity of Senior Loans may adversely affect the Fund’s yield.

The Fund may purchase and retain in its portfolio Senior Loans where the Borrower has experienced, or may be perceived to be likely to experience, credit problems, including involvement in or recent emergence from bankruptcy court proceedings or other forms of debt restructuring. Such distressed investments may provide opportunities for enhanced income as well as capital appreciation, although they also will be subject to greater risk of loss. At times, in connection with the restructuring of a Senior Loan either outside of bankruptcy court or in the context of bankruptcy court proceedings, the Fund may determine or be required to accept equity securities or junior credit securities in exchange for all or a portion of a Senior Loan.

In the process of buying, selling and holding Senior Loans, the Fund may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, amendment fees, commissions and prepayment penalty fees. When the Fund buys a Senior Loan it may receive a

 

30


Table of Contents

facility fee and when it sells a Senior Loan it may pay a facility fee. On an ongoing basis, the Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a Senior Loan. In certain circumstances, the Fund may receive a prepayment penalty fee upon the prepayment of a Senior Loan by a Borrower. Other fees received by the Fund may include covenant waiver fees, covenant modification fees or other amendment fees.

Direct Assignments . The Fund may purchase Senior Loans on a direct assignment basis. If the Fund purchases a Senior Loan on direct assignment, it typically succeeds 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. Investments in Senior Loans on a direct assignment basis may involve additional risks to the Fund. For example, if such loan is foreclosed, the Fund could become part owner of any collateral, and would bear the costs and liabilities associated with owning and disposing of the collateral.

Loan Participations . The Fund may transact in participations in Senior Loans. The participation by the Fund in a lender’s portion of a Senior Loan typically will result in the Fund’s having a contractual relationship only with such lender, not with the Borrower. As a result, the Fund may have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation and only upon receipt by such lender of payments from the Borrower. Such indebtedness may be secured or unsecured. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the Borrower with the terms of the Loan Agreement, nor any rights with respect to any funds acquired by other investors through set-off against the Borrower and the Fund may not directly benefit from the collateral supporting the Senior Loan in which it has purchased the participation. In the event of the insolvency of the entity selling a participation, the Fund may be treated as a general creditor of such entity. The selling entity and other persons interpositioned between such entity and the Fund with respect to such participations will likely conduct their principal business activities in the banking, finance and financial services industries. Persons engaged in these industries may be more susceptible to, among other things, fluctuations in interest rates, changes in the Federal Reserve Open Market Committee’s monetary policy, governmental regulations concerning these industries and concerning capital raising activities generally and fluctuations in the financial markets generally.

Prefunded Letter of Credit Loans . The Fund may transact in participations in prefunded letter of credit loans (a “Prefunded L/C Loan”). A Prefunded L/C Loan is a facility created by the Borrower in conjunction with the agent bank as issuer of a loan, and the Prefunded L/C Loan is backed by letters of credit (each letter, an “L/C”). Each participant in a Prefunded L/C Loan (sometimes referred to as a funded letter of credit facility) fully funds its commitment amount to the agent bank for the facility. The funds are invested by the agent bank and held solely to satisfy a Prefunded L/C Loan lender’s obligation to the agent bank under the facility. The funds paid by the lenders are invested by the agent bank in deposits that pay interest, usually approximating a benchmark rate, such as LIBOR, which goes to the Borrower. Generally, the Borrower, via the agent bank, pays the lenders an interest rate, equivalent to the fully drawn spread plus the benchmark rate, usually LIBOR. The funds are returned to the lender upon termination of the Prefunded L/C Loan (and upon satisfaction of all obligations). Under the terms of the Prefunded L/C Loan agreement, a lender often may sell and assign all or a portion of its interest in the loan to another lender so long as the other lender is eligible and agrees to the terms and conditions of the Prefunded L/C Loan agreement.

When the Borrower needs funds, it may draw against the Prefunded L/C Loan and the agent bank makes payment to the Borrower by withdrawing some of the amount invested as deposits. Consequently, the lenders do not have to advance any additional funds at the time the Borrower draws against the Prefunded L/C Loan facility. The Prefunded L/C Loan can be structured from the standpoint of the Borrower as either (i) a revolving credit facility, where the Borrower can reborrow, during the term of the loan, moneys it has paid back to the facility during the term of the loan or (ii) a delayed draw term loan where the Borrower may not reborrow moneys it has repaid to the facility during the term of the loan.

When the Fund purchases a participation in a Prefunded L/C Loan, the proceeds of the purchase are deposited in a collateral account, which backs an L/C loan by the agent bank to the Borrower to support trade or

 

31


Table of Contents

other financing. The Fund typically receives interest on the cash collateral account equal to LIBOR. Participations by the Fund in a Prefunded L/C Loan typically will result in the Fund’s having a contractual relationship only with the agent bank, not with the Borrower. As a result, the Fund may have the right to receive interest, fees and any repayments, if any, to which it is entitled only from the agent bank selling the participation and only upon receipt by the agent bank of such payments from the Borrower. In connection with purchasing the participation in a Prefunded L/C Loan, the Fund generally will have no right to enforce compliance by the Borrower with the terms of the Prefunded L/C Loan. As a result, the Fund may assume the credit risk of both the Borrower and the agent bank selling the participation in a Prefunded L/C Loan. In the event of the insolvency of the agent bank selling a participation in a Prefunded L/C Loan, the Fund may be treated as a general creditor of such agent bank. The agent bank will likely conduct its principal business activities in the banking, finance and financial services industries. Persons engaged in such industries may be more susceptible to, among other things, fluctuations in interest rates, changes in the Federal Reserve Open Market Committee’s monetary policy, governmental regulations concerning such industries and concerning capital raising activities generally and fluctuations in the financial markets generally.

Subordinated Loans

The Fund may invest in Subordinated Loans. Because Subordinated Loans are subordinated and thus lower in priority of payment and/or in priority of lien to Senior Loans, they are subject to the additional risk that the cash flow of the Borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the Borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Subordinated Loans generally have greater price volatility than Senior Loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in Subordinated Loans, which would create greater credit risk exposure for the holders of such loans. Subordinated Loans share the same risks as other below investment grade instruments.

Corporate Bonds

The Fund may invest in corporate bonds. The investment return of corporate bonds reflects interest on the security and changes in the market value of the security. The market value of a corporate bond generally may be expected to rise and fall inversely with interest rates. The value of intermediate- and longer-term corporate bonds normally fluctuates more in response to changes in interest rates than does the value of shorter-term corporate bonds. The market value of a corporate bond also may be affected by the credit rating of the corporation, the corporation’s performance and perceptions of the corporation in the marketplace. There is a risk that the issuers of these securities may not be able to meet their obligations on interest or principal payments at the time called for by an instrument.

Collateralized Loan Obligations

A collateralized loan obligation (“CLO”) typically takes the form of a financing company (generally called a Special Purpose Vehicle or “SPV”), created to reapportion the risk and return characteristics of a pool of assets. While the assets underlying CLOs are often Senior Loans, the assets may also include (i) Subordinated Loans; (ii) debt tranches of other CLOs; and (iii) equity securities incidental to investments in Senior Loans. The Fund may invest in lower tranches of CLOs, which typically experience a lower recovery, greater risk of loss or deferral or non-payment of interest than more senior tranches of the CLO. When investing in a CLO, the Fund intends, although is not required, to invest in a CLO consisting primarily of individual Senior Loans of Borrowers and not repackaged CLO obligations from other high risk pools. A key feature of the CLO structure is the prioritization of the cash flows from a pool of debt securities among the several classes of the CLO. The SPV is a company founded for the purpose of securitizing payment claims arising out of this diversified asset pool. On this basis, marketable securities are issued by the SPV which, due to the diversification of the underlying risk, generally represent a lower level of risk than the original assets. The redemption of the securities issued by the SPV typically takes place at maturity out of the cash flow generated by the collected claims.

 

32


Table of Contents

Distressed and Defaulted Securities

The Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or at risk of being in default as to the repayment of principal and/ or interest at the time of acquisition by the Fund (“Distressed Securities”). Investment in Distressed Securities is speculative and involves significant risks.

Equity Securities

From time to time, the Fund may invest in or hold common stock and other equity securities incident to the purchase or ownership of a Senior Loan or in connection with a reorganization of a Borrower. Investments in equity securities incidental to investment in Senior Loans entail certain risks in addition to those associated with investments in Senior Loans. Common stock represents an equity ownership interest in a company. Historical trends would indicate that common stock is subject to higher levels of volatility and market and issuer-specific risk than debt securities. The value of equity securities may be affected more rapidly, and to a greater extent, by company-specific developments and general market conditions. These risks may increase fluctuations in the Fund’s net asset value. In addition, the Fund frequently may possess material non-public information about a Borrower as a result of its ownership of a Senior Loan of a Borrower. Because of prohibitions on trading in securities while in possession of material non-public information, the Fund might be unable to enter into a transaction in a security of the Borrower when it would otherwise be advantageous to do so. The equity interests held by the Fund, if any, may not pay dividends or otherwise generate income or appreciate in value and, in fact, may decline in value. Accordingly, the Fund may not be able to realize gains from its equity investments, and any gains that the Fund does realize may not be sufficient to contribute materially to the Fund’s investment objective of seeking current income. Equity securities held by the Fund may be illiquid.

Non-U.S. Securities

The Fund may invest in non-U.S. securities. Some non-U.S. securities may be less liquid and more volatile than securities of comparable U.S. issuers. Similarly, there is less volume and liquidity in most foreign securities markets than in the United States and, at times, greater price volatility than in the United States.

Because evidences of ownership of such securities usually are held outside the United States, the Fund will be subject to additional risks if it invests in non-U.S. securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions that might adversely affect or restrict the payment of principal and interest on the foreign securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Because non-U.S. securities may trade on days when the Fund’s common shares are not traded on the New York Stock Exchange (“NYSE”), the market value or net asset value of the Fund’s shares can change at times when common shares cannot be sold.

Foreign Currency Transactions

The Fund may engage in foreign currency exchange transactions in connection with its investments in foreign securities. The Fund is not required to hedge its currency exposure, if any, and may choose not to do so. The Fund generally will conduct its foreign currency exchange transactions either on a spot ( i.e ., cash) basis at the spot rate prevailing in the foreign currency exchange market or through forward contracts to purchase or sell foreign currencies, including the payment of dividends and the settlement of securities transactions that otherwise might require untimely dispositions of Fund securities.

A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days (usually less than one year) from the date of the contract agreed upon by the parties, at a price and for an amount set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has a deposit requirement, and no commissions are charged at any stage for trades. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based

 

33


Table of Contents

on the difference (the spread) between the price at which they are buying and selling various currencies. At the consummation of a forward contract, the Fund may either make delivery of the foreign currency or terminate its contractual obligation to deliver the foreign currency by purchasing an offsetting contract obligating it to purchase, at the same maturity date, the same amount of such foreign currency. If the Fund chooses to make delivery of the foreign currency, it may be required to obtain such currency through the sale of portfolio securities denominated in such currency or through conversion of other assets of the Fund into such currency. If the Fund engages in an offsetting transaction, the Fund will incur a gain or loss to the extent that there is a difference between the forward contract price and the offsetting forward contract price.

It should be noted that this method of protecting the value of the Fund’s portfolio securities against a decline in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. Rather, it simply establishes a rate of exchange that can be achieved at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, at the same time they tend to limit any potential gain should the value of the currency increase.

Derivatives

The Fund may use instruments referred to as derivative securities (“Derivatives”). Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). Derivatives may allow the Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in other types of instruments. The Fund may or may not use Derivatives for hedging purposes, as a form of leverage or for speculative purposes to seek to enhance returns, including speculation on changes in credit spreads, interest rates or other characteristics of the market, individual securities or groups of securities. If the Fund invests in a Derivative for speculative purposes, the Fund will be fully exposed to the risks of loss of that Derivative, which may sometimes be greater than the Derivative’s cost. The use of Derivatives may involve substantial leverage.

Swap Agreements . The Fund may enter into swap agreements, including interest rate and index swap agreements, for hedging purposes, as a form of leverage or to seek to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded the desired return. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount” ( i.e. , the dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular index). The “notional amount” of the swap agreement is only a basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The Fund’s obligations (or rights) under a swap agreement generally will be equal only to the “net amount” to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Fund’s obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by marking as segregated liquid, unencumbered assets, marked-to-market daily, to avoid potential leveraging.

The Fund may enter into credit default swap agreements and similar agreements, and may also buy credit-linked securities. Among other purposes, credit default swaps provide investment exposure to changes in credit spreads and relative interest rates. The credit default swap agreement or similar instrument may have as reference obligations one or more securities that are not currently held by the Fund (including a “basket” of securities representing an index). The protection “buyer” in a credit default contract may be obligated to pay the protection “seller” an up front payment or a periodic stream of payments over the term of the contract provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net

 

34


Table of Contents

cash amount, if the swap is cash settled. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, the Fund generally receives an up front payment or a fixed rate of income throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value.

Swaptions . The Fund, to the extent permitted under applicable law, may enter into “swaptions,” which are options on swap agreements on either an asset-based or liability-based basis. A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, the Fund generally will incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. When the Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.

Credit-Linked Securities . Among the income producing securities in which the Fund may invest are credit- linked securities, which are issued by a limited purpose trust or other vehicle that, in turn, invests in a Derivative instrument or basket of Derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, the Fund may invest in credit-linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when more traditional income producing securities are not available.

Indexed and Inverse Floating Rate Securities . The Fund may invest in securities that provide a potential return based on a particular index of value or interest rates. To the extent the Fund invests in these types of securities, the Fund’s return on such securities will be subject to risk with respect to the value of the particular index: that is, if the value of the index falls, the value of the indexed securities owned by the Fund will fall. Interest and principal payable on certain securities may also be based on relative changes among particular indices. The Fund may invest in so-called “inverse floating obligations” or “residual interest bonds” on which the interest rates vary inversely with a floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Fund may purchase synthetically-created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when interest rates increase, and will increase when interest rates decrease.

Segregation and Cover Requirements

As a closed-end investment company registered with the SEC, the Fund is subject to the federal securities laws, including the Investment Company Act, the rules thereunder, and various SEC and SEC staff interpretive positions. In accordance with these laws, rules and positions, the Fund may “set aside” liquid assets (often referred to as “asset segregation”), or engage in other SEC- or staff-approved measures, to “cover” open positions with respect to certain kinds of Derivatives that could be considered “senior securities” as defined in Section 18(g) of the Investment Company Act. With respect to certain Derivatives that are contractually required to cash settle, for example, the Fund is permitted to set aside liquid assets in an amount equal to the Fund’s daily marked-to-market net obligations ( i.e. , the Fund’s daily net liability) under the contracts, if any, rather than such contracts’ full notional value. The Fund reserves the right to modify its asset segregation policies in the future to comply with any changes in the positions from time to time announced by the SEC or its staff regarding asset segregation. These segregation and coverage requirements could result in the Fund’s maintaining securities positions that it would otherwise liquidate, segregating assets at a time when it might be disadvantageous to do so or otherwise restricting portfolio management. Such segregation and cover requirements will not limit or offset losses on related positions.

 

35


Table of Contents

LEVERAGE

The Fund currently anticipates utilizing leverage. The Fund may engage in leverage to the maximum extent permitted by law for investment and other general corporate purposes. The Fund expects to initially incur leverage in an aggregate amount of approximately 33% of the Fund’s Managed Assets. As discussed further below, the Fund’s ability to use leverage will be limited by the Investment Company Act and any agreements on debt limitations or asset coverage requirements imposed on the Fund by its lenders or necessary to obtaining ratings on any preferred stock or debt issued by the Fund. The Fund may issue preferred shares and/or notes or other forms of indebtedness, and it may also borrow funds from banks and other financial institutions. The Fund may also gain leverage synthetically through swaps and other Derivatives. The issuance of preferred shares or use of borrowings to leverage the common shares can create risks, including increased variability of the Fund’s net income, distributions and/or net asset value in relation to market changes. Changes in the value of the Fund’s portfolio, including securities bought with the proceeds of leverage, will be borne entirely by common shareholders. All costs and expenses related to any form of leverage used by the Fund will be borne entirely by common shareholders. Increases and decreases in the value of the Fund’s portfolio will be magnified if the Fund uses leverage. In particular, leverage may magnify interest rate risk, which is the risk that the prices of portfolio securities will fall (or rise) if market interest rates for those types of securities rise (or fall). To the extent that the Fund makes investments in Senior Loans or other debt instruments structured with LIBOR floors, the Fund will not realize additional income if rates increase to levels below the LIBOR floor but the Fund’s cost of financing is expected to increase, resulting in the potential for a decrease in the level of income available for dividends or distributions made by the Fund. During periods when the Fund is using leverage, if any, the fees paid to the Adviser for advisory services will be higher than if the Fund did not use leverage because the fees paid will be calculated on the basis of the Fund’s Managed Assets, which includes the assets purchased through leverage. In such case, the Adviser may have a financial incentive to increase the Fund’s use of leverage, which constitutes an inherent conflict of interest. In addition, the fees paid to the Adviser are borne exclusively by common shareholders. It is expected that preferred shareholders, noteholders and any lenders to the Fund will not bear any expenses of the Fund. The Fund’s leveraging strategy, if utilized, may not be successful.

Preferred Shares and Notes

The Fund may engage in leverage through the issuance of preferred shares and/or notes or other forms of indebtedness. Under the Investment Company Act, the Fund is not permitted to issue preferred shares unless immediately after such issuance the Fund will have an asset coverage of at least 200%. In general, the term “asset coverage” for this purpose means the ratio the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness of the Fund plus the aggregate of the involuntary liquidation preference of the preferred shares. The involuntary liquidation preference refers to the amount to which the preferred shares would be entitled on the involuntary liquidation of the Fund in preference to a security junior to them. In addition, the Fund is not permitted to declare any cash dividend or other distribution on its common shares or purchase its common shares unless, at the time of such declaration or purchase, the Fund satisfies this 200% asset coverage requirement after deducting the amount of the distribution or purchase price, as applicable.

Under the Investment Company Act, the Fund is not permitted to incur indebtedness, including through the issuance of debt securities, unless immediately thereafter the Fund will have an asset coverage of at least 300%. In general, the term “asset coverage” for this purpose means the ratio which the value of the total assets of the Fund, less all liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness of the Fund. In addition, the Fund is not permitted to declare any cash distribution on its capital stock or purchase its capital stock unless, at the time of such declaration or purchase, the Fund has an asset coverage of at least 300% after deducting the amount of such distribution or purchase price, as applicable. The Investment Company Act contains an exception, however, that permits dividends to be declared upon any preferred stock issued by the Fund if the Fund’s indebtedness has an asset coverage of at least 200% at the time of declaration after deducting the amount of the dividend.

 

36


Table of Contents

In addition, as a condition to obtaining financing or, if applicable, ratings on the preferred shares and/or notes or other forms of indebtedness, the terms of any preferred shares and/or notes or other forms of indebtedness issued would be expected to include asset coverage maintenance provisions that would require a reduction of indebtedness or the redemption of the preferred shares and/or notes or other forms of indebtedness in the event of non-compliance by the Fund and might also prohibit dividends and other distributions on the common shares in such circumstances. In order to meet such redemption requirements, the Fund might have to liquidate portfolio securities. These liquidations and redemptions, or reductions in indebtedness, would cause the Fund to incur related transaction costs and could result in capital losses to the Fund. Prohibitions on dividends and other distributions on the common shares could impair the Fund’s ability to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”).

If the Fund has preferred shares outstanding, two of the Fund’s directors will be elected by the holders of preferred shares voting separately as a class. The remaining directors of the Fund will be elected by common shareholders and preferred shareholders voting together as a single class. In the event dividends on the preferred shares are unpaid in an amount equal to two full years’ dividends on such securities, holders of preferred shares would be entitled to elect a majority of the directors of the Fund (subject to any prior rights of debt holders) and continue to be so represented until all dividends in arrears shall have been paid or otherwise provided for.

If the Fund issues preferred shares and/or notes or other forms of indebtedness, it may be subject to certain restrictions imposed by guidelines of one or more ratings agencies that may issue ratings for preferred shares issued by the Fund, or may be subject to loan covenants or other restrictions imposed by its lenders. These guidelines would be expected to impose asset coverage or portfolio composition requirements that would be more stringent than those imposed on the Fund by the Investment Company Act. It is not anticipated that these covenants or guidelines would impede the Adviser from managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies.

Credit Facility

The Fund may negotiate with one or more large commercial banks to arrange a floating rate credit facility (the “Credit Facility”) pursuant to which the Fund would be entitled to borrow funds from time to time in accordance with the terms of the Credit Facility. Any such borrowings, as well as the issuance of notes or other forms of indebtedness, would constitute financial leverage and would be subject to the 300% asset coverage requirements imposed by the Investment Company Act described above with respect to the amount of the borrowings and the Fund’s ability to declare dividends and distributions or purchase its capital stock. The Fund may choose not to enter into a Credit Facility.

The Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Fund expects that a Credit Facility would contain customary covenants that, among other things, likely would limit the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the Investment Company Act. The Fund may be required to pledge some or all of its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Fund expects that any Credit Facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Fund will enter into an agreement for a Credit Facility, or, if it does, that the Fund would receive terms and conditions representative of the foregoing, or that additional material terms will not apply. In addition, if entered into, the Credit Facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred shares or debt securities.

The Fund may borrow money in an amount equal to 5% of its total assets as a temporary measure for extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions that otherwise might require untimely dispositions of Fund securities.

 

37


Table of Contents

Effects of Leverage

The following table is furnished in response to requirements of the SEC. It is designed to illustrate the effect of leverage on the return to a common shareholder, assuming hypothetical annual investment portfolio total returns, net of expenses (comprised of income and changes in the value of securities held in the Fund’s portfolio) of –10%, –5%, 0%, 5% and 10%. Actual returns may be greater or less than those appearing in the table. The table further reflects leverage representing, in the aggregate, 33% of the Fund’s total assets, net of expenses, and the Fund’s currently projected dividend and/or interest rate of 2.31% on its preferred shares and/or notes or other forms of indebtedness. The Fund’s common shares must experience an annual return of 1.14% in order to cover the rate of annual dividend and/or interest payments on preferred shares and/or notes or other forms of indebtedness, if any. As the table shows, the total leverage generally increases the return to common shareholders when portfolio return is positive or greater than the cost of leverage and decreases when the portfolio total return is negative or less than the cost of leverage. These assumed investment portfolio returns are hypothetical figures and are not necessarily indicative of the investment portfolio returns that may be experienced by the Fund.

 

Assumed Portfolio Total Return (Net of Expenses)

     (10 )%      (5 )%      0     5     10

Common Share Total Return

     (16.06 )%      (8.60 )%      (1.14 )%      6.33     13.79

Common share total return is comprised of two elements—the common share dividends paid by the Fund (the amount of which is largely determined by the net investment income of the Fund after paying dividends) and gains or losses on the value of the securities the Fund owns. As required by SEC rules, the table above assumes that the Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, to assume a total return of 0% the Fund must assume that the interest it receives on its investments is entirely offset by losses in the value of those investments.

If the Fund uses leverage, the amount of fees paid to the Adviser for investment advisory services will be higher than if the Fund does not use leverage because the Fees paid are calculated on the Fund’s Managed Assets, which include assets purchased with leverage. Therefore, the Adviser has a financial incentive to use leverage, which creates a conflict of interest between the Adviser and the common shareholders as only the common shareholders would bear the fees and expenses incurred through the Fund’s use of leverage.

 

38


Table of Contents

RISK FACTORS

An investment in the Fund’s common stock may be speculative in that it involves a high degree of risk and should not constitute a complete investment program. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this prospectus. At any point in time, an investment in the Fund’s common shares may be worth less than the original amount invested, even after taking into account the distributions paid, if any, and the ability of shareholders to reinvest dividends. If any of the risks discussed in this prospectus occurs, the Fund’s results of operations could be materially and adversely affected. If this were to happen, the price of Fund common stock could decline significantly and you could lose all or a part of your investment.

General

Investing in the Fund involves certain risks and the Fund may not be able to achieve its intended results for a variety of reasons, including, among others, the possibility that the Fund may not be able to structure its investments as anticipated. Because the value of your investment in the Fund will fluctuate, there is a risk that you will lose money. Your investment will decline in value if, among other things, the value of the Fund’s investments decreases. The value of your shares also will be affected by the Fund’s ability to successfully implement its investment strategy, as well as by market, economic and other conditions. As with any security, complete loss of investment is possible.

Beginning in 2007, the global capital markets were in a period of disruption evidenced by a lack of liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of certain major financial institutions and have remained as such through the date of this prospectus. Despite actions of the United States federal government and foreign governments, these events have contributed to general economic conditions that are materially and adversely impacting the broader financial and credit markets and reducing the availability of debt and equity capital for the market as a whole and financial services firms in particular. These conditions could continue for a prolonged period of time or worsen in the future. While these conditions persist, the capital markets, and, in particular, the market for debt obligations, may be subject to heightened volatility, increased risks of default, periods of illiquidity and other situations adverse to investors.

On July 21, 2010, the President signed into law major financial services reform legislation in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act, among other things, grants regulatory authorities such as the Commodity Futures Trading Commission and SEC broad rulemaking authority to implement various provisions of the Dodd-Frank Act, including comprehensive regulation of the over-the-counter derivatives market. It is unclear how these regulators will exercise these revised and expanded powers and whether they will undertake rulemaking, supervisory or enforcement actions that would adversely affect the Fund or investments made by the Fund. Possible regulatory actions taken under these revised and expanded powers may include actions related to financial consumer protection, proprietary trading and derivatives. There can be no assurance that future regulatory actions authorized by the Dodd-Frank Act will not significantly reduce the profitability of the Fund. The implementation of the Dodd-Frank Act could adversely affect the Fund by increasing transaction and/or regulatory compliance costs. In addition, greater regulatory scrutiny may increase the Fund’s and the Adviser’s exposure to potential liabilities. Increased regulatory oversight can also impose administrative burdens on the Fund and the Adviser, including, without limitation, responding to examinations or investigations and implementing new policies and procedures.

At any time after the date of this prospectus, legislation may be enacted that could negatively affect the assets of the Fund or the issuers of such assets. Changing approaches to regulation may have a negative impact on the entities in which the Fund invests. Legislation or regulation may also change the way in which the Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Fund or will not impair the ability of the Fund to achieve its investment objective.

 

39


Table of Contents

Instability in the credit markets has made it more difficult for a number of issuers of debt securities to obtain financing or refinancing for their investment or lending activities or operations. In particular, because of volatile conditions in the credit markets, issuers of debt securities may be subject to increased cost for debt, tightening underwriting standards and reduced liquidity for loans they make, securities they purchase and securities they issue. Certain Borrowers may, due to macroeconomic conditions, be unable to repay their Senior Loans or other debt obligations because of these conditions. A Borrower’s failure to satisfy financial or operating covenants imposed by lenders could lead to defaults and, potentially, termination of the Senior Loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a Borrower’s ability to meet its obligations under its debt securities. The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting Borrower. The Fund may also experience a loss of principal.

These developments also (i) may make it more difficult for the Fund to accurately value its securities or to sell its securities on a timely basis; (ii) could adversely affect the ability of the Fund to use leverage for investment purposes and increase the cost of such leverage, which would reduce returns to the common shareholders; and (iii) may adversely affect the broader economy, which in turn may adversely affect the ability of issuers of securities owned by the Fund to make payments of principal and interest when due, lead to lower credit ratings of the issuer and increased defaults by the issuer. Such developments could, in turn, reduce the value of securities owned by the Fund and adversely affect the net asset value and market price of the Fund’s common shares.

Principal Risks Relating to Fund Investments

Investment and Market Risk

An investment in the Fund’s common shares is subject to investment risk, including the possible loss of the entire principal amount invested. An investment in the Fund’s common shares represents an indirect investment in the portfolio of Senior Loans and other securities owned by the Fund, and the value of these securities may fluctuate, sometimes rapidly and unpredictably. At any point in time, an investment in the Fund’s common shares may be worth less than the original amount invested, even after taking into account distributions paid by the Fund, if any, and the ability of shareholders to reinvest dividends. The Fund anticipates using leverage, which will magnify the Fund’s risks.

Senior Loans Risk

Senior Loans are usually rated below investment grade or may also be unrated. As a result, the risks associated with Senior Loans are similar to the risks of below investment grade fixed income instruments, although Senior Loans are senior and secured in contrast to other below investment grade fixed income instruments, which are often subordinated or unsecured. Investment in Senior Loans rated below investment grade is considered speculative because of the credit risk of their issuers. Such issuers are more likely than investment grade issuers to default on their payments of interest and principal owed to the Fund, and such defaults could reduce the Fund’s net asset value and income distributions. An economic downturn would generally lead to a higher non-payment rate, and a Senior Loan may lose significant market value before a default occurs. Moreover, any specific collateral used to secure a Senior Loan may decline in value or become illiquid, which would adversely affect the Senior Loan’s value. Senior Loans are subject to a number of risks described elsewhere in this prospectus, including liquidity risk and the risk of investing in below investment grade fixed income instruments.

Senior Loans are subject to the risk of non-payment of scheduled interest or principal. Such non-payment would result in a reduction of income to the Fund, a reduction in the value of the investment and a potential decrease in the net asset value of the Fund. There can be no assurance that the liquidation of any collateral securing a Senior Loan would satisfy the Borrower’s obligation in the event of non-payment of scheduled interest or principal payments, or that the collateral could be readily liquidated. In the event of bankruptcy or insolvency of a Borrower, the Fund could experience delays or limitations with respect to its ability to realize the benefits of

 

40


Table of Contents

the collateral securing a Senior Loan. The collateral securing a Senior Loan may lose all or substantially all of its value in the event of the bankruptcy or insolvency of a Borrower. Some Senior Loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws, could subordinate such Senior Loans to presently existing or future indebtedness of the Borrower or take other action detrimental to the holders of Senior Loans including, in certain circumstances, invalidating such Senior Loans or causing interest previously paid to be refunded to the Borrower.

There may be less readily available and reliable information about most Senior Loans than is the case for many other types of securities, including securities issued in transactions registered under the Securities Act, or registered under the Exchange Act. As a result, the Adviser will rely primarily on its own evaluation of a Borrower’s credit quality rather than on any available independent sources. Therefore, the Fund will be particularly dependent on the analytical abilities of the Adviser.

In general, the secondary trading market for Senior Loans is not well developed. No active trading market may exist for certain Senior Loans, which may make it difficult to value them. Illiquidity and adverse market conditions may mean that the Fund may not be able to sell Senior Loans quickly or at a fair price. To the extent that a secondary market does exist for certain Senior Loans, the market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods.

Senior Loans and other variable rate debt instruments are subject to the risk of payment defaults of scheduled interest or principal. Such payment defaults would result in a reduction of income to the Fund, a reduction in the value of the investment and a potential decrease in the net asset value of the Fund. Similarly, a sudden and significant increase in market interest rates may increase the risk for payment defaults and cause a decline in the value of these investments and in the Fund’s net asset value. Other factors (including, but not limited to, rating downgrades, credit deterioration, a large downward movement in stock prices, a disparity in supply and demand of certain securities or market conditions that reduce liquidity) can reduce the value of Senior Loans and other debt obligations, impairing the Fund’s net asset value.

Senior Loans are subject to legislative risk. If legislation or state or federal regulations impose additional requirements or restrictions on the ability of financial institutions to make loans, the availability of Senior Loans for investment by the Fund may be adversely affected. In addition, such requirements or restrictions could reduce or eliminate sources of financing for certain Borrowers. This would increase the risk of default. If legislation or federal or state regulations require financial institutions to increase their capital requirements this may cause financial institutions to dispose of Senior Loans that are considered highly levered transactions. Such sales could result in prices that, in the opinion of the Adviser, do not represent fair value. If the Fund attempts to sell a Senior Loan at a time when a financial institution is engaging in such a sale, the price the Fund could receive for the Senior Loan may be adversely affected.

The Fund may acquire Senior Loans through assignments or participations. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchaser’s rights can be more restricted than those of the assigning institution, and the Fund may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. In general, a participation is a contractual relationship only with the institution participating out the interest, not with the Borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In purchasing participations, the Fund generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement against the Borrower, and the Fund may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the Fund will be exposed to the credit risk of both the Borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, the Fund will not be able to conduct the due diligence on the Borrower or the quality of the Senior Loan with respect to which it is buying a participation that the Fund would otherwise conduct if it were investing directly in the Senior Loan, which may result in the Fund being exposed to greater credit or fraud risk with respect to the Borrower or the Senior Loan.

 

41


Table of Contents

Subordinated Loans Risk

Subordinated Loans generally are subject to similar risks as those associated with investments in Senior Loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. In the event of default on a Subordinated Loan, the first priority lien holder has first claim to the underlying collateral of the loan. Subordinated Loans are subject to the additional risk that the cash flow of the Borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior unsecured or senior secured obligations of the Borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Subordinated Loans generally have greater price volatility than Senior Loans and may be less liquid.

Below Investment Grade Securities Risk

The Fund anticipates that it will invest the majority of its assets in Senior Loans, Subordinated Loans and other debt instruments that are rated below investment grade. Non-investment grade fixed income or convertible securities, often referred to as “junk bonds,” “leveraged loans” or “high yield” securities, are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that the Adviser believes are of comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt securities and similar debt instruments may be subject to greater risks than securities or instruments that have higher credit ratings, including a high risk of default. The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities and similar instruments often are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities. Lower grade securities and similar debt instruments may be particularly susceptible to economic downturns. It is likely that a prolonged or deepening economic recession could adversely affect the ability of Borrowers issuing such securities and similar debt instruments to repay principal and pay interest on the instrument, increase the incidence of default and severely disrupt the market value of the securities and similar debt instruments.

New Adviser Risk

The Adviser is a newly organized entity with no operating history. The Adviser’s sole assets under management initially will be the assets raised in connection with the initial public offering of the Fund’s common stock.

Credit Risk

Credit risk is the risk that one or more debt securities in the Fund’s portfolio will decline in price or fail to pay interest or principal when due because the issuer of the security experiences a decline in its financial status. While a senior position in the capital structure of a Borrower may provide some protection with respect to the Fund’s investments in Senior Loans, losses may still occur because the market value of Senior Loans is affected by the creditworthiness of Borrowers and by general economic and specific industry conditions. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund that invests in investment grade securities. The prices of lower grade securities are more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. In addition, the Fund may use credit Derivatives that may expose it to additional risk in the event that the securities underlying the Derivatives default.

Prepayment Risk

During periods of declining interest rates, Borrowers may exercise their option to prepay principal earlier than scheduled. For fixed rate securities, such payments often occur during periods of declining interest rates, which may require the Fund to reinvest in lower yielding securities, resulting in a possible decline in the Fund’s

 

42


Table of Contents

income and distributions to shareholders. This is known as prepayment or “call” risk. Below investment grade securities frequently have call features that allow the issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“Call Protection”). An issuer may redeem a below investment grade security if, for example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. Subordinated Loans typically do not have Call Protection. For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced.

Senior Loans are subject to prepayment risk and typically do not have Call Protection. The degree to which Borrowers prepay Senior Loans, whether as a contractual requirement or at their election, may be affected by general business conditions, the financial condition of the Borrower and competitive conditions among Senior Loan investors, among others. For these reasons, prepayments cannot be predicted with accuracy. Upon a prepayment, either in part or in full, the outstanding debt on which the Fund derives interest income will be reduced. The Fund may not be able to reinvest the proceeds received on terms as favorable as the prepaid loan.

Interest Rate Risk

Because Senior Loans with floating or variable rates reset their interest rates periodically, changes in prevailing interest rates can be expected to cause some fluctuations in the Fund’s net asset value. Similarly, a sudden and significant increase in market interest rates (which are currently considered low by historic standards) may cause a decline in the Fund’s net asset value. In addition, Senior Loans or similar securities may allow the Borrower to opt between LIBOR-based interest rates and interest rates based on bank prime rates, which may have an effect on the Fund’s net asset value.

Liquidity Risk

The Fund generally considers “illiquid securities” to be securities that cannot be sold within seven days in the ordinary course of business at approximately the value used by the Fund in determining its net asset value. The Fund may not be able to readily dispose of such securities at prices that approximate those at which the Fund could sell the securities if they were more widely-traded and, as a result of that illiquidity, the Fund may have to sell other investments or engage in borrowing transactions if necessary to raise cash to meet its obligations. Limited liquidity can also affect the market price of securities, thereby adversely affecting the Fund’s net asset value and ability to make dividend distributions.

Some Senior Loans are not readily marketable and may be subject to restrictions on resale. Senior Loans generally are not listed on any national securities exchange and no active trading market may exist for the Senior Loans in which the Fund may invest. When a secondary market exists, if at all, the market for some Senior Loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. The Fund has no limitation on the amount of its assets that may be invested in securities that are not readily marketable or are subject to restrictions on resale.

Distressed and Defaulted Securities Risk

The Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or at risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund. Investment in these Distressed Securities is speculative and involves significant risks.

The Fund may make such investments when the Adviser believes it is reasonably likely that the issuer of the Distressed Securities will make an exchange offer or will be the subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed Securities. There can be no assurance, however, that such an exchange offer will be made or that such a plan of reorganization will be adopted. In

 

43


Table of Contents

addition, a significant period of time may pass between the time at which the Fund makes its investment in Distressed Securities and the time that any such exchange offer or plan of reorganization is completed, if at all. During this period, it is unlikely that the Fund would receive any interest payments on the Distressed Securities, the Fund would be subject to significant uncertainty whether the exchange offer or plan of reorganization will be completed and the Fund may be required to bear certain extraordinary expenses to protect and recover its investment. Therefore, to the extent the Fund seeks capital appreciation through investment in Distressed Securities, the Fund’s ability to achieve current income for its shareholders may be diminished. The Fund also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the Distressed Securities will eventually be satisfied ( e.g. , through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the Distressed Securities or a payment of some amount in satisfaction of the obligation). Even if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by the Fund, there can be no assurance that the securities or other assets received by the Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made or no value. Moreover, any securities received by the Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale. Similarly, if the Fund participates in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be restricted from disposing of such securities. To the extent that the Fund becomes involved in such proceedings, the Fund may have a more active participation in the affairs of the issuer than that assumed generally by an investor.

Structured Products Risk

The Fund may invest in structured products, including, without limitation, CLOs, structured notes and credit-linked notes. Holders of structured products bear risks of the underlying investments, index or reference obligation and are subject to counterparty risk.

The Fund may have the right to receive payments only from the structured product, and generally does not have direct rights against the issuer or the entity that sold the assets to be securitized. While certain structured products enable the investor to acquire interests in a pool of securities without the brokerage and other expenses associated with directly holding the same securities, investors in structured products generally pay their share of the structured product’s administrative and other expenses. Although it is difficult to predict whether the prices of indices and securities underlying structured products will rise or fall, these prices (and, therefore, the prices of structured products) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. If the issuer of a structured product uses shorter term financing to purchase longer term securities, the issuer may be forced to sell its securities at below market prices if it experiences difficulty in obtaining short-term financing, which may adversely affect the value of the structured products owned by the Fund.

Certain structured products may be thinly traded or have a limited trading market. CLOs are typically privately offered and sold. As a result, investments in CLOs may be characterized by the Fund as illiquid securities. In addition to the general risks associated with debt securities discussed above, CLOs carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the possibility that the investments in CLOs are subordinate to other classes or tranches of the CLOs; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

Investments in structured notes involve risks, including credit risk and market risk. When the Fund’s investments in structured notes are based upon the movement of one or more factors, including currency exchange rates, interest rates, referenced bonds and stock indices, depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of the factor may cause significant price fluctuations. Additionally, changes in the reference instrument or security may cause the interest rate on the

 

44


Table of Contents

structured note to be reduced to zero, and any further changes in the reference instrument may then reduce the principal amount payable on maturity. Structured notes may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the note.

Inflation/Deflation Risk

Inflation risk is the risk that the value of certain assets or income from the Fund’s investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of investments and distributions can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund’s use of leverage would likely increase, which would tend to further reduce returns to shareholders. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the value of the Fund’s portfolio.

Derivatives Risks

Swap Agreements . The Fund may enter into swap agreements, including interest rate and index swap agreements, for hedging purposes, as a form of leverage or to seek to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded the desired return. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. Whether the Fund’s use of swap agreements will be successful in furthering its investment objective will depend on the Adviser’s ability to correctly predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, some swap agreements may be considered by the Fund to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Fund may seek to reduce this risk to some extent by entering into a transaction only if the counterparty meets the Adviser’s current credit standards for over-the-counter (“OTC”) option counterparties. Swap agreements also bear the risk that the Fund will not be able to meet its payment obligations to the counterparty. Generally, the Fund will deposit in a segregated account liquid assets permitted to be so segregated by the SEC in an amount equal to or greater than the market value of the Fund’s liabilities under the swap agreement or the amount it would cost the Fund initially to make an equivalent direct investment plus or minus any amount the Fund is obligated to pay or is to receive under the swap agreement. Restrictions imposed by the tax rules applicable to regulated investment companies may limit the Fund’s ability to use swap agreements. The swap market currently is largely unregulated. It is possible that developments in the swap market, including potential significant government regulation, could adversely affect the Fund’s ability to enter into or terminate swap agreements or to realize amounts to be received under these agreements. Swap transactions may involve substantial leverage.

The Fund may enter into credit default swap agreements and similar agreements, and may also buy credit-linked securities. Credit default swaps are often structured with significant leverage and may be considered speculative. The credit default swap agreement or similar instrument may have as reference obligations one or more securities that are not currently held by the Fund. The protection “buyer” in a credit default contract may be obligated to pay the protection “seller” an up front payment or a periodic stream of payments over the term of the contract provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, the Fund generally receives an up front payment or a fixed rate of income

 

45


Table of Contents

throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value.

Swaptions . The Fund, to the extent permitted under applicable law, may enter into “swaptions,” which are options on swap agreements on either an asset-based or liability-based basis. A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Fund may write (sell) and purchase put and call swaptions. Depending on the terms of the particular option agreement, the Fund generally will incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When the Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. When the Fund writes a swaption, upon exercise of the option, the Fund will become obligated according to the terms of the underlying agreement.

Credit-Linked Securities . Among the income producing securities in which the Fund may invest are credit-linked securities, which are issued by a limited purpose trust or other vehicle that, in turn, invests in a Derivative instrument or basket of Derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed income markets. For instance, the Fund may invest in credit-linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when more traditional income producing securities are not available.

Like an investment in a bond, investments in these credit-linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the issuer’s receipt of payments from, and the issuer’s potential obligations to, the counterparties to the Derivative instruments and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that the Fund would receive. The Fund’s investments in these instruments are indirectly subject to the risks associated with Derivative instruments, including, among others, credit risk and leverage risk. There may be no established trading market for these securities and they may constitute illiquid investments.

General Risks Associated with Derivatives . The Fund may use Derivatives including, in particular, swaps, synthetic collateralized loan obligations, reverse repurchase agreements and other similar transactions, in seeking to achieve its investment objective or for other reasons, such as cash management, financing activities or to hedge its positions. Accordingly, Derivatives may be used as a form of leverage or for speculative purposes to seek to enhance returns, including speculation on changes in credit spreads, interest rates or other characteristics of the market, individual securities or groups of securities. If the Fund invests in a Derivative for speculative purposes, the Fund will be fully exposed to the risks of loss of that Derivative, which may sometimes be greater than the Derivative’s cost. The use of Derivatives may involve substantial leverage. The use of Derivatives may subject the Fund to the following risks, including but not limited to:

 

   

Credit Risk — the risk that the counterparty in a Derivative transaction will be unable to honor its financial obligation to the Fund, 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 recently experienced significant financial hardship and deteriorating credit conditions. If the Fund’s 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 be substantially increased.

 

46


Table of Contents
   

Currency Risk — the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.

 

   

Leverage Risk — the risk associated with certain types of Derivative strategies that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading strategies that involve leverage can result in losses that greatly exceed the amount originally invested.

 

   

Liquidity Risk — the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is currently worth. This risk is heightened to the extent the Fund engages in OTC Derivative transactions.

 

   

Correlation Risk — the risk that changes in the value of a Derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Fund seeks exposure.

 

   

Index Risk — if the Derivative is linked to the performance of an index, it will be subject to the risks associated with changes in that index. If the index changes, the Fund could receive lower interest payments or experience a reduction in the value of the Derivative to below what the Fund paid. Certain indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.

Other Risks Relating to Fund Investments

Investments in Equity Securities Incidental to Investments in Senior Loans

From time to time, the Fund also may invest in or hold common stock and other equity securities incidental to the purchase or ownership of a Senior Loan or in connection with a reorganization of a Borrower. Investments in equity securities incidental to investments in Senior Loans entail certain risks in addition to those associated with investments in Senior Loans. Because equity is merely the residual value of an issuer after all claims and other interests, it is inherently more risky than the bonds or Senior Loans of the same Borrower. The value of the equity securities may be affected more rapidly, and to a greater extent, by company-specific developments and general market conditions. These risks may increase fluctuations in the Fund’s net asset value. The Fund frequently may possess material non-public information about a Borrower as a result of its ownership of a Senior Loan of a Borrower. Because of prohibitions on trading in securities while in possession of material non-public information, the Fund might be unable to enter into a transaction in a security of the Borrower when it would otherwise be advantageous to do so.

Lender Liability Risk

A number of U.S. judicial decisions have upheld judgments of borrowers against lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or contractual) of good faith, commercial reasonableness and fair dealing, or a similar duty owed to the Borrower or has assumed an excessive degree of control over the Borrower resulting in the creation of a fiduciary duty owed to the Borrower or its other creditors or shareholders. Because of the nature of its investments, the Fund may be subject to allegations of lender liability.

In addition, under common law principles that in some cases form the basis for lender liability claims, if a lender or bondholder (i) intentionally takes an action that results in the undercapitalization of a Borrower to the detriment of other creditors of such Borrower; (ii) engages in inequitable conduct to the detriment of the other creditors; (iii) engages in fraud with respect to, or makes misrepresentations to, the other creditors; or (iv) uses its influence as a stockholder to dominate or control a Borrower to the detriment of other creditors of the Borrower, a court may elect to subordinate the claim of the offending lender or bondholder to the claims of the disadvantaged creditor or creditors, a remedy called “equitable subordination.”

 

47


Table of Contents

Because affiliates of, or persons related to, the Adviser may hold equity or other interests in obligors of the Fund, the Fund could be exposed to claims for equitable subordination or lender liability or both based on such equity or other holdings.

Non-U.S. Securities Risk

The Fund may invest in securities, including Senior Loans and Subordinated Loans, of non-U.S. issuers or Borrowers. These investments involve certain risks not involved in domestic investments and may experience more rapid and extreme changes in value than investments in securities of U.S. companies. Securities markets in foreign countries often are not as developed, efficient or liquid as securities markets in the United States, and therefore, the prices of non-U.S. securities can be more volatile. Certain foreign countries may impose restrictions on the ability of issuers of non-U.S. securities to make payments of principal and interest to investors located outside the country, whether from currency blockage or otherwise. In addition, the Fund will be subject to risks associated with adverse political and economic developments in foreign countries, including seizure or nationalization of foreign deposits, different legal systems and laws relating to creditors’ rights and the potential inability to enforce legal judgments, all of which could cause the Fund to lose money on its investments in non-U.S. securities. Generally, there is less readily available and reliable information about non-U.S. issuers or Borrowers due to less rigorous disclosure or accounting standards and regulatory practices. The ability of a foreign sovereign issuer to make timely payments on its debt obligations will also be strongly influenced by the sovereign issuer’s balance of payments, including export performance, its access to international credit facilities and investments, fluctuations of interest rates and the extent of its foreign reserves. The cost of servicing external debt generally will also be adversely affected by rising international interest rates, as many external debt obligations bear interest at rates that are adjusted based upon international interest rates. Because non-U.S. securities may trade on days when the Fund’s common shares are not traded on the NYSE, the market value or net asset value of the Fund’s shares can change at times when common shares cannot be sold.

Foreign Currency Risk

Because the Fund may invest in securities denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency exchange rates may affect the value of securities in the Fund and the unrealized appreciation or depreciation of investments. Currencies of certain countries may be volatile and therefore may affect the value of securities denominated in such currencies, which means that the Fund’s net asset value could decline as a result of changes in the exchange rates between foreign currencies and the U.S. dollar. The Adviser may, but is not required to, elect for the Fund to seek to protect itself from changes in currency exchange rates through hedging transactions depending on market conditions. The Fund may incur costs in connection with the conversions between various currencies. In addition, certain countries may impose foreign currency exchange controls or other restrictions on the repatriation, transferability or convertibility of currency.

Repurchase Agreements and Reverse Repurchase Agreements Risk

Subject to its investment objective and policies, the Fund may invest in repurchase agreements. Repurchase agreements are transactions in which the Fund purchases securities or other obligations from a bank or securities dealer (or its affiliate) and simultaneously commits to resell them to the counterparty at an agreed-upon date or upon demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased obligations. The Fund maintains custody of the underlying obligations prior to their repurchase, either through its regular custodian or through a special “triparty” custodian or sub-custodian that maintains separate accounts for both the Fund and its counterparty. The obligation of the counterparty to pay the repurchase price on the date agreed to or upon demand is, in effect, secured by such obligations.

Repurchase agreements carry certain risks not associated with direct investments in securities, including a possible decline in the market value of the underlying obligations. If their value becomes less than the repurchase price, plus any agreed-upon additional amount, the counterparty must provide additional collateral so that at all

 

48


Table of Contents

times the collateral is at least equal to the repurchase price plus any agreed-upon additional amount. The difference between the total amount to be received upon repurchase of the obligations and the price that was paid by the Fund upon acquisition is accrued as interest and included in its net investment income. Repurchase agreements involving obligations other than U.S. Government securities (such as commercial paper and corporate bonds) may be subject to special risks and may not have the benefit of certain protections in the event of the counterparty’s insolvency. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and losses, including (1) possible decline in the value of the underlying security during the period in which the Fund seeks to enforce its rights thereto; (2) possible lack of access to income on the underlying security during this period; and (3) expenses of enforcing its rights.

Reverse repurchase agreements involve the sale of securities held by the Fund subject to the Fund’s agreement to repurchase the securities at an agreed-upon date or upon demand and at a price reflecting a market rate of interest. Reverse repurchase agreements may be subject to the Fund’s limitation on borrowings and may be entered into only with banks or securities dealers or their affiliates.

Reverse repurchase agreements involve the risk that the buyer of the securities sold by the Fund might be unable to deliver them when the Fund seeks to repurchase. In the event that the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer, trustee or receiver may receive an extension of time to determine whether to enforce the Fund’s obligation to repurchase the securities, and the Fund’s use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such decision.

U.S. Government Debt Securities Risk

U.S. Government debt securities generally do not involve the credit risks associated with investments in other types of debt securities, although, as a result, the yields available from U.S. Government debt securities are generally lower than the yields available from other securities. Like other debt securities, however, 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 the Fund’s net asset value. Because the magnitude of these fluctuations will generally be greater at times when the Fund’s average maturity is longer, under certain market conditions the Fund may, for temporary defensive purposes, accept lower current income from short-term investments rather than investing in higher yielding long-term securities.

Government Intervention in the Financial Markets

The recent instability in the financial markets has led the U.S. Government to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity. Federal, state, and other governments, their regulatory agencies or self regulatory organizations may take additional actions that affect the regulation of the securities or structured products in which the Fund invests, or the issuers of such securities or structured products, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude the Fund’s ability to achieve its investment objective. The Adviser will monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objective, but there can be no assurance that it will be successful in doing so. Governments or their agencies may also acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such a program may have positive or negative effects on the liquidity, valuation and performance of the Fund’s portfolio holdings. Furthermore, volatile financial markets can expose the Fund to greater market and liquidity risk and potential difficulty in valuing portfolio instruments held by the Fund. The Adviser will monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objective, but there can be no assurance that it will be successful in doing so.

 

49


Table of Contents

Market Disruption and Geopolitical Risk

The aftermath of the war in Iraq, instability in Afghanistan, Pakistan and the Middle East and terrorist attacks in the United States and around the world may result in market volatility, may have long-term effects on the United States and worldwide financial markets and may cause further economic uncertainties in the United States and worldwide. The Fund does not know how long the securities markets may be affected by these events and cannot predict the effects of these events or similar events in the future on the U.S. economy and securities markets. These events could impact interest rates, secondary trading, ratings, credit risk, inflation and other factors relating to an investment in the Fund’s common stock. High yield securities tend to be more volatile than investment grade fixed income securities and, as a result, these events and other market disruptions may have a greater impact on the prices and volatility of high yield securities than on investment grade fixed income securities. There can be no assurance that such market disruptions may not have other material and adverse implications for the high yield securities markets.

Principal Risks Relating to Fund Operations

Leverage Risk

The Fund intends to utilize leverage and may utilize leverage to the maximum extent permitted by law for investment and other general corporate purposes. The Fund may obtain leverage by issuing preferred shares and/or notes and it may also borrow funds from banks and other financial institutions. The Fund may also gain leverage synthetically through swaps and other Derivatives. The use of leverage to purchase additional securities creates an opportunity for increased common share dividends, but also creates risks for common shareholders, including increased variability of the Fund’s net income, distributions and/or net asset value in relation to market changes. Leverage is a speculative technique that exposes the Fund to greater risk and increased costs than if it were not implemented. Increases and decreases in the value of the Fund’s portfolio will be magnified if the Fund uses leverage. In particular, leverage may magnify interest rate risk, which is the risk that the prices of portfolio securities will fall (or rise) if market interest rates for those types of securities rise (or fall). As a result, leverage may cause greater changes in the Fund’s net asset value, which will be borne entirely by the Fund’s common shareholders. To the extent that the Fund makes investments in Senior Loans or other debt instruments structured with LIBOR floors, the Fund will not realize additional income if rates increase to levels below the LIBOR floor but the Fund’s cost of financing is expected to increase, resulting in the potential for a decrease in the level of income available for dividends or distributions made by the Fund. If the Fund issues preferred shares and/or notes or engages in other borrowings, it will have to pay dividends on its preferred shares or interest on its notes or borrowings, which will increase expenses (which will be borne entirely by common shareholders) and may reduce the Fund’s return. These dividend payments or interest expenses may be greater than the Fund’s return on the underlying investments. The Fund’s leveraging strategy, if utilized, may not be successful.

The Fund may issue preferred shares and/or notes or other forms of indebtedness as a form of leverage. These means of obtaining leverage would be senior to the Fund’s common shares, such that holders of preferred shares and/or notes or other Fund indebtedness would have priority over the common shareholders in the distribution of the Fund’s assets, including dividends, distributions of principal and liquidating distributions. If preferred shares are issued and outstanding, holders of the preferred shares would elect two directors of the Fund, and would vote separately as a class on certain matters which may at times give holders of preferred shares disproportionate influence over the Fund’s affairs. If the preferred shares were limited in their term, redemptions of such preferred shares would require the Fund to liquidate its investments and would reduce the Fund’s use of leverage, which could negatively impact common shareholders. In addition, if the Fund elects to issue preferred stock and/or notes or other forms of indebtedness its ability to make distributions to its common shareholders or to repurchase its stock will be limited by the asset coverage requirements and other limitations imposed by the Investment Company Act and the Fund’s lenders.

The Fund will pay (and common shareholders will bear) all costs and expenses relating to the issuance and ongoing maintenance of any preferred shares and/or notes or other forms of indebtedness issued by the Fund,

 

50


Table of Contents

including higher advisory fees. As a result, the Fund cannot assure you that the issuance of preferred shares and/or notes or other forms of indebtedness will provide a higher yield or return to the holders of the common shares. If the Fund offers and/or issues preferred shares and/or notes or other forms of indebtedness, the costs of the offering will be borne immediately by the Fund’s common shareholders and result in a reduction of the net asset value of the common shares.

The Fund anticipates that any money borrowed from a bank or other financial institution for investment purposes will accrue interest based on shorter-term interest rates that would be periodically reset. So long as the Fund’s portfolio provides a higher rate of return, net of expenses, than the interest rate on borrowed money, as reset periodically, the leverage may cause common shareholders to receive a higher current rate of return than if the Fund were not leveraged. If, however, long-term and/or short-term rates rise, the interest rate on borrowed money could exceed the rate of return on securities held by the Fund, reducing returns to common shareholders. Developments in the credit markets may adversely affect the ability of the Fund to borrow for investment purposes and may increase the costs of such borrowings, which would reduce returns to common shareholders.

There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for common shareholders, including:

 

   

the likelihood of greater volatility of net asset value, market price and dividend rate of common shares than a comparable portfolio without leverage;

 

   

the risk that fluctuations in interest rates on borrowings and short-term debt or in dividend payments on, principal proceeds distributed to, or redemption of any preferred shares and/or notes or other forms of indebtedness that the Fund has issued will reduce the return to the common shareholders;

 

   

the effect of leverage in a declining market, which is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares;

 

   

when the Fund uses financial leverage, the investment advisory fees payable to the Adviser will be higher than if the Fund did not use leverage, and may provide a financial incentive to the Adviser to increase the Fund’s use of leverage and create an inherent conflict of interest; and

 

   

leverage may increase expenses (which will be borne entirely by common shareholders), which may reduce total return.

If the Fund issues preferred stock and/or notes or other forms of indebtedness, the Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which may issue ratings for the preferred shares and/or notes or short-term debt securities issued by the Fund, or may be subject to loan covenants or other restrictions imposed by its lenders. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the Investment Company Act. Certain types of borrowings by the Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage and portfolio composition requirements. These covenants and restrictions may negatively affect the Fund’s ability to achieve its investment objective.

Key Personnel

The Adviser depends on the diligence, skill and network of business contacts of its senior management. For a description of the senior management team, see “The Portfolio Managers.” The Adviser will also depend, to a significant extent, on its access to the investment professionals and partners of its affiliates and the information and deal flow generated by the investment professionals of its affiliates in the course of their investment and portfolio management activities. The senior management of the Adviser will, among other things, evaluate, negotiate, structure and monitor Fund investments. The Fund’s future success will depend on the continued

 

51


Table of Contents

service of the senior management team of the Adviser. As with any managed fund, the Adviser may not be successful in selecting the best-performing securities or investment techniques for the Fund’s portfolio and the Fund’s performance may lag behind that of similar funds. The Adviser has informed the Fund that the investment professionals associated with the Adviser are actively involved in other investment activities not concerning the Fund and will not be able to devote all of their time to the Fund’s business and affairs. The departure of any of the senior managers of the Adviser, or of a significant number of the investment professionals or partners of the Adviser’s affiliates, could have a material adverse effect on the Fund’s ability to achieve its investment objective. Individuals not currently associated with the Adviser may become associated with the Fund and the performance of the Fund may also depend on the experience and expertise of such individuals. In addition, there is no assurance that the Adviser will remain the Fund’s investment adviser or that the Adviser will continue to have access to the investment professionals and partners of its affiliates and the information and deal flow generated by the investment professionals of its affiliates.

Potential Conflicts of Interest Risk-Allocation of Personnel

The Fund’s executive officers and directors, and the employees of the Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Fund or of investment funds or accounts managed by the Adviser or its affiliates. As a result, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of the Fund or its shareholders. Additionally, certain personnel of the Adviser and its management may face conflicts in their time management and commitments.

Potential Conflicts of Interest Risk-Allocation of Investment Opportunities

The Adviser and its affiliates (“Apollo”) have adopted allocation procedures that are intended to ensure that each fund or account managed by Apollo (“Apollo-advised funds) is treated in a manner that, over time, is fair and equitable. These allocation procedures have been developed taking into account the fact that (i) the Apollo-advised funds tend to have broad investment mandates, but each Apollo-advised fund has one or more primary investment mandates, and (ii) the Apollo-advised funds may have overlapping primary investment mandates. In operating under these procedures, Apollo generally allocates investment opportunities first to the Apollo-advised funds whose primary investment mandates are consistent with the investment being allocated. When more than one Apollo-advised fund has a primary investment mandate that is consistent with an investment being allocated, the allocation generally is made on a pro rata basis. As a result, in situations where a security is appropriate for the Fund but is limited in availability, the Fund may receive a lower allocation than may be desired by its portfolio managers or no allocation if Apollo believes the investment is more appropriate for a different Apollo-advised fund because of its investment mandate. Investment opportunities may be allocated on a basis other than pro rata to the extent it is done in good faith and does not, or is not reasonably expected to, result in an improper disadvantage or advantage to one participating Apollo-advised fund as compared to another participating Apollo-advised fund.

In the event investment opportunities are allocated among the Fund and the other Apollo-advised funds, the Fund may not be able to structure its investment portfolio in the manner desired. Although Apollo endeavors to allocate investment opportunities in a fair and equitable manner, it is possible that the Fund may not be given the opportunity to participate in certain investments made by the other Apollo-advised funds or portfolio managers affiliated with the Adviser. Furthermore, the Fund and the other Apollo-advised funds may make investments in securities where the prevailing trading activity may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold by the Fund and the other Apollo-advised funds. When this occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the Fund may not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.

 

52


Table of Contents

It is possible that the other Apollo-advised funds may make investments in the same or similar securities at different times and on different terms than the Fund. From time to time, the Fund and the other Apollo-advised funds may make investments at different levels of an issuer’s capital structure or otherwise in different classes of an issuer’s securities. Such investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by such entities. Conflicts may also arise because portfolio decisions regarding the Fund may benefit the other Apollo-advised funds. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) one or more Apollo-advised funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) one or more Apollo-advised funds.

The Adviser, its affiliates and their clients may pursue or enforce rights with respect to an issuer in which the Fund has invested, and those activities may have an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Fund’s investments may be negatively impacted by the activities of the Adviser and its affiliates or their clients, and transactions for the Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.

The Adviser is paid a fee based on a percentage of the Fund’s Managed Assets. The Adviser may have a conflict of interest in deciding whether to cause the Fund to incur leverage or to invest in more speculative investments or financial instruments, thereby potentially increasing the assets of the Fund and, accordingly, the fees received by the Adviser. Certain other Apollo-advised funds pay the Adviser or its affiliates performance-based compensation, which could create an incentive for the Adviser or affiliate to favor such investment fund or account over the Fund.

Potential Conflicts of Interest Risk-Lack of Information Barriers

There are no information barriers among the Adviser and certain of its affiliates. If the Adviser or its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, the Fund may be prevented from investing or liquidating an investment in such company. This risk may affect the Fund more than it does other investment vehicles, as the Adviser generally does not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. The Adviser’s decision not to implement these barriers could prevent its investment professionals from undertaking certain transactions such as advantageous investments or dispositions that would be permissible for them otherwise. In addition, the Adviser could in the future decide to establish information barriers, particularly as its business expands and diversifies. See “Conflicts of Interest” for an additional discussion of the types of conflicts of interest to which the operations of the Fund may be subject.

Non-Diversification Risk

The Fund is classified as “non-diversified” under the Investment Company Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence. The Fund intends to qualify for the special tax treatment available to “regulated investment companies” under Subchapter M of the Code, and thus intends to satisfy the diversification requirements of Subchapter M, including its less stringent diversification requirements that apply to the percentage of the Fund’s total assets that are represented by cash and cash items (including receivables), U.S. Government securities, the securities of other regulated investment companies and certain other securities.

Risks Associated with Fund Distribution Policy

The Fund intends to make regular distributions. Currently, in order to maintain a relatively stable level of distributions, the Fund may pay out less than all of its net investment income, pay out undistributed income from

 

53


Table of Contents

prior months, return capital in addition to current period net investment income or borrow money to Fund distributions. The distributions for any full or partial calendar year might not be made in equal amounts, and one distribution may be larger than the other. The Fund will make a distribution only if authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available for these distributions. This distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital, which would reduce the Fund’s net asset value and, over time, potentially increase the Fund’s expense ratio. If the Fund distributes a return of capital, it means that the Fund is returning to shareholders a portion of their investment rather than making a distribution that is funded from the Fund’s earned income or other profits. The Fund’s distribution policy may be changed at any time by the Board of Directors.

If the Fund elects to issue preferred stock and/or notes or other forms of indebtedness, its ability to make distributions to its common shareholders will be limited by the asset coverage requirements and other limitations imposed by the Investment Company Act and the Fund’s lenders.

No Operating History

The Fund is a recently formed entity and has no previous operating or trading history upon which a potential investor can evaluate the Fund’s performance. Special risks apply during a fund’s start-up period, including the risk of failing to achieve the desired portfolio composition within the time period expected and the risk of commencing operations under inopportune market conditions. The Fund’s shares have no history of public trading.

Inadequate Return

No assurance can be given that the returns on the Fund’s investments will be commensurate with the risk of investment in the Fund nor can the Fund assure you that the Adviser will be able to find enough appropriate investments that meet the Fund’s investment criteria. Fund investments may be highly speculative and aggressive, therefore, an investment in Fund securities may not be suitable for someone with a low risk tolerance. Investors should not commit money to the Fund unless they have the resources to sustain the loss of their entire investment in the Fund.

Closed-End Structure; Market Discount from Net Asset Value

Shares of closed-end investment companies that trade in a secondary market frequently trade at market prices that are lower than their net asset values. This is commonly referred to as “trading at a discount.” This risk may be greater for investors expecting to sell their shares in a relatively short period after completion of the public offering. As a result, the Fund is designed primarily for long-term investors. The Fund’s total assets will be reduced following this offering by the amount of offering and related expenses to be paid by the Fund.

Although the value of the Fund’s net assets is generally considered by market participants in determining whether to purchase or sell shares, whether an investor will realize gains or losses upon the sale of the shares will depend entirely upon whether the market price of the shares at the time of sale is above or below the investor’s purchase price for the shares. Because the market price of the shares will be determined by factors such as relative supply of and demand for the shares in the market, general market and economic conditions, and other factors beyond the control of the Fund, the Fund cannot predict whether the shares will trade at, below or above net asset value or at, below or above the initial public offering price. The net asset value of the shares, however, is expected to be reduced immediately following the initial public offering as a result of the payment of offering costs. As with any security, complete loss of investment is possible.

Anti-Takeover Provisions

The Fund’s charter and Bylaws contain provisions that may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of the shareholders. Such provisions may discourage

 

54


Table of Contents

outside parties from seeking control of the Fund or seeking to change the composition of its Board of Directors, which could result in shareholders not having the opportunity to realize a price greater than the current market price for their shares at some time in the future.

The Fund’s charter classifies the Fund’s Board of Directors into three classes, serving staggered three-year terms, and authorizes the Board of Directors to cause the Fund to issue additional shares of common stock. The Board of Directors also may classify or reclassify any unissued shares of common stock into one or more series of stock, including preferred stock, may set the terms of each class or series and may authorize the Fund to issue the newly-classified or reclassified shares. The Board of Directors may, without any action by the Fund’s shareholders, amend the Fund’s charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Fund has the authority to issue.

*        *        *         *        *

The above discussion of the various risks associated with the Fund and its investments is not, and is not intended to be, a complete enumeration or explanation of the risks involved in an investment in the Fund. Prospective investors should read this entire prospectus and consult with their own advisors before deciding whether to invest in the Fund. In addition, as market, economic, political, tax and other factors change or evolve over time, an investment in the Fund may be subject to risk factors not foreseeable at this time or able to be described in this prospectus at this time.

LISTING OF SHARES

The Fund’s common shares have been approved for listing on the NYSE, subject to notice of issuance, under the ticker symbol “AFT” and will be required to meet the NYSE’s listing requirements.

INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions:

The following investment restrictions are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund’s outstanding shares of common stock (which for this purpose and under the Investment Company Act means the lesser of (i) 67% of the shares of common stock represented at a meeting at which more than 50% of the outstanding shares of common stock are represented or (ii) more than 50% of the outstanding shares). Subject to such shareholder approval, the Fund may not:

 

  1. Make investments for the purpose of exercising control or management.

 

  2. Purchase or sell real estate, commodities or commodity contracts, except that, to the extent permitted by applicable law, the Fund may (i) invest in securities directly or indirectly secured by real estate or interests therein or issued by entities that invest in real estate or interests therein; (ii) invest in securities directly or indirectly secured by commodities or securities issued by entities that invest in or hold such commodities; and (iii) purchase and sell forward contracts, financial futures contracts and options thereon.

 

  3. Issue senior securities or borrow money except as permitted by Section 18 of the Investment Company Act or otherwise as permitted by applicable law.

 

  4. Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act in selling portfolio securities.

 

  5.

Make loans to other persons, except that (i) the Fund will not be deemed to be making a loan to the extent that the Fund makes investments in accordance with its stated investment strategies or otherwise

 

55


Table of Contents
 

purchases Senior Loans, Subordinated Loans, bonds, debentures or other loans or debt securities of any type, preferred securities, commercial paper, pass through instruments, loan participation interests, corporate loans, certificates of deposit, bankers acceptances, repurchase agreements or any similar instruments; (ii) the Fund may take short positions in any security or financial instrument; and (iii) the Fund may lend its portfolio securities in an amount not in excess of 33  1 / 3 % of its total assets, taken at market value, provided that such loans shall be made in accordance with applicable law.

 

  6. Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in any one industry; provided that securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities and tax-exempt securities of governments or their political subdivisions will not be considered to represent an industry. The Fund determines industries by reference to the Global Industry Classification Standard as it may be amended from time to time.

Non-Fundamental Investment Restrictions:

The Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board of Directors without the approval of the holders of a majority of the outstanding common shares or preferred shares, if any. The Fund may not:

 

  1. change or alter the Fund’s investment objective;

 

  2. under normal market conditions, invest less than 80% of its Managed Assets in floating rate Senior Loans and investments with similar economic characteristics. The Fund will provide shareholders with written notice at least 60 days prior to changing this non-fundamental policy of the Fund, unless such change was previously approved by shareholders;

 

  3. Purchase securities of other investment companies, except to the extent that such purchases are permitted by applicable law, including any exemptive orders issued by the SEC; and

 

  4. Purchase any securities on margin except as may be necessary in connection with transactions described under “The Fund’s Investments” above and except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio investments (the deposit or payment by the Fund of initial or variation margin in connection with swaps, forward contracts and financial futures contracts and options thereon is not considered the purchase of a security on margin).

Compliance with any policy or limitation of the Fund that is expressed as a percentage of assets is determined at the time of purchase of portfolio securities. The policy will not be violated if these limitations are exceeded because of changes in the market value or investment rating of the Fund’s assets or if a Borrower distributes equity securities incident to the purchase or ownership of a Senior Loan or in connection with a reorganization of a Borrower. The Fund interprets its policies with respect to borrowing and lending to permit such activities as may be lawful for the Fund, to the full extent permitted by the Investment Company Act or by exemption from the provisions therefrom pursuant to an exemptive order of the SEC.

 

56


Table of Contents

MANAGEMENT OF THE FUND

Board of Directors

The Board of Directors of the Fund is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the directors of investment companies by the Investment Company Act and applicable Maryland law.

Biographical Information . Certain biographical and other information relating to the Directors of the Fund is set out below, including their ages, their principal occupations for at least the last five years, the length of time served, the total number of portfolios overseen in the complex of funds advised by the Adviser (“Apollo Funds”) and other public directorships.

 

Name, Address (1) and

Age of Director

 

Position(s)

Held with

the Fund

 

Term of

Office and

Length of

Time Served

 

Principal Occupation(s)

During Past Five
Years

  Number of
Apollo  Funds
and Portfolios
Overseen
    Other
Directorships
Held by the
Director During
Past Five Years
 

Interested Director (2)

         

Barry Cohen

58

  Director and Chairman of the Board   Since 2011; Class I Director, current term ends at the 2012 annual meeting   Senior Managing Director, Apollo Capital Markets since 2008; Senior Managing Director, Bear Stearns Asset Management from 2003 to 2008.     1        None.   

Independent Directors (3)

         

Glenn N. Marchak (4)

54

  Director   Since 2011; Class II Director, current term ends at the 2013 annual meeting   Managing Director and Senior Portfolio Manager, Citi Capital Advisors (formerly Citigroup Alternative Investments) from 2005 to 2008; Senior Vice President, Travelers Asset Management International Company LLC from 1998 to 2005.     1        None.   

Carl J. Rickertsen

50

  Director   Since 2011; Class III Director, current term ends at the 2014 annual meeting   Managing Partner, Pine Creek Partners (private equity investment firm) since 2005; Chief Operating Officer and Partner, Thayer Capital Partners (private equity investment firm) from 1994 to 2004.     1       
 
 
 
 
 
 
 
 
 
MicroStrategy
Incorporated;
Convera
Corporation;
UAP Holding
Corp.; and
Homeland
Security
Capital
Corporation.
  
  
  
  
  
  
  
  
  
  

 

57


Table of Contents

Name, Address (1) and

Age of Director

 

Position(s)

Held with

the Fund

 

Term of

Office and

Length of

Time Served

 

Principal Occupation(s)

During Past Five
Years

  Number of
Apollo  Funds
and Portfolios
Overseen
    Other
Directorships
Held by the
Director
During Past
Five Years

Todd J. Slotkin (5)

57

  Director   Since 2011; Class II Director, current term ends at the 2013 annual meeting.   Former Senior Managing Director, Irving Place Capital (private equity investment firm); Co-Founder and Managing Partner, Newton Pointe Partners (consulting firm) from 2007 to 2008; Managing Director, Natixis Capital Markets (finance) from 2006 to 2007; Executive Vice President and Chief Financial Officer, MacAndrews & Forbes Holdings, Inc. from 1999 to 2006.     1      CBIZ, Inc.;
Martha
Stewart
Living
Omnimedia,
Inc.; and
Allied
Security
Holdings.

 

(1)

The address of each Director is care of the Fund at 9 West 57 th Street, 43 rd  Floor, New York, NY 10019.

(2) “Interested person,” as defined in the Investment Company Act, of the Fund. Mr. Cohen is an interested person of the Fund due to his affiliation with the Adviser.
(3) “Independent Directors” are directors who are not “interested persons,” as defined in the Investment Company Act, of the Fund.
(4) Mr. Marchak serves as chairman of the Audit Committee.
(5) Mr. Slotkin serves as the Lead Independent Director.

 

58


Table of Contents

Biographical Information of the Executive Officers of the Fund . Certain biographical and other information relating to the executive officers of the Fund is set out below:

 

Name, Address (1) and

Age of Officer

  

Position(s)
Held with

the Fund

   Term of
Office  and
Length of
Time Served
    

Principal Occupation(s)

During Past Five Years

Joseph Moroney

39

   President and Chief Investment Officer      Since 2011       Loan product manager, Apollo Management L.P. since 2008; Senior Managing Director and Senior Portfolio Manager, Aladdin Capital Management from 2001 to 2008.

Jodi Sarsfield

39

   Treasurer and Chief Financial Officer      Since 2011       Controller, AP Alternative Assets, L.P. and Apollo Palmetto Strategic Partnership, L.P. since 2007 and 2008, respectively; Ms. Sarsfield joined the Apollo organization in 2007; Controller and Vice President, Greenhill, Inc. from 2004 to 2007.

Joseph D. Glatt

37

   Secretary and Chief Legal Officer      Since 2011       Secretary and Vice President, Apollo Investment Corporation since 2010 and 2009, respectively; General Counsel, Apollo Capital Management, L.P. since 2007; Associate, Schulte Roth & Zabel LLP (law firm) from 2003 to 2007.

Cindy Michel

36

   Chief Compliance Officer      Since 2011       Chief Compliance Officer and Vice President, Apollo Investment Corporation since 2010; Director of Compliance, Apollo Global Management, LLC since 2007; Director of Compliance, Lehman Brothers, Private Equity Division, from 2004 to 2007.

 

(1)

The address of each officer is care of the Fund at 9 West 57 th Street, 43 rd  Floor, New York, NY 10019.

 

59


Table of Contents

Stock Ownership . Information relating to each Director’s share ownership in the Fund and in all Apollo Funds as of December 31, 2010 is set out in the chart below.

 

Name

   Dollar Range of Equity
Securities in the Fund
     Aggregate Dollar Range
of Equity Securities in
Apollo Funds
 

Interested Director

  

Barry Cohen

     None         None   

Independent Directors

     

Glenn N. Marchak

     None         None   

Carl J. Rickertsen

     None         None   

Todd J. Slotkin

     None         None   

As of the date of this prospectus, none of the Directors and officers of the Fund owned any outstanding shares of the Fund. As of the date of this prospectus, none of the Independent Directors of the Fund or their immediate family members owned beneficially or of record any securities in the Adviser or the Underwriters.

Compensation of Directors . The following table sets forth the estimated compensation to be paid by the Fund to the Directors projected through the end of the Fund’s first fiscal year and the projected aggregate compensation to be paid to them from all Apollo Funds for the calendar year ending December 31, 2011. The Directors who are “interested persons,” as defined in the Investment Company Act, of the Fund and the Fund’s officers do not receive compensation from the Fund.

 

Name

   Aggregate
Compensation
from

the Fund
     Pension or Retirement
Benefits Accrued as
Part of Fund
Expenses
     Total Compensation
from the Fund and
Apollo
Fund Complex Paid to

Each Director
 

Interested Director

  

Barry Cohen

     None         None         None   

Independent Directors

        

Glenn N. Marchak

   $ 26,000         None       $ 26,000   

Carl J. Rickertsen

   $ 23,000         None       $ 23,000   

Todd J. Slotkin

   $ 23,000         None       $ 23,000   

Board Structure and Role of the Board of Directors in Risk Oversight

 

The Investment Company Act requires that at least 40% of the Directors be Independent Directors. Currently, three of the four Directors are Independent Directors. The Independent Directors exercise their informed business judgment to appoint an individual of their choosing to serve as Chairman, regardless of whether the Director happens to be independent or a member of management. The Board has determined that its leadership structure, in which the Chairman of the Board of Directors is an interested person of the Fund, is appropriate because the Independent Directors believe that an interested Chairman has a personal and professional stake in the quality and continuity of services provided by management to the Fund. The Independent Directors have determined that they can act independently and effectively without having an Independent Director serve as Chairman and that a key factor for assuring that they are in a position to do so is for the Directors who are independent of management to constitute a substantial majority of the Board. In addition, the Independent Directors have designated a Lead Independent Director who chairs meetings or executive sessions of the Independent Directors, reviews and comments on Board of Directors meeting agendas, represents the views of the Independent Directors to management and facilitates communication among the Independent Directors and their counsel and between management and the Independent Directors.

The Board of Directors’ primary role is oversight of the management of the Fund. As is the case with virtually all investment companies, the Fund’s service providers, primarily the Adviser and its affiliates, have responsibility for the Fund’s day-to-day management, which includes responsibility for risk management (including management of investment performance and investment risk, valuation risk, issuer and counterparty credit risk, compliance risk and operational risk). As part of its oversight, the Board of Directors, acting at its

 

60


Table of Contents

scheduled meetings, or the Chairman or the Lead Independent Director acting between Board of Directors meetings, regularly interacts with and receives reports from senior personnel of the Fund and its service providers.

The Audit Committee of the Board of Directors (which consists of all the Independent Directors) meets regularly, and between meetings the Audit Committee Chair maintains contact with the Fund’s independent registered public accounting firm and with the Fund’s Treasurer. The Board of Directors also receives periodic presentations from senior personnel of the Adviser or its affiliates regarding risk management, as well as periodic presentations regarding specific operational, compliance or investment areas such as business continuity, personal trading, valuation, credit and investment research.

The Adviser and other service providers have adopted a variety of policies, procedures and controls designed to address the Fund’s particular risks. However, it is not possible to eliminate, or even to mitigate, all of the risks applicable to the Fund. The Board of Directors receives reports from Fund counsel or counsel to the Adviser and the Board of Directors’ own independent legal counsel regarding regulatory compliance and governance matters. The Board of Directors’ oversight role does not make the Board of Directors a guarantor of Fund investments or activities or the activities of any of the Fund’s service providers.

Committees of the Board of Directors

Audit Committee.

The Audit Committee operates pursuant to an Audit Committee charter approved by the Board of Directors. The charter sets forth the responsibilities of the Audit Committee, which include assisting the Board of Directors in its oversight of (i) the integrity of the financial statements of the Fund; (ii) the independent registered public accounting firm’s (the “Independent Auditor”) qualifications and independence; (iii) the performance of the Fund’s internal audit function and Independent Auditor; and (iv) the compliance by the Fund with legal and regulatory requirements. The Audit Committee is presently composed of each of the Independent Directors. Since the Fund has been incorporated, the Audit Committee has held one meeting.

Nominating and Corporate Governance Committee.

The Nominating and Corporate Governance Committee is responsible for (i) identifying and selecting or recommending qualified nominees to be elected to the Board of Directors at the annual meeting of stockholders (consistent with criteria approved by the Board of Directors); (ii) identifying, selecting or recommending qualified nominees to fill any vacancies on the Board of Directors or a committee thereof (consistent with criteria approved by the Board of Directors); (iii) developing and recommending to the Board of Directors a set of corporate governance principles applicable to the Fund; (iv) overseeing the evaluation of the Board of Directors, any committees thereof and management; and (v) undertaking such other duties and responsibilities as may from time to time be delegated by the Board of Directors. The Nominating and Corporate Governance Committee is presently composed of each of the Independent Directors. As of the date of this prospectus, the Nominating and Corporate Governance Committee has not held any meetings.

Information About Each Director’s Experience, Qualifications, Attributes or Skills.

Additional information about each Director follows (supplementing the information provided in the tables above) that describes some of the specific experiences, qualifications, attributes or skills that each Director possesses which the Board believes has prepared him to be an effective Director. The Board of Directors believes that the significance of each Director’s experience, qualifications, attributes or skills is an individual matter (meaning that experience that is important for one Director may not have the same value for another) and that these factors are best evaluated at the Board level, with no single Director, or particular factor, being indicative of Board

 

61


Table of Contents

effectiveness. However, the Board of Directors believes that Directors need to have the ability to critically review, evaluate, question and discuss information provided to them, and to interact effectively with Fund management, service providers and counsel, in order to exercise effective business judgment in the performance of their duties. Experience relevant to having this ability may be achieved through a Director’s educational background; business, professional training or practice (e.g., accounting or law); public service or academic positions; experience from service as a board member or as an executive of investment funds, public companies or significant private or not-for-profit entities or other organizations; and/or other life experiences. To assist them in evaluating matters under federal and state law, the Independent Directors are counseled by their own independent legal counsel, who participates in Board meetings and interacts with the Adviser, and also may benefit from information provided by the Fund’s or the Adviser’s counsel; both counsel to the Independent Directors and the Fund have significant experience advising funds and fund board members. The Board of Directors and its committees have the ability to engage other experts as appropriate. The Board of Directors evaluates its performance on an annual basis.

Independent Directors

Glenn N. Marchak. Mr. Marchak was a Managing Director and Senior Portfolio Manager of Citi Capital Advisors (formerly Citigroup Alternative Investments (“CAI”)) through February 2008. At the time, CAI was Citigroup’s integrated alternative investments platform that managed over $100 billion of assets. Mr. Marchak managed the Leveraged Loan Investments Group. He originated, marketed and managed a variety of funds primarily invested in leveraged loans. He was a member of both the Management Committee and Management Counsel of CAI. He was also a member of the Mezzanine Investments Committee. He also managed LMP Corporate Loan Fund, a NYSE traded closed-end fund. Previously, Mr. Marchak was a Managing Director at Smith Barney where he was responsible for developing and heading the firm’s leveraged lending and loan syndication effort. Prior to that, he was a Senior Vice President and Head of Loan Syndications at Nat West Markets. Before joining Nat West Markets, he was a Vice President at Citibank where he was a member of the Leveraged Finance Division providing debt capital to the leveraged buyout community and subsequently, a member of the Loan Syndications Department. He began his business career at Ernst & Young (formerly Arthur Young & Company) where he became an Audit Manager and was a founder of that firm’s Reorganization and Insolvency practice. Mr. Marchak currently serves as a board member of Resolvion / Atlanta Equity Investors, LLC and formerly was a board member of Mediq Incorporated, a medical equipment company. Mr. Marchak earned his BSA in Accounting from the University of Florida and is a Certified Public Accountant.

Carl J. Rickertsen. Mr. Rickertsen is currently managing partner of Pine Creek Partners, a private equity investment firm, a position he has held since January 2004. From January 1998 to January 2004, Mr. Rickertsen was chief operating officer and a partner at Thayer Capital Partners, a private equity investment firm. From September 1994 to January 1998, Mr. Rickertsen was a managing partner at Thayer. Mr. Rickertsen was a founding partner of three Thayer investment funds totaling over $1.4 billion and is a published author. Mr. Rickertsen has been a member of the Board of Directors of MicroStrategy, a publicly-traded software firm, since October 2002. Mr. Rickertsen was formerly a board member of publicly-traded companies Convera Corporation, a search-engine software company, UAP Holding Corp., a distributor of agriculture products, and Homeland Security Capital Corporation, a specialized technology provider to government and commercial customers. Mr. Rickertsen received a BS from Stanford University and an MBA from Harvard Business School.

Todd J. Slotkin. Mr. Slotkin has served as the portfolio manager of Irving Place Capital, a private equity firm. Mr. Slotkin served as a Managing Director and co-head of the Natixis Capital Markets Leveraged Finance business from 2006 to 2007. Previously, Mr. Slotkin served as Executive Vice President and Chief Financial Officer of MacAndrews & Forbes Holdings, Inc. from 1999 to 2006. In addition, he was Chief Financial Officer of M & F Worldwide Corp., a public company, from 1999 to 2006. Prior to joining MacAndrew & Forbes in 1992 as a senior vice president, Mr. Slotkin spent over 17 years with Citicorp, now known as Citigroup. Since 2003, he has been a director of CBIZ, Inc., a publicly-traded provider of business services, products and solutions for financial and employee management, where he is on the audit and compensation committees. He has been a director of Martha Stewart Living Omnimedia, Inc. since March 2008. Mr. Slotkin was formerly a board member

 

62


Table of Contents

of Allied Security Holdings LLC, a publicly-traded provider of contract security officer services, and TransTech Pharma, Inc., a pharmaceutical company. Mr. Slotkin is the chairman, director and co-founder of the Food Allergy Initiative.

Interested Director

Barry Cohen . Mr. Cohen joined Apollo in 2008 and serves as a Senior Managing Director of Apollo Capital Markets. Prior to that time he was with Bear Stearns from 1987 to 2008. Mr. Cohen joined Bear Stearns in 1987 as head of its Risk Arbitrage Department, where he also co-headed the Bear Stearns Global Equity Arbitrage Funds. From 2003 to 2008, he worked in Bear Stearns Asset Management, focusing on its hedge fund businesses. Prior to joining Bear Stearns in 1987, Mr. Cohen was a risk arbitrageur at First Boston Corporation, a partner in Bedford Partners, a risk arbitrage hedge fund, and a mergers and acquisitions lawyer at Davis Polk & Wardwell. Mr. Cohen graduated summa cum laude from Harvard College with a BA in Applied Mathematics and received JD and MBA degrees from Harvard Law School and Harvard Business School, respectively. Mr. Cohen is a member of the Board of Directors of both the Mt. Sinai Children’s Center Foundation and The Michael J. Fox Foundation for Parkinson’s Research.

AGREEMENTS WITH THE ADVISER

The Investment Adviser

Apollo Credit Management, LLC serves as the Fund’s investment adviser. The principal executive offices of the Adviser are at 9 West 57th Street, New York, NY 10019. As of the date of this prospectus, the Adviser has no assets under management and no operating history. However, affiliates of the Adviser, as of September 30, 2010, had a total of approximately $58 billion in assets under management, including over $15 billion in loans and bonds managed by the Apollo senior loan management team as of September 30, 2010.

The Adviser provides certain investment advisory, management and administrative services to the Fund pursuant to an investment advisory and management agreement with the Fund (the “Investment Advisory Agreement”). The Fund and the Adviser have also entered into an Administrative Services and Expense Reimbursement Agreement pursuant to which the Adviser will provide certain administrative services, personnel and facilities to the Fund and perform operational services necessary for the operation of the Fund not otherwise provided by other Fund service providers. Pursuant to this agreement, the Fund will reimburse the Adviser at cost, at the Adviser’s request, for certain costs and expenses incurred by the Adviser that are necessary for the administration and operation of the Fund.

The Adviser may elect from time to time, in its sole discretion, to waive its right to reimbursement or its receipt of the advisory fee. If the Adviser elects to waive its compensation, such action may have a positive effect on the Fund’s performance or yield. The Adviser is under no obligation to waive its fees or rights to reimbursement, may elect not to do so, or may decide to waive its compensation periodically.

The Adviser has entered into a marketing agreement with TS Capital, LLC (“TSC”) and its affiliated broker-dealer, ABAX Brokerage Services, Inc. (“ABAX”), under which TSC and ABAX provide assistance to the Adviser with respect to the Fund’s common shares and shareholder services. The fees due pursuant to this distribution agreement will be paid exclusively by the Adviser (and not the Fund). The services provided by TSC and ABAX to the Adviser include, without limitation, marketing assistance, distribution support and shareholder servicing.

Investment Advisory Agreement and Advisory Fee

The Investment Advisory Agreement provides that, subject to the supervision of the Fund’s Board of Directors, the Adviser is responsible for management and oversight of the Fund’s portfolio. The Investment Advisory Agreement obligates the Adviser to provide investment advisory, management and certain other services to the Fund. Unless earlier terminated as described below, the Investment Advisory Agreement will

 

63


Table of Contents

remain in effect for a period of two years from the date of execution and will remain in effect from year to year thereafter if approved annually (a) by the Board of Directors of the Fund or by a majority of the outstanding shares of the Fund and (b) by a majority of the Directors who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such contract is not assignable and may be terminated without penalty on 60 days’ prior written notice at the option of either party thereto or by the vote of the shareholders of the Fund. The Investment Advisory Agreement provides that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations thereunder, the Fund may indemnify the Adviser, under certain circumstances, against liabilities arising from the Adviser’s performance of its duties under the Investment Advisory Agreement.

For its services, the Fund pays the Adviser a monthly fee at the annual rate of 1% of the average daily value of the Fund’s Managed Assets. “Managed Assets” means the total assets of the Fund (including any assets attributable to any preferred shares that may be issued or to money borrowed (including the liquidation preference of preferred shares) or notes issued by the Fund) minus the sum of the Fund’s accrued liabilities, including accrued interest and accumulated dividends (other than liabilities for money borrowed or notes issued). Fees for any partial month are appropriately pro rated. During periods when the Fund is using leverage, if any, the fees paid to the Adviser will be higher than if the Fund did not use leverage because the fees paid are calculated on the basis of the Fund’s Managed Assets, which includes the assets purchased through leverage.

A discussion regarding the basis of the Board of Directors’ approval of the Investment Advisory Agreement will be available in the Fund’s first shareholder report issued following the effectiveness of this prospectus.

THE PORTFOLIO MANAGERS

Unless otherwise indicated, the information below is provided as of the date of this prospectus.

The following individuals (the “Portfolio Managers”) have primary responsibility for the day-to-day implementation of the Fund’s investment strategy:

Joseph Moroney, CFA . Mr. Moroney is the Adviser’s loan product manager and will serve as the senior portfolio manager for the Fund. Mr. Moroney joined Apollo in 2008. Prior to that time, Mr. Moroney was with Aladdin Capital Management where he most recently served as the Senior Managing Director and Senior Portfolio Manager in the Leveraged Loan Group. Mr. Moroney’s career spans 17 years, focused in financial advisory and investment management, with experience at various leading financial services firms including Merrill Lynch Investment Managers. Mr. Moroney graduated from Rutgers University with a BS in Ceramic Engineering, and he is also a Chartered Financial Analyst.

Bret Leas . Mr. Leas joined Apollo in 2009 and will serve as a portfolio manager of the Fund. Prior to that time, Mr. Leas was a Director at Barclays Capital where he served in a variety of different roles, most recently as a member of the Credit Structuring Group. From 2000 to 2004 he was an attorney at Weil, Gotshal & Manges LLP in the Structured Finance/Derivatives Group, primarily focusing on asset-backed securities, CDOs and credit derivatives. Mr. Leas graduated cum laude from the University of Maryland with a BA in History and received his JD, cum laude, from Georgetown University Law Center.

Robert Ruberton . Mr. Ruberton is the Adviser’s portfolio manager for European investments and will serve as a portfolio manager of the Fund. Mr. Ruberton joined Apollo in 2004, and has had investment responsibilities across multiple credit funds managed by Apollo affiliates. Previously, Mr. Ruberton was with Arsenal Capital Partners, a middle-market private equity fund, from December 2000 through June 2004. From August 1997 through December 2000, Mr. Ruberton was an investment banker at Donaldson, Lufkin & Jenrette in the Leveraged Finance Group. Mr. Ruberton graduated cum laude from Harvard College with an AB in Economics.

 

64


Table of Contents

Alexander B. Wright . Mr. Wright joined Apollo in 2011 and will serve as a portfolio manager of the Fund. Prior to joining Apollo, Mr. Wright was with GSC Group where he served in a variety of different roles mostly recently as the Chief Administrative Officer and Chief Financial Officer. Prior to these executive roles he was the head of the U.S. Corporate Debt business. From 2003 to 2007, Mr. Wright served as head of origination for the U.S. Corporate Debt business. Prior to that, Mr. Wright was with IBJ Whitehall Bank & Trust Corporation and Chemical Banking Corporation. Mr. Wright graduated from Rutgers College with a BA degree in Political Science and a minor in Economics, and from Fordham University with an MBA degree.

* * *

In implementing the Fund’s investment strategy, the Portfolio Managers will have access to the experience and expertise of Mr. Anthony M. Civale and Mr. James Zelter. Messrs. Civale and Zelter are senior executives in the Apollo organization and are primarily responsible for the development and growth of the organization’s loan business. Messrs. Civale and Zelter continue to oversee and operate the loan business for various Apollo sponsored entities and are active in other business operations, but will not have primary responsibility for the Fund’s day-to-day investment activities. Biographies of Mr. Civale and Mr. Zelter are included below.

Anthony M. Civale. Mr. Civale is a Senior Partner of Apollo Management, L.P. (Apollo’s private equity business) and is Co-head of Apollo’s loan business, which includes the Adviser. Mr. Civale serves on the board of directors of Berry Plastics Group, Inc., and he has previously served on the boards of directors of Breuners Home Furnishing Corp., Covalence Specialty Materials, Corp., Goodman Global, Inc., Harrah’s Entertainment Inc. and Prestige Cruises. Mr. Civale also serves on the board of directors of Youth INC, a non-profit organization, and is a member of the Board of Trustees of Middlebury College. In addition to his responsibilities in Apollo’s loan and private equity businesses, Mr. Civale also has responsibilities with respect to corporate development for Apollo Global Management, LLC (“AGM”). Prior to joining Apollo, Mr. Civale was employed by Deutsche Bank Securities and Bankers Trust Company in their Corporate Finance Divisions. Mr. Civale graduated from Middlebury College with a BA in Political Science.

James Zelter. Mr. Zelter is Managing Partner of Apollo Capital Management and is Co-head of AGM’s loan business, which includes the Adviser. Mr. Zelter joined Apollo Management, L.P. in 2006. Mr. Zelter is the Managing Director of Apollo’s capital markets business, Chief Executive Officer and director of Apollo Investment Corporation, and director of AP Investment Europe Limited. Prior to joining Apollo, Mr. Zelter was with Citigroup Inc. and its predecessor companies from 1994 to 2006. From 2003 to 2005, Mr. Zelter was Chief Investment Officer of Citigroup Alternative Investments, and prior to that he was responsible for the firm’s Global High Yield franchise. Prior to joining Citigroup in 1994, Mr. Zelter was a High Yield Trader at Goldman Sachs & Co. Mr. Zelter is a board member of DUMAC, the investment management company that oversees the Duke Endowment and Duke Foundation. Mr. Zelter has a degree in Economics from Duke University.

In addition, the Portfolio Managers will be able to draw on the experience and expertise of other senior personnel of the Adviser and its affiliates, including Leon Black, Marc Rowan and Joshua Harris. Messrs. Black, Rowan and Harris, however, will not be primarily involved in managing the Fund’s portfolio or its day-to-day operations.

Leon Black . Mr. Black is the Chairman of the Board and Chief Executive Officer of AGM and a Managing Partner of Apollo Management, L.P. which he founded in 1990 to manage investment capital on behalf of a group of institutional investors, focusing on corporate restructuring, leveraged buyouts, and taking minority positions in growth-oriented companies. From 1977 to 1990, Mr. Black worked at Drexel Burnham Lambert Incorporated, where he served as Managing Director, head of the Mergers and Acquisitions Group and co-head of the Corporate Finance Department. He serves on the boards of directors of Sirius XM Radio Inc., and the general partner of AP Alternative Assets. Mr. Black is a trustee of Dartmouth College, The Museum of Modern Art, Mt. Sinai Hospital, The Metropolitan Museum of Art, Prep for Prep, and The Asia Society. He is also a member of The Council on Foreign Relations, The Partnership for New York City and the National Advisory Board of JPMorgan Chase. Mr. Black is also a member of the Board of Faster Cures and the Port Authority Task Force. He graduated summa cum laude from Dartmouth College with a major in Philosophy and History and received an MBA from Harvard Business School.

 

65


Table of Contents

Joshua Harris . Mr. Harris is a Senior Managing Director of AGM and Managing Partner of Apollo Management, L.P. which he co-founded in 1990. Prior to 1990, Mr. Harris was a member of the Mergers and Acquisitions Group of Drexel Burnham Lambert Incorporated. Mr. Harris currently serves on the boards of directors of the general partner of AP Alternative Assets, AGM, Berry Plastics Group, Inc., LyondellBasell Industries, CEVA Group plc and Momentive Performance Materials. Mr. Harris has previously served on the boards of directors of Verso Paper, Metals USA, Nalco, Allied Waste Industries, Pacer International, General Nutrition Centers, Furniture Brands International, Compass Minerals Group, Alliance Imaging, NRT Inc., Covalence Specialty Materials, United Agri Products, Quality Distribution, Whitmire Distribution, and Noranda Aluminum. Mr. Harris is actively involved in charitable and political organizations. He is a member and serves on the Corporate Affairs Committee of the Council on Foreign Relations. Mr. Harris serves as Chairman of the Department of Medicine Advisory Board for The Mount Sinai Medical Center and is on the Board of Trustees of the Mount Sinai Medical Center. Mr. Harris is a member of The Federal Reserve Bank of New York Investors Advisory Committee on Financial Markets. He is also a member of The University of Pennsylvania’s Wharton Undergraduate Executive Board and is on the Board of Trustees for The Allen-Stevenson School and Harvard Business School. Mr. Harris graduated summa cum laude and Beta Gamma Sigma from the University of Pennsylvania’s Wharton School of Business with a Bachelor of Science degree in Economics and received his MBA from the Harvard Business School, where he graduated as a Baker and Loeb Scholar.

Marc Rowan . Mr. Rowan is a Senior Managing Director of AGM and Managing Partner of Apollo Management, L.P., which he co-founded in 1990. Prior to that time, Mr. Rowan was a member of the Mergers and Acquisitions Group of Drexel Burnham Lambert Incorporated, with responsibilities in high yield financing, transaction idea generation and merger structure negotiation. Mr. Rowan currently serves on the boards of directors of the general partner of AP Alternative Assets, L.P., AGM, Athene Re, Countrywide PLC, Harrah’s Entertainment, Inc. and Norwegian Cruise Lines. He has previously served on the boards of directors of AMC Entertainment, Inc., Culligan Water Technologies, Inc., Furniture Brands International, Mobile Satellite Ventures, LLC, National Cinemedia, Inc., National Financial Partners, Inc., New World Communications, Inc., Quality Distribution, Inc., Samsonite Corporation, SkyTerra Communications Inc., Unity Media SCA, Vail Resorts, Inc. and Wyndham International, Inc. Mr. Rowan is also active in charitable activities. He is a founding member and serves on the executive committee of the Youth Renewal Fund and is a member of the boards of directors of the National Jewish Outreach Program and the Undergraduate Executive Board of the University of Pennsylvania’s Wharton School of Business. Mr. Rowan graduated summa cum laude from the University of Pennsylvania’s Wharton School of Business with a BS and an MBA in Finance.

 

66


Table of Contents

Other Accounts Managed . As of September 30, 2010, the Portfolio Managers were primarily responsible for the day-to-day portfolio management of the following accounts:

 

Name of Portfolio Manager

  

Type of Accounts

   Total # of
Accounts
Managed
     Total Assets (1)      # of Accounts
Managed for
which Advisory
Fee is Based on
Performance
     Total Assets
for which
Advisory Fee
is Based on
Performance (2)
 

Joseph Moroney

   Registered Investment Companies      None         None         None         None   
   Other Pooled Investment Vehicles      5       $ 9.859 billion         3       $ 8.957 billion   
               Other Accounts      None         None         None         None   

Bret Leas

   Registered Investment Companies      None         None         None         None   
   Other Pooled Investment Vehicles      5       $ 9.859 billion         3       $ 8.957 billion   
               Other Accounts      None         None         None         None   

Robert Ruberton

   Registered Investment Companies      None         None         None         None   
   Other Pooled Investment Vehicles      3       $ 4.734 billion         2       $ 4.565 billion   
               Other Accounts      None         None         None         None   

Alexander B. Wright (3)

   Registered Investment Companies      None         None         None         None   
   Other Pooled Investment Vehicles      5       $ 9.859 billion         3       $ 8.957 billion   
               Other Accounts      None         None         None         None   

 

 

(1)

Total assets represents assets under management as defined by Apollo Global Management, LLC, which includes unfunded commitments.

(2)

Represents the assets under management of the accounts managed that generate incremental fees in addition to management fees.

(3)

Mr. Wright joined Apollo in 2011 and assumed management of the accounts and assets as indicated at that time.

Compensation . The Adviser’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary and a discretionary bonus.

Base Compensation . Generally, portfolio managers receive base compensation based on their individual seniority and their position within the firm.

Discretionary Compensation . In addition to base compensation, portfolio managers may receive discretionary compensation. Discretionary compensation may be based on individual seniority and contribution.

Material Conflicts of Interest . Actual or apparent conflicts of interest may arise when a Portfolio Manager has day-to-day management responsibilities with respect to more than one fund or other account.

Certain inherent conflicts of interest arise from the fact that the Portfolio Managers, the Adviser and its affiliates provide investment management services both to the Fund and the other Apollo-advised funds, including other funds, as well as client accounts, proprietary accounts and any other investment vehicles that the Adviser and its affiliates may establish from time to time, managed by the Adviser and its affiliates in which the Fund will not have an interest. The investment program of the Fund and the other Apollo-advised funds may or may not be substantially similar. The Portfolio Managers, the Adviser and its affiliates may give advice and recommend securities to the other Apollo-advised funds that may differ from advice given to, or securities recommended or bought for, the Fund, even though their investment objectives may be the same or similar to those of the Fund.

The Adviser will seek to manage potential conflicts of interest in good faith; nonetheless, the portfolio strategies employed by the Portfolio Managers, the Adviser and its affiliates in managing the other Apollo-advised

 

67


Table of Contents

funds could conflict with the transactions and strategies employed by the Portfolio Managers in managing the Fund and may affect the prices and availability of the securities and instruments in which the Fund invests. Conversely, participation in specific investment opportunities may be appropriate, at times, for both the Fund and the other Apollo-advised funds. It is the policy of the Adviser to generally share appropriate investment opportunities (and sale opportunities) with the other Apollo-advised funds. In general, this policy will result in such opportunities being allocated pro rata among the Fund and the other Apollo-advised funds. Nevertheless, investment and/or opportunities may be allocated other than on a pro rata basis, to the extent it is done in good faith and does not, or is not reasonably expected to, result in an improper disadvantage or advantage to one participating Apollo-advised fund as compared to another participating Apollo-advised fund.

In the event investment opportunities are allocated among the Fund and the other Apollo-advised funds, the Fund may not be able to structure its investment portfolio in the manner desired. Although the Adviser endeavors to allocate investment opportunities in a fair and equitable manner, it is possible that the Fund may not be given the opportunity to participate in certain investments made by the other Apollo-advised funds or portfolio managers affiliated with the Adviser. Furthermore, the Fund and the other Apollo-advised funds may make investments in securities where the prevailing trading activity may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold by the Fund and the other Apollo-advised funds. When this occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the Fund may not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.

It is possible that other Apollo-advised funds may make investments in the same or similar securities at different times and on different terms than the Fund. From time to time, the Fund and the other Apollo-advised funds may make investments at different levels of an issuer’s capital structure or otherwise in different classes of an issuer’s securities. Such investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by such entities. Conflicts may also arise because portfolio decisions regarding the Fund may benefit the other Apollo-advised funds. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) one or more Apollo-advised funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) one or more Apollo-advised funds.

While these conflicts cannot be eliminated, the Adviser, when practicable, will cause the Fund and the other Apollo-advised funds to hold investments in the same levels of an issuer’s capital structure in the same proportion at each level; provided, however, that neither the Fund nor any other Apollo-advised fund will be required to hold an investment if holding such investment would result in a violation of the provisions of the organizational documents of the Fund or the other Apollo-advised fund, as applicable, or constitute a breach of, or default or debt repayment event with respect to, any credit facility or other debt instrument or obligation.

Although the professional staff of the Adviser will devote as much time to the management of the Fund as the Adviser deems appropriate to perform its obligations, the professional staff of the Adviser may have conflicts in allocating its time and services among the Fund and the Adviser’s other investment vehicles and accounts. The Adviser and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in competition with the Fund and/or may involve substantial time and resources of the Adviser and its professional staff. These activities could be viewed as creating a conflict of interest in that the time and effort of the members of the Adviser and their officers and employees will not be devoted exclusively to the business of the Fund but will be allocated between the business of the Fund and the management of the monies of other clients of the Adviser.

Beneficial Ownership of Securities . As of the date of this prospectus, none of the Portfolio Managers beneficially owns any equity securities of the Fund.

 

68


Table of Contents

CONTROL PERSONS

A control person includes a person who beneficially owns more than 25% of the voting securities of a company. The Adviser has provided the initial capitalization of the Fund and therefore is a control person of the Fund because it is the sole shareholder of the Fund as of the date of this prospectus. The Adviser may also be considered a controlling person of the Fund under the Investment Company Act to the extent it has the power to exercise a controlling influence over the management or policies of the Fund.

NET ASSET VALUE

Net asset value per common share will be determined daily by The Bank of New York Mellon as of 4 p.m. on each day the NYSE is open for trading or at such other times as the Board of Directors may determine. The net asset value of the common shares of the Fund means the total assets of the Fund (including all securities, cash and other assets) minus the sum of the Fund’s total liabilities (including accrued expenses, dividends payable, borrowings and the liquidation value of any preferred stock) divided by the total number of common shares of the Fund outstanding.

The Fund values its investments primarily using the mean between the last available bid and ask price of market quotations from a nationally recognized security pricing service. Securities and assets for which market quotations are not readily available or for which the valuations provided by the primary pricing sources are believed to be unreliable are valued at fair value pursuant to procedures adopted by the Board of Directors of the Fund. Market quotations may be deemed not to represent fair value in certain circumstances where the Adviser reasonably believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security causes current market quotes not to reflect the fair value of the security. Examples of these events could include situations in which material events are announced after the close of the market on which a security is primarily traded, when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a “fire sale” by a distressed seller.

If available, bank loans are priced based on valuations provided by an approved independent, third-party pricing agent or broker. If a price is not available from an independent, third-party pricing service or broker or, if the price provided by the independent third-party pricing service or broker is believed to be unreliable, the security will be fair valued pursuant to procedures adopted by the Board of Directors.

Long positions in securities traded in the OTC market, electronic dealer quotation system or Bulletin Board are valued at the mean between the last available bid and ask price or yield equivalent obtained from one or more dealers or any pricing services approved by the Board of Directors. Short positions in securities traded in the OTC market, electronic dealer quotation system or Bulletin Board are valued at the mean between the last available bid and ask price.

The value of swaps, including credit default swaps, total return swaps and interest rate swaps will be determined by obtaining at least one dealer quotation (including information from counterparties) or valuations from third-party pricing services. If no quotations or valuations are available, or if such quotations or valuations are believed to be unreliable, swaps will be fair valued pursuant to procedures adopted by the Board of Directors. Repurchase agreements are generally valued at cost plus accrued interest.

Generally, trading in U.S. Government securities and money market instruments is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund’s common shares are determined as of such times.

 

69


Table of Contents

DISTRIBUTIONS

Commencing with the Fund’s initial dividend, the Fund intends to make regular monthly cash distributions of all or a portion of its net investment income to common shareholders. The Fund expects to declare the initial monthly dividend on the Fund’s common shares within approximately 45 days after completion of this offering and to pay that initial monthly dividend approximately 60 to 90 days after completion of this offering. The Fund intends to pay common shareholders at least annually all or substantially all of its net investment income after the payment of dividends and interest, if any, owed with respect to any outstanding preferred shares and/or notes or other forms of leverage utilized by the Fund. The Fund intends to pay any capital gains distributions at least annually. If the Fund makes a long-term capital gain distribution, it will be required to allocate such gain between the common shares and any preferred shares issued by the Fund in proportion to the total dividends paid to each class for the year in which the income is realized.

The U.S. federal income tax treatment and characterization of the Fund’s distributions may vary significantly from time to time because of the varied nature of the Fund’s investments. In light of the Fund’s investment policies, the Fund anticipates that the Investment Company Act will require it to accompany each monthly distribution with a statement setting forth the estimated source (as between net income, capital gains and return of capital) of the distribution made. The Fund will indicate the proportion of its capital gains distributions that constitute long-term and short-term gains annually. The ultimate U.S. federal income tax characterization of the Fund’s distributions made in a calendar or fiscal year cannot finally be determined until after the end of that taxable year. As a result, there is a possibility that the Fund may make total distributions during a calendar or taxable year in an amount that exceeds the Fund’s net investment company taxable income and net capital gains for the relevant taxable year. In such situations, if a distribution exceeds the Fund’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes), a portion of each distribution paid with respect to such taxable year would generally be treated as a tax-free return of capital reducing the amount of a shareholder’s tax basis in such shareholder’s shares. When you sell your shares in the Fund, the amount, if any, by which your sales price exceeds your basis in the Fund’s shares is gain subject to tax. Because a return of capital reduces your basis in the shares, it will increase the amount of your gain or decrease the amount of your loss when you sell the shares, all other things being equal. To the extent that the amount of any return of capital distribution exceeds the shareholder’s basis in such shareholder’s shares, the excess will be treated as gain from a sale or exchange of the shares.

Various factors will affect the level of the Fund’s income, including the asset mix, the average maturity of the Fund’s portfolio and default rates, the amount of leverage utilized by the Fund, if any, and any use of hedging activities by the Fund. To permit the Fund to maintain a more stable monthly distribution, the Fund may from time to time distribute less than the entire amount of income earned in a particular period. The undistributed income would be available to supplement future distributions. As a result, the distributions paid by the Fund for any particular monthly period may be more or less than the amount of income actually earned by the Fund during that period. Undistributed income will add to the Fund’s net asset value (and indirectly benefits the Adviser by increasing its fees) and, correspondingly, distributions from undistributed income will reduce the Fund’s net asset value. The Board of Directors may elect to change the Fund’s distribution policy at any time.

The distributions for any full or partial year might not be made in equal amounts, and one distribution may be larger than the other. The Fund will make a distribution only if authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available for these distributions. The Fund may pay a special distribution at the end of each calendar year, if necessary, to comply with U.S. federal income tax requirements. This distribution policy may, under certain circumstances, have certain adverse consequences to the Fund and its shareholders because it may result in a return of capital to shareholders, which would reduce the Fund’s net asset value and, over time, potentially increase the Fund’s expense ratio. If the Fund distributes a return of capital, it means that the Fund is returning to shareholders a portion of their investment rather than making a distribution that is funded from the Fund’s earned income or other profits.

Section 19(b) of the Investment Company Act and Rule 19b-1 thereunder generally limit the Fund to one long-term capital gain distribution per year, subject to certain exceptions.

 

70


Table of Contents

DIVIDEND REINVESTMENT PLAN

Unless a shareholder specifically elects to receive common stock of the Fund as set forth below, all net investment income dividends and all capital gains distributions declared by the Board of Directors will be payable in cash.

A shareholder may elect to have net investment income dividends and capital gains distributions reinvested in common stock of the Fund. To exercise this option, such shareholder must notify BNY Mellon Investment Servicing (US) Inc., the plan administrator and the Fund’s transfer agent and registrar, in writing so that such notice is received by the plan administrator not less than 10 days prior to the record date fixed by the Board of Directors for the net investment income dividend and/or capital gains distribution involved.

The plan administrator will set up an account for shares acquired pursuant to the plan for each shareholder that elects to receive common stock of the Fund (each a “Participant”). The plan administrator may hold each Participant’s shares, together with the shares of other Participants, in non-certificated form in the plan administrator’s name or that of its nominee.

The shares are acquired by the plan administrator for a participant’s account, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized shares of common stock from the Fund (“Newly Issued Shares”) or (ii) by purchase of outstanding shares of common stock on the open market (“Open-Market Purchases”) on the NYSE or elsewhere. If, on the dividend payment date, the net asset value per share of the common stock is equal to or less than the market price per share of the common stock plus estimated brokerage commissions (such condition being referred to as “market premium”), the plan administrator will invest the dividend amount in Newly Issued Shares on behalf of the Participant. The number of Newly Issued Shares of common stock to be credited to the Participant’s account will be determined by dividing the dollar amount of the dividend by the net asset value per share on the date the shares are issued, unless the net asset value is less than 95% of the then current market price per share, in which case the dollar amount of the dividend will be divided by 95% of the then current market price per share. If on the dividend payment date the net asset value per share is greater than the market value (such condition being referred to as “market discount”), the plan administrator will invest the dividend amount in shares acquired on behalf of the Participant in Open-Market Purchases.

The plan administrator’s service fee, if any, and expenses for administering the plan will be paid for by the Fund. If a Participant elects by written notice to the plan administrator to have the plan administrator sell part or all of the shares held by the plan administrator in the Participant’s account and remit the proceeds to the Participant, the plan administrator is authorized to deduct a $15 transaction fee plus a 5¢ per share brokerage commission from the proceeds.

Shareholders who receive dividends in the form of stock are subject to the same federal, state and local tax consequences as are shareholders who elect to receive their dividends in cash. A shareholder’s basis for determining gain or loss upon the sale of stock received in a dividend from the Fund will be equal to the total dollar amount of the dividend payable to the shareholders. Any stock received in a dividend will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. shareholder’s account.

Participants may terminate their accounts under the plan by notifying the plan administrator via its website at bnymellon.com/shareowner, by filling out the transaction request form located at the bottom of the Participant’s statement and sending it to the plan administrator at P.O. Box 358035, Pittsburgh, PA 15252-8035 or by calling the plan administrator at 800-331-1710.

The plan may be terminated by the Fund upon notice in writing mailed to each Participant at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund. All correspondence, including requests for additional information, concerning the plan should be directed to the plan administrator by mail at P.O. Box 358035, Pittsburgh, PA 15252-8035.

 

71


Table of Contents

PORTFOLIO TRANSACTIONS

Subject to policies established by the Board of Directors, the Adviser is primarily responsible for the execution of the Fund’s portfolio transactions and the allocation of brokerage. The Fund has no obligation to deal with any dealer or group of dealers in the execution of transactions in portfolio securities of the Fund. When possible, the Fund deals directly with the dealers who make a market in the securities involved except in those circumstances where better prices and execution are available elsewhere. It is the policy of the Fund to obtain what are believed to be the best results in conducting portfolio transactions, taking into account such factors as price (including the applicable dealer spread or commission), the size, type and difficulty of the transaction involved, the firm’s general execution and operations facilities and the firm’s risk in positioning the securities involved. The cost of portfolio securities transactions of the Fund primarily consists of dealer or underwriter spreads and brokerage commissions. While reasonable competitive spreads or commissions are sought, the Fund will not necessarily be paying the lowest spread or commission available.

Subject to obtaining the best net results, dealers who provide supplemental investment research (such as quantitative and modeling information assessments and statistical data and other similar services) to the Adviser may receive orders for transactions by the Fund. Information so received will be in addition to and not in lieu of the services required to be performed by the Adviser and the expenses of the Adviser will not necessarily be reduced as a result of the receipt of such supplemental information. Supplemental investment research obtained from such dealers might be used by the Adviser in servicing all of its accounts and such research might not be used by the Adviser in connection with the Fund.

Under the Investment Company Act, any affiliated person or promoter of or principal underwriter for the Fund and persons who are affiliated with such persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. Because transactions in the OTC market usually involve transactions with dealers acting as principal for their own accounts, affiliated persons of the Fund and the Underwriters, while the underwriting agreement is in effect, will not serve as the Fund’s dealer in such transactions. However, affiliated persons of the Fund may serve as its broker in listed or OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions. In addition, the Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which an affiliate is a member or in a private placement in which an affiliate serves as placement agent except pursuant to procedures adopted by the Board of Directors of the Fund that either comply with rules adopted by the SEC or with interpretations of the SEC staff.

Section 11(a) of the Exchange Act generally prohibits members of the U.S. national securities exchanges from executing exchange transactions for their affiliates and institutional accounts that they manage unless the member (i) has obtained prior express authorization from the account to effect such transactions; (ii) at least annually furnishes the account with a statement setting out the aggregate compensation received by the member in effecting such transactions; and (iii) complies with any rules the SEC has prescribed with respect to the requirements of clauses (i) and (ii).

Securities may be held by, or be appropriate investments for, the Fund as well as other funds or investment advisory clients of the Adviser or its affiliates. Because of different investment objectives or other factors, a particular security may be bought for one or more clients of the Adviser or its affiliates when one or more clients of the Adviser or its affiliates are selling the same security. If purchases or sales of securities arise for consideration at or about the same time that would involve the Fund or other clients or funds for which the Adviser or its affiliates act as investment advisers, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Adviser or its affiliates during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price.

 

72


Table of Contents

Portfolio Turnover

Under normal circumstances, the Fund expects to incur portfolio turnover at a rate of more than 100% in any fiscal year. The Fund’s portfolio turnover rate is calculated by dividing the lesser of purchases or sales of portfolio securities for the particular fiscal year by the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. A high portfolio turnover rate generally results in greater transaction costs, which are borne directly by the Fund, and also has certain tax consequences for shareholders.

CONFLICTS OF INTEREST

The Fund’s executive officers and directors, and the employees of the Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Fund or of other Apollo-advised funds. As a result, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of the Fund or its shareholders. Moreover, notwithstanding the difference in principal investment objectives between the Fund and the other Apollo-advised funds, such other Apollo sponsored funds, including potential new pooled investment vehicles or managed accounts not yet established (whether managed or sponsored by those Apollo affiliates or the Adviser), have and may from time to time have overlapping investment objectives with the Fund and, accordingly, invest in, whether principally or secondarily, asset classes similar to those targeted by the Fund. To the extent the other Apollo-advised funds have overlapping investment objectives, the scope of opportunities otherwise available to the Fund may be adversely affected and/or reduced. Additionally, certain employees of the Adviser and its management may face conflicts in their time management and commitments as well as in the allocation of investment opportunities to other Apollo funds.

The Adviser and/or its affiliates and portfolio managers may determine that an investment is appropriate both for the Fund and for one or more other funds or accounts. In such event, depending on the availability of such investment and other appropriate factors, the Adviser may determine that the Fund should invest on a side-by-side basis with one or more other funds. The Fund may make all such investments subject to compliance with applicable laws and regulations and interpretations thereof by the SEC and its staff. In certain circumstances, negotiated co-investments may be made only if the Fund has received an exemptive order from the SEC permitting such investment. There can be no assurance that any such exemptive order will be sought or obtained.

In the event investment opportunities are allocated among the Fund and the other Apollo-advised funds, the Fund may not be able to structure its investment portfolio in the manner desired. Although Apollo endeavors to allocate investment opportunities in a fair and equitable manner, it is possible that the Fund may not be given the opportunity to participate in certain investments made by the other Apollo-advised funds or portfolio managers affiliated with the Adviser. Furthermore, the Fund and the other Apollo-advised funds may make investments in securities where the prevailing trading activity may make impossible the receipt of the same price or execution on the entire volume of securities purchased or sold by Apollo for the Fund and the other Apollo-advised funds. When this occurs, the various prices may be averaged, and the Fund will be charged or credited with the average price. Thus, the effect of the aggregation may operate on some occasions to the disadvantage of the Fund. In addition, under certain circumstances, the Fund may not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated order.

It is possible that the other Apollo-advised funds may make investments in the same or similar securities at different times and on different terms than the Fund. From time to time, the Fund and the other Apollo-advised funds may make investments at different levels of an issuer’s capital structure or otherwise in different classes of an issuer’s securities. Such investments may inherently give rise to conflicts of interest or perceived conflicts of interest between or among the various classes of securities that may be held by such entities. Conflicts may also arise because portfolio decisions regarding the Fund may benefit the other Apollo-advised funds. For example, the sale of a long position or establishment of a short position by the Fund may impair the price of the same security sold short by (and therefore benefit) one or more Apollo-advised funds, and the purchase of a security or covering of a short position in a security by the Fund may increase the price of the same security held by (and therefore benefit) the other Apollo-advised funds.

 

73


Table of Contents

The results of the Fund’s investment activities may differ significantly from the results achieved by the other Apollo-advised funds. It is possible that one or more Apollo-advised funds will achieve investment results that are substantially more or less favorable than the results achieved by the Fund. Moreover, it is possible that the Fund will sustain losses during periods in which one or more affiliates achieve significant profits on their trading for proprietary or other accounts. The opposite result is also possible. The investment activities of one or more Adviser affiliates for their proprietary accounts and accounts under their management may also limit the investment opportunities for the Fund in certain markets.

The Adviser, its affiliates and their clients may pursue or enforce rights with respect to an issuer in which the Fund has invested, and those activities may have an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Fund’s investments may be negatively impacted by the activities of the Adviser and its affiliates or their clients, and transactions for the Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.

The Adviser may enter into transactions and invest in securities, instruments and currencies on behalf of the Fund in which customers of its affiliates, to the extent permitted by applicable law, serve as the counterparty, principal or issuer. In such cases, such party’s interests in the transaction could be adverse to the interests of the Fund, and such party may have no incentive to assure that the Fund obtains the best possible prices or terms in connection with the transaction. In addition, the purchase, holding and sale of such investments by the Fund may enhance the profitability of the Adviser or its affiliates. One or more affiliates may also create, write or issue Derivatives for their customers, the underlying securities, currencies or instruments of which may be those in which the Fund invests or which may be based on the performance of the Fund. The Fund may, subject to applicable law, purchase investments that are the subject of an underwriting or other distribution by one or more Adviser affiliates and may also enter into transactions with other clients of an affiliate where such other clients have interests adverse to those of the Fund.

Subject to applicable law, one or more affiliates of the Adviser may act as broker, dealer, agent, lender or advisor or in other commercial capacities for the Fund. It is anticipated that the commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by an affiliate will be in its view commercially reasonable, although each affiliate, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to the affiliate and such sales personnel. Subject to applicable law, affiliates of the Adviser (and their personnel) will be entitled to retain fees and other amounts that they receive in connection with their service to the Fund as broker, dealer, agent, lender, advisor or in other commercial capacities and no accounting to the Fund or its shareholders will be required, and no fees or other compensation payable by the Fund or its shareholders will be reduced by reason of receipt by an affiliate of any such fees or other amounts. When an affiliate acts as broker, dealer, agent, adviser or in other commercial capacities in relation to the Fund, the affiliate may take commercial steps in its own interests, which may have an adverse effect on the Fund.

The Adviser may select brokers (including, without limitation, affiliates of the Adviser) that furnish the Adviser directly or through correspondent relationships, with research or other appropriate services that provide, in the Adviser’s view, appropriate assistance to the Adviser in the investment decision-making process (including with respect to futures, fixed-price offerings and OTC transactions). Such research or other services may include, to the extent permitted by law, research reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; and other services and products. Research or other services obtained in this manner may be used in servicing any or all of the Fund and other client accounts, including in connection with client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such products and services may disproportionately benefit other client accounts relative to the Fund based on the amount of brokerage commissions paid by the Fund and such other client accounts. For example, research or other services that are paid for through one client’s commissions may not be used in managing that client’s account. In addition, other client accounts may receive the benefit, including disproportionate benefits, of economies of scale or price discounts in connection with products and services that

 

74


Table of Contents

may be provided to the Fund and to such other client accounts. The Adviser may receive research that is bundled with the trade execution, clearing, and/or settlement services provided by a particular broker-dealer. To the extent that the Adviser receives research on this basis, many of the same conflicts related to traditional soft dollars may exist. For example, the research effectively will be paid by client commissions that also will be used to pay for the execution, clearing, and settlement services provided by the broker-dealer and will not be paid by the Adviser.

The Fund will be required to establish business relationships with its counterparties based on the Fund’s own credit standing. Neither the Adviser nor any of its affiliates will have any obligation to allow its credit to be used in connection with the Fund’s establishment of its business relationships, nor is it expected that the Fund’s counterparties will rely on the credit of the Adviser or its affiliates in evaluating the Fund’s creditworthiness.

The Adviser is paid a fee based on a percentage of the Fund’s Managed Assets. The Adviser may have a conflict of interest in deciding whether to cause the Fund to incur leverage or to invest in more speculative investments or financial instruments, thereby potentially increasing the assets of the Fund and, accordingly, the fees received by the Adviser. Certain other Apollo-advised funds pay the Adviser or its affiliates performance-based compensation, which could create an incentive for the Adviser or affiliate to favor such investment fund or account over the Fund.

There are no information barriers among the Adviser and certain of its affiliates. If the Adviser or its affiliates were to receive material non-public information about a particular company, or have an interest in investing in a particular company, the Fund may be prevented from investing, or liquidating an investment, in such company. This risk may affect the Fund more than it does other investment vehicles, as the Adviser generally does not use information barriers that many firms implement to separate persons who make investment decisions from others who might possess material, non-public information that could influence such decisions. The Adviser’s decision not to implement these barriers could prevent its investment professionals from undertaking certain transactions such as advantageous investments or dispositions that would be permissible for them otherwise. In addition, the Adviser could in the future decide to establish information barriers, particularly as its business expands and diversifies.

The Adviser has adopted policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions made on behalf of advisory clients, including the Fund, and to help ensure that such decisions are made in accordance with its fiduciary obligations to clients. Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions may have the effect of favoring the interests of other clients, provided that the Adviser believes such voting decisions to be in accordance with its fiduciary obligations.

The Fund has entered into a royalty-free license agreement with AGM, pursuant to which AGM has agreed to grant the Fund a non-exclusive license to use the name “Apollo.” Under the license agreement, the Fund has the right to use the “Apollo” name for so long as the Adviser or one of its affiliates remains the Fund’s investment adviser. In addition, the Fund may pay fees to, or reimburse expenses of, the Adviser or its affiliates for certain management or administration services and disbursements, including the Fund’s allocable portion of the cost of its Chief Financial Officer and Chief Compliance Officer and their respective staffs, which can create conflicts of interest.

CODE OF ETHICS

The Fund’s Board of Directors has adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act and have also approved the Adviser’s code of ethics that was adopted by it in accordance with Rule 17j-1 and Rule 204A-1 under the Investment Advisers Act of 1940. These codes of ethics establish procedures for personal investments and restrict certain personal securities transactions. Personnel subject to a code may invest in securities for their personal investment accounts, including securities that may be purchased or held by the Fund, so long as such investments are made in accordance with the code’s requirements.

 

75


Table of Contents

The codes of ethics may be viewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the SEC’s Public Reference Room may be obtained by calling the SEC at (202) 551-8090. The codes of ethics also may be available on the Edgar Database on the SEC’s website, http://www.sec.gov, or be obtained, after paying a duplicating fee, by electronic request to publicinfo@sec.gov, or by writing to: SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549-0102. This reference to the website does not incorporate the contents of the website into this prospectus.

PROXY VOTING POLICIES

The Board of Directors of the Fund has delegated the voting of proxies for Fund securities to the Adviser pursuant to the Adviser’s proxy voting guidelines. Under these guidelines, the Adviser will vote proxies related to Fund securities in the best interests of the Fund and its shareholders. A copy of the Adviser’s proxy voting policy is attached as Appendix B.

Information on how the Fund voted proxies (if any) relating to portfolio securities during the most recent 12 month period ended June 30 will be available without charge by calling (888) 301-3838, or on the SEC’s website at http://www.sec.gov. This reference to the website does not incorporate the contents of the website into this prospectus.

DESCRIPTION OF SECURITIES

The following description of the terms of the Fund’s shares is only a summary. For a complete description, please refer to the Maryland General Corporation Law, and the Fund’s charter and Bylaws. The charter and Bylaws are exhibits to the Registration Statement, of which this prospectus forms a part.

Outstanding Securities . The following table sets forth information with respect to the outstanding securities of the Fund as of January 21, 2011.

 

Title of Class

   Amount of Shares
Authorized
     Amount of Shares
Held by the
Fund for its Account
     Amount of Shares
Outstanding 
 

Common Stock

     1,000,000,000 Shares         0 Shares         5,236 Shares   

The Fund’s Board of Directors may, without any action by the Fund’s shareholders, approve amendments to the Fund’s charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of stock that the Fund is authorized to issue. Additionally, the Fund’s charter authorizes the Board of Directors to classify and reclassify any unissued shares of common stock into one or more classes or series of stock, including preferred stock, from time to time, by setting or changing the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption for each class or series. Although the Fund has no present intention of doing so, it could issue a class or series of stock that could delay, defer or prevent a transaction or change in control of the Fund that might otherwise be in the shareholders’ best interest.

Common Stock

General . All shares of common stock offered pursuant to this prospectus will be, upon issuance, duly authorized, fully paid and nonassessable. All shares of common stock offered pursuant to this prospectus will be of the same class and will have identical rights, as described below. Holders of shares of common stock are entitled to receive distributions when, as and if authorized by the Board of Directors and declared by the Fund out of assets legally available for the payment of distributions. Common shareholders have no preference,

 

76


Table of Contents

conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any of the Fund’s securities. Shares of common stock are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. All shares of common stock have equal earnings, assets, distribution, liquidation and other rights.

Distributions . Distributions may be paid to the Fund’s common shareholders if, as and when authorized by the Fund’s Board of Directors and declared by the Fund out of assets legally available therefor.

If any shares of preferred stock are outstanding, common shareholders generally will not be entitled to receive any distributions from the Fund unless (1) the Fund has paid all accumulated dividends on the preferred stock, (2) the Fund has redeemed the full number of shares of preferred stock required to be redeemed by any provision for mandatory redemption of such preferred stock, (3) immediately after such a distribution, the Fund has an asset coverage of at least 200%, (4) the assets in the Fund’s portfolio meet any asset coverage requirements set forth by the Fund’s lenders or any applicable rating agency, in each case, after giving effect to such a distribution, and (5) there is no event of default existing under the terms of any of the Fund’s borrowings, in each case, after giving effect to such distributions. See “Leverage.”

So long as senior securities representing indebtedness of the Fund are outstanding, common shareholders generally will not be entitled to receive any distributions from the Fund unless (1) there is no event of default existing under the terms of such indebtedness, (2) immediately after such a distribution, the Fund has an asset coverage of at least 300% and (3) the assets in the Fund’s portfolio meet any asset coverage requirements set forth by the Fund’s lenders or any applicable rating agency, in each case, after giving effect to such a distribution. See “Leverage.”

Liquidation Rights . The Fund’s common shareholders are entitled to share ratably in the assets legally available for distribution to the Fund’s shareholders in the event of the liquidation, dissolution or winding up of the Fund, after payment of or adequate provision for all of the Fund’s known debts and liabilities, including any outstanding debt securities or other borrowings and any interest thereon. These rights are subject to the preferential rights of outstanding shares of any other class or series of the Fund’s stock, including any preferred stock.

Voting Rights . Each outstanding share of common stock generally entitles the holder to cast one vote on all matters submitted to a vote of the Fund’s shareholders, including the election of Directors. The presence of common shareholders entitled to cast a majority of the votes entitled to be cast at a meeting of the Fund’s shareholders constitutes a quorum at the meeting, unless applicable law or the Fund’s charter requires a separate vote of one or more classes of the Fund’s stock, in which case the presence in person or by proxy of the holders of shares entitled to cast a majority of the votes entitled to be cast by each such class on such a matter will constitute a quorum.

The Fund’s charter provides that, except as may otherwise be provided in the Fund’s Bylaws, Directors will be elected by the affirmative vote of the holders of a majority of the shares of stock outstanding and entitled to vote thereon. There is no cumulative voting in the election of Directors. Consequently, at each annual meeting of the Fund’s shareholders, the holders of a majority of the outstanding shares of stock entitled to vote will be able to elect all of the successors of the class of Directors whose terms expire at that meeting, except that holders of any outstanding preferred stock will have the right to elect two Directors at all times. Pursuant to the Fund’s charter and Bylaws, the Board of Directors may amend the Bylaws from time to time to alter the vote required to elect a Director.

Under the rules of the NYSE applicable to listed companies, the Fund will be required to hold an annual meeting of shareholders in each fiscal year. If for any reason the common stock are not listed on the NYSE (or any other national securities exchange, the rules of which require annual meetings of the Fund’s shareholders) or such rule otherwise ceases to apply to the Fund, the Fund may amend its Bylaws so that the Fund is not otherwise required to hold annual meetings of shareholders.

 

 

77


Table of Contents

Issuance of Additional Shares . The provisions of the Investment Company Act generally require that the public offering price of common stock of a closed-end investment company (less underwriting commissions and discounts) must equal or exceed the net asset value of the company’s common stock (calculated within 48 hours of pricing), unless the sale is made with the consent of a majority of the Fund’s common shareholders. Any sale of common stock by the Fund will be subject to the requirements of the Investment Company Act.

Preferred Stock

The Fund’s charter authorizes the Board of Directors to classify and reclassify any unissued shares of common stock into shares of other classes or series of stock, including preferred stock, without the approval of the common shareholders. Common shareholders have no preemptive right to purchase any shares of preferred stock that the Fund may issue. The Fund may elect to issue preferred stock as part of a leveraging strategy.

Prior to issuance of shares of each class or series, the Board of Directors is required by Maryland law and by the Fund’s charter to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption for each class or series. Thus, the Board of Directors could authorize the Fund to issue shares of preferred stock with terms that could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for common shareholders or otherwise be in their best interest. Any issuance of preferred stock, however, must comply with the requirements of the Investment Company Act.

The Investment Company Act, among other things, requires that the holders of outstanding shares of preferred stock, voting separately as a class, have the right to elect at least two Directors at all times. The remaining Directors will be elected by common and preferred shareholders, voting together as a single class. In addition, subject to the prior rights, if any, of the holders of any other class of senior securities outstanding, preferred shareholders will have the right to elect a majority of the Directors at any time that two years’ dividends on any outstanding shares of preferred stock are unpaid.

Certain Provisions of the Maryland General Corporation Law and the Fund’s Charter and Bylaws

The Maryland General Corporation Law and the Fund’s charter and Bylaws contain provisions that could make it more difficult for a potential acquiror to acquire the Fund by means of a tender offer, proxy contest or otherwise. These provisions are designed to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Fund to negotiate first with the Board of Directors. The Fund believes that the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.

Classified Board of Directors . The Fund’s Board of Directors is divided into three classes of Directors serving staggered three-year terms. The current terms for the first, second and third classes will expire in 2012, 2013 and 2014, respectively. Upon expiration of their current terms, Directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify, and each year one class of Directors will be elected by the shareholders. A classified board may render a change in control of the Fund or the removal of the Fund’s incumbent management more difficult. The Fund believes, however, that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of the Fund’s management and policies.

Election of Directors . The Fund’s charter and Bylaws provide that the affirmative vote of the holders of a majority of the outstanding shares of stock entitled to vote in the election of Directors will be required to elect a Director. As noted above, pursuant to the Fund’s charter, the Board of Directors may amend the Bylaws from time to time to alter the vote required to elect a Director.

 

 

78


Table of Contents

Number of Directors; Vacancies; Removal . The Fund’s charter provides that the number of Directors will be set only by the Board of Directors in accordance with the Fund’s Bylaws. The Fund’s Bylaws provide that a majority of the entire Board of Directors may at any time increase or decrease the number of Directors. However, unless the Fund’s Bylaws are amended, the number of Directors cannot be less than the minimum number required by the Maryland General Corporation Law or more than 12.

The Fund’s charter provides that, at such time as the Fund has at least three independent directors and its common stock is registered under the Exchange Act, the Fund elects to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the Board of Directors. For that reason, except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any and all vacancies on the Board of Directors may be filled only by the affirmative vote of a majority of the Directors remaining in office, even if the remaining Directors do not constitute a quorum, and any Director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act.

The Fund’s charter provides that a Director may be removed only for cause, as defined in the charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of Directors.

Action by Shareholders . Under the Maryland General Corporation Law, shareholder action can be taken only at an annual or special meeting of shareholders or, unless the charter provides for shareholder action by less than unanimous written consent (which is not the case for the Fund’s charter), by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of the Fund’s Bylaws regarding the calling of a shareholder-requested special meeting of shareholders discussed below, may have the effect of delaying consideration of a shareholder proposal until the next annual meeting of shareholders.

Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals . The Fund’s Bylaws provide that, with respect to an annual meeting of shareholders, the nomination of individuals for election as Directors and the proposal of other business to be considered by the Fund’s shareholders may be made only (1) pursuant to the Fund’s notice of the meeting, (2) by or at the direction of the Board of Directors or (3) by a shareholder who is entitled to vote at the meeting in the election of such individuals as Directors or on such other business and who has complied with the advance notice requirements of, and provided the information required by, the Fund’s Bylaws. With respect to special meetings of the Fund’s shareholders, only the business specified in the notice of the meeting may be brought before the meeting. Nominations of individuals for election as Directors at a special meeting of shareholders may be made only (i) by or at the direction of the Board of Directors or (ii) if the special meeting has been called in accordance with the Fund’s Bylaws for the purpose of electing directors, by any shareholder who is a shareholder of record both at the time the shareholder provides the notice required by the Fund’s Bylaws at the time of the special meeting, who is entitled to vote at the meeting in the election of each individual so nominated and who has complied with the advance notice requirements of, and provided the information required by, the Fund’s Bylaws.

Calling of Special Meetings of Shareholders . The Fund’s Bylaws provide that special meetings of the Fund’s shareholders may be called by the Board of Directors and certain of the Fund’s officers. The Fund’s Bylaws also provide that, subject to the satisfaction of certain procedural and informational requirements by the shareholders requesting the meeting, a special meeting of shareholders must be called by the secretary of the Fund upon the written request of shareholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. The Fund’s secretary will inform the requesting shareholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Fund’s proxy materials), and the requesting shareholders must pay the estimated cost before the secretary may prepare and mail notice of the special meeting.

Approval of Extraordinary Corporate Action; Amendment of the Fund’s Charter and Bylaws . Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless

 

79


Table of Contents

approved by the affirmative vote of shareholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter.

The Fund’s charter generally provides for approval of charter amendments and extraordinary transactions by the shareholders entitled to cast at least a majority of the votes entitled to be cast on the matter. However, the Fund’s charter provides that the following matters require the approval of shareholders entitled to cast at least 80 percent of the votes entitled to be cast on such matter:

 

   

amendments to the provisions of the Fund’s charter relating to the classification of the Board of Directors, the power of the Board of Directors to fix the number of directors and to fill vacancies on the Board and the vote required to elect or remove a Director;

 

   

charter amendments that would convert the Fund from a closed-end company to an open-end company or make the Fund’s common stock a redeemable security (within the meaning of the Investment Company Act);

 

   

the liquidation or dissolution of the Fund or charter amendments to effect the liquidation or dissolution of the Fund;

 

   

amendments to the provisions of the Fund’s charter relating to the vote required to approve the dissolution of the Fund, charter amendments and extraordinary transactions;

 

   

any merger, consolidation, share exchange or sale or exchange of all or substantially all of the Fund’s assets that the Maryland General Corporation Law requires be approved by the Fund’s shareholders; or

 

   

any transaction between the Fund, on the one hand, and any person or group of persons acting together that is entitled to exercise or direct the exercise, or acquire the right to exercise or direct the exercise, directly or indirectly (other than solely by virtue of a revocable proxy), of one-tenth or more of the voting power in the election of Directors generally, or any affiliate of such a person, group or member of such a group (collectively “Transacting Persons”), on the other hand.

However, if such amendment, proposal or transaction is approved by at least two-thirds of the Fund’s continuing directors (in addition to approval by the Board of Directors), the amendment, proposal or transaction may instead be approved by a majority of the votes entitled to be cast on such amendment, proposal or transaction, except that any transaction including Transacting Persons that would not otherwise require shareholder approval under the Maryland General Corporation Law would not require further shareholder approval unless another provision of the Fund’s charter requires such approval. The “continuing directors” are defined in the Fund’s charter as its current Directors and Directors whose nomination for election by the Fund’s shareholders or whose election by the Directors to fill a vacancy on the Board is approved by a majority of the continuing directors then serving on the Board of Directors.

The Fund’s charter and Bylaws provide that the Board of Directors will have the exclusive power to adopt, alter or repeal any provision of the Fund’s Bylaws and to make new Bylaws.

CLOSED-END FUND STRUCTURE

The Fund is a newly organized, non-diversified, closed-end management investment company (commonly referred to as a closed-end fund). Unlike open-end funds (which are generally referred to as mutual funds) closed-end funds generally list their shares for trading on a stock exchange and do not redeem their shares at the request of the shareholder. As a result, if shareholders wish to sell common shares of a closed-end fund they must trade them on the market as they would with respect to any other stock at the prevailing market price at that time. If the shareholder wishes to sell shares of the mutual fund, the mutual fund will redeem or buy back the shares at “net asset value.”

 

80


Table of Contents

Shares of closed-end funds frequently trade at a discount to their net asset value. Because of this possibility and the recognition that any such discount may not be in the interest of shareholders, the Fund’s Board of Directors might consider from time to time engaging in transactions such as open-market repurchases, tender offers for shares or other programs intended to reduce the discount. The Fund cannot guarantee or assure, however, that the Fund’s Board of Directors will decide to engage in any of these actions. Nor is there any guarantee or assurance that such actions, if undertaken, would result in the shares trading at a price equal or close to net asset value per common share.

REPURCHASE OF COMMON SHARES

Because the Fund is a closed-end management investment company, its shareholders will not have the right to cause the Fund to redeem their common shares. Instead, the Fund’s common shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Notice is hereby given in accordance with Section 23(c) of the Investment Company Act that the Fund may purchase at market prices from time to time its common shares in the open market but is under no obligation to do so.

Notwithstanding the foregoing, at any time if the Fund has preferred shares outstanding, the Fund may not purchase, redeem or otherwise acquire any of its common shares unless (i) all accrued preferred shares dividends have been paid and (ii) at the time of such purchase, redemption or acquisition, the Fund has an asset coverage of at least 200% after deducting the amount of such purchase, redemption or acquisition, as applicable. Similarly, if the Fund has outstanding indebtedness, the Fund may not purchase, redeem or acquire its capital stock unless the Fund has an asset coverage of at least 300% after deducting the amount of such purchase, redemption or acquisition, as applicable. See “Leverage.” Any service fees incurred in connection with any tender offer made by the Fund will be borne by the Fund and will not reduce the stated consideration to be paid to tendering shareholders.

Subject to its investment restrictions, the Fund may borrow to finance the repurchase of common shares or to make a tender offer for those shares. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Fund’s net income. Any share repurchase, tender offer or borrowing approved by the Fund’s Board of Directors would have to comply with the NYSE listing requirements and the Exchange Act, the Investment Company Act, and the rules and regulations thereunder.

There is no assurance that, if action is undertaken to repurchase or tender for common shares, such action will result in the common shares trading at a price that approximates their net asset value. Although share repurchases and tenders could have a favorable effect on the market price of the Fund’s common shares, shareholders should be aware that the acquisition of common shares by the Fund will decrease the total net assets of the Fund and, therefore, may have the effect of increasing the Fund’s expense ratio and decreasing the asset coverage with respect to any preferred shares outstanding and any amounts borrowed.

TAX MATTERS

The discussion below provides general tax information related to an investment in common shares of the Fund. Because tax laws are complex and often change, shareholders should consult their tax advisors about the tax consequences of an investment in the Fund. Unless otherwise noted, the following tax discussion applies only to U.S. shareholders that hold the common shares as a capital asset (generally, property held for investment). A U.S. shareholder is, for U.S. federal income tax purposes, an individual who is a citizen or resident of the United States, a U.S. corporation, or any estate or trust the income of which is subject to U.S. federal income tax regardless of its source.

 

81


Table of Contents

The Fund intends to elect to be treated and to qualify each taxable year as a regulated investment company under Subchapter M of the Code. To qualify under Subchapter M for the favorable tax treatment accorded to regulated investment companies, the Fund must, among other things: (1) distribute to its shareholders in each taxable year at least 90% of the sum of its investment company taxable income ( i.e. , income other than its net realized long-term capital gain over its net realized short-term capital loss, but without regard to the deduction for dividends paid) and its net tax-exempt income; (2) derive in each taxable year at least 90% of its gross income from (a) dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income (including but not limited to gain from options, futures and forward contracts) derived with respect to its business of investing in such stock, securities or foreign currencies; and (b) net income derived from interests in “Qualified Publicly Traded Partnerships” ( i . e ., partnerships that are traded on an established securities market or tradable on a secondary market) that derive less than 90% of their gross income from the items described in (a) above and (3) diversify its holdings so that, at the end of each quarter of each taxable year of the Fund (a) at least 50% of the value of the Fund’s total assets is represented by cash, cash items, U.S. government securities and securities of other regulated investment companies, and other securities, with these other securities limited, with respect to any one issuer, to an amount not greater in value than 5% of the value of the Fund’s total assets, and to not more than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of the Fund’s total assets is represented by the securities (other than U.S. government securities or securities of other regulated investment companies) of (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same or similar trades or businesses or related trades or businesses or (III) any one or more Qualified Publicly Traded Partnerships. As a regulated investment company, the Fund generally will not be subject to U.S. federal income tax on its investment company taxable income and net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, that it distributes in each taxable year to its shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable income and net capital gain.

A regulated investment company that fails to distribute, by the close of each calendar year, an amount at least equal to the sum of 98% of its ordinary taxable income for such calendar year and 98.2% of its capital gain net income for the one-year period ended on October 31 of such calendar year, plus any shortfalls from any prior year’s required distribution, is liable for a 4% excise tax on the portion of the undistributed amounts of such income that are less than the required distributions. For these purposes, the Fund will be deemed to have distributed any income on which it paid federal income tax. To avoid the imposition of this excise tax, the Fund intends to make the required distributions of its ordinary taxable income and its capital gain net income, to the extent possible, by the close of each calendar year.

Distributions to shareholders by the Fund of ordinary income (including “market discount” realized by the Fund on the sale of debt securities), and of net short-term capital gains, if any, realized by the Fund will, except as described below with respect to distributions of “qualified dividend income,” be taxable to shareholders as ordinary income to the extent such distributions are paid out of the Fund’s current or accumulated earnings and profits. Distributions, if any, of net capital gains will be taxable as long-term capital gains, regardless of the length of time the shareholder has owned common shares of the Fund. A distribution of an amount in excess of the Fund’s current and accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be treated by a shareholder as a return of capital that is applied against and reduces the shareholder’s basis in his or her shares of common shares of the Fund. To the extent that the amount of any such distribution exceeds the shareholder’s basis in his or her shares, the excess will be treated by the shareholder as gain from a sale or exchange of the common shares. A non-corporate shareholder should also be aware that the benefits of the favorable tax rate applicable to long-term capital gains and qualified dividend income may be affected by the application of the alternative minimum tax to individual shareholders. Under current law, the reduced maximum 15% U.S. federal income tax rate for non-corporate shareholders on qualified dividend income and long-term capital gains will not apply in taxable years beginning after December 31, 2012.

Distributions will be treated in the manner described above regardless of whether such distributions are paid in cash or invested in additional common shares of the Fund. Shareholders receiving distributions in the form of

 

82


Table of Contents

additional common shares of the Fund will be treated as receiving a distribution in the amount of cash that they would have received if they had elected to receive the distribution in cash, unless the Fund issues additional common shares with a fair market value equal to or greater than net asset value, in which case, shareholders will be treated as receiving a distribution in the amount of the fair market value of the distributed common shares.

Although dividends generally will be treated as distributed when paid, dividends declared in October, November or December, payable to shareholders of record on a specified date in one of those months, and paid during the following January, will be treated as having been distributed by the Fund (and received by shareholders) on December 31 of the year in which declared. In addition, certain other distributions made after the close of a taxable year of the Fund may be “spilled back” and treated for certain purposes as paid by the Fund during such taxable year. In such case, shareholders generally will be treated as having received such dividends in the taxable year in which the distributions were actually made. For purposes of calculating the amount of a regulated investment company’s undistributed income and gain subject to the 4% excise tax described above, such “spilled back” dividends are treated as paid by the regulated investment company when they are actually paid.

For U.S. federal income tax purposes, the Fund is permitted to carry forward a net capital loss for any year to offset future capital gains. To the extent subsequent capital gains are offset by such losses, they would not result in U.S. federal income tax liability to the Fund and may not be distributed as such to shareholders. The Fund may not carry forward any losses other than net capital losses.

In general, the sale or other disposition of common shares will result in capital gain or loss to shareholders. A holder’s gain or loss generally will be a long-term gain or loss if the common shares have been held for more than one year. Present law taxes both long- and short-term capital gains of corporations at the rates applicable to ordinary income. For non-corporate taxpayers, however, under current law net capital gains will be taxed at a maximum rate of 20% for taxable years beginning after December 31, 2012 (unless Congress enacts legislation providing otherwise), while short-term capital gains and other ordinary income will be taxed at a maximum rate of 35% (increasing to 39.6% in 2013). Because of the limitations on itemized deductions and the deduction for personal exemptions applicable to higher income taxpayers, the effective rate of tax may be higher in certain circumstances. Losses realized by a holder on the sale or exchange of common shares held for six months or less are treated as long-term capital losses to the extent of any distribution of long-term capital gain received (or amounts designated as undistributed capital gains) with respect to such common shares. In addition, no loss will be allowed on the sale or other disposition of common shares if the owner acquires (including pursuant to the dividend reinvestment plan) or enters into a contract or option to acquire securities that are substantially identical to such common shares within 30 days before or after the disposition. In such case, the basis of the securities acquired will be adjusted to reflect the disallowed loss.

Beginning in 2013, a 3.8% Medicare contribution tax will be imposed on net investment income, including interest, dividends, and capital gain, of U.S. individuals with income exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.

The Fund’s transactions in foreign currencies, forward contracts, options and futures contracts (including options and futures contracts on foreign currencies), to the extent permitted, will be subject to special provisions of the Code (including provisions relating to “hedging transactions” and “straddles”) that, among other things, may affect the character of gains and losses realized by the Fund ( i.e ., may affect whether gains or losses are ordinary or capital), accelerate recognition of income to the Fund and defer Fund losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Fund to mark-to-market certain types of the positions in its portfolio ( i.e ., treat them as if they were closed out at the end of each year) and (b) may cause the Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise taxes. The Fund will endeavor to monitor its transactions and will endeavor to make

 

83


Table of Contents

the appropriate tax elections and the appropriate entries in its books and records when it acquires any foreign currency, forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and prevent disqualification of the Fund as a regulated investment company.

The Fund’s investment in so-called “section 1256 contracts,” such as regulated futures contracts, most foreign currency forward contracts traded in the interbank market and options on most stock indices, are subject to special tax rules. All section 1256 contracts held by the Fund at the end of its taxable year are required to be marked to their market value, and any unrealized gain or loss on those positions will be included in the Fund’s income as if each position had been sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain or loss realized by the Fund from positions in section 1256 contracts closed during the taxable year. Provided such positions were held as capital assets and were not part of a “hedging transaction” nor part of a “straddle,” 60% of the resulting net gain or loss will be treated as long-term capital gain or loss, and 40% of such net gain or loss will be treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the Fund.

As a result of entering into swap contracts, the Fund may make or receive periodic net payments. The Fund may also make or receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction. Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap will generally result in capital gain or loss (which will be a long-term capital gain or loss if the Fund has been a party to the swap for more than one year). With respect to certain types of swaps, the Fund may be required to currently recognize income or loss with respect to future payments on such swaps or may elect under certain circumstances to mark such swaps to market annually for tax purposes as ordinary income or loss. The tax treatment of many types of credit default swaps is uncertain.

Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income or receivables or expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such income or pays such liabilities are generally treated as ordinary income or ordinary loss. Similarly, gains or losses on foreign currency, foreign currency forward contracts and certain foreign currency options or futures contracts, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss unless the Fund were to elect otherwise.

In certain situations, the Fund may, for a taxable year, defer all or a portion of its capital losses and currency losses realized after October and ordinary losses incurred after December until the next taxable year in computing its investment company taxable income and net capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and losses realized after October (or December) may affect the tax character of shareholder distributions.

For taxable years beginning before January 1, 2012, properly reported dividends are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of the Fund’s “qualified net interest income” (generally, the Fund’s U.S. source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the Fund is at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of the Fund’s “qualified short-term capital gains” (generally, the excess of the Fund’s net short-term capital gain over the Fund’s long-term capital loss for such taxable year). However, depending on its circumstances, the Fund could report all, some or none of its potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a non-U.S. shareholder would need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute Form). In the case of shares held through an intermediary, the intermediary could withhold even if the Fund designated the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their accounts.

 

 

84


Table of Contents

For taxable years beginning before January 1, 2012, distributions that the Fund reported as “short-term capital gain dividends” or “long-term capital gain dividends” will not be treated as such to a recipient foreign shareholder if the distribution is attributable to gain received from the sale or exchange of U.S. real property or an interest in a U.S. real property holding corporation and the Fund’s direct or indirect interests in U.S. real property exceeds certain levels. Instead, if the foreign shareholder does not own more than 5% of the outstanding shares of the Fund at any time during the one year period ending on the date of distribution, such distributions will be subject to 30% withholding by the Fund and will be treated as ordinary dividends to the foreign shareholder; if the foreign shareholder owns more than 5% of the outstanding shares of the Fund at any time during the one year period ending on the date of the distribution, such distribution will be treated as real property gain subject to 35% withholding tax and could subject the foreign shareholder to U.S. filing requirements. Additionally, if the Fund’s direct or indirect interests in U.S. real property were to exceed certain levels, a foreign shareholder realizing gains upon redemption from the Fund on or before December 31, 2011 could be subject to the 35% withholding tax and U.S. filing requirements unless more than 50% of the Fund’s shares were owned by U.S. persons at such time or unless the foreign person had not held more than 5% of the Fund’s outstanding shares throughout either such person’s holding period for the redeemed shares or, if shorter, the previous five years.

Beginning in 2013, a withholding tax of 30% will apply to payments of Fund dividends and gross proceeds of Fund redemptions paid to shareholders that are non-U.S. entities unless such shareholders comply with certain reporting requirements to the IRS (for non-U.S. investment funds and financial institutions) or the Fund (other non-U.S. entities) as to identifying information (including name, address and taxpayer identification number) of their direct and indirect U.S. owners.

The foregoing tax discussion is for general information only. The provisions of the Code and regulations thereunder presently in effect as they directly govern the taxation of the Fund and its shareholders are subject to change by legislative or administrative action, and any such change may be retroactive with respect to the Fund’s transactions. The foregoing does not represent a detailed description of the federal income tax considerations relevant to special classes of taxpayers including, without limitation, financial institutions, insurance companies, investors in pass-through entities, U.S. shareholders whose “functional currency” is not the U.S. dollar, tax-exempt organizations, dealers in securities or currencies, traders in securities or commodities that elect mark to market treatment, or persons that will hold common shares as a position in a “straddle,” “hedge” or as part of a “constructive sale” for federal income tax purposes. Shareholders are advised to consult with their own tax advisors for more detailed information concerning federal income tax matters.

 

85


Table of Contents

UNDERWRITERS

Under the terms and subject to the conditions contained in the underwriting agreement dated as of the date of this prospectus, the Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC are acting as Representatives, have severally agreed to purchase, and the Fund has agreed to sell to them, severally, the number of common shares indicated below.

 

Name

   Number of
Common Shares
 

Morgan Stanley & Co. Incorporated

  

Citigroup Global Markets Inc.

  

Merrill Lynch, Pierce, Fenner & Smith
                 Incorporated

  

Wells Fargo Securities, LLC

  

Janney Montgomery Scott LLC

  

Ladenburg Thalmann & Co. Inc.

  

Maxim Group LLC

  

Oppenheimer & Co. Inc.

  

RBC Capital Markets, LLC

  

Stifel, Nicolaus & Company, Incorporated

  

Wunderlich Securities, Inc.

  
        

Total

  
        

The Underwriters are offering the common shares subject to their acceptance of the common shares from the Fund and subject to prior sale. The underwriting agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the common shares offered by this prospectus are subject to the approval of legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all of the common shares offered by this prospectus if any such common shares are taken. However, the Underwriters are not required to take or pay for the common shares covered by the Underwriters’ over-allotment option described below.

The Underwriters initially propose to offer part of the common shares directly to the public at the initial offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $             per common share under the initial offering price. After the initial offering of the common shares, the offering price and other selling terms may from time to time be varied by the Representatives. The underwriting discounts and commissions (sales load) of $0.90 per common share are equal to 4.5% of the initial offering price. Investors must pay for any common shares purchased on or before                     , 2011.

The Fund has granted to the Underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to an aggregate of                      common shares at the initial offering price per common share listed on the cover page of this prospectus, less underwriting discounts and commissions. The Underwriters may exercise this option solely for the purpose of covering overallotments, if any, made in connection with the offering of the common shares offered by this prospectus. To the extent the option is exercised, each Underwriter will become obligated, subject to limited conditions, to purchase approximately the same percentage of the additional common shares as the number listed next to the Underwriter’s name in the preceding table bears to the total number of common shares listed next to the names of all Underwriters in the preceding table. If the Underwriters’ overallotment option is exercised in full, the total price to the public would be $            , the total Underwriters’ discounts and commissions (sales load) would be $            , the estimated offering expenses would be $            , $             of which would be borne by the Fund, and the total proceeds to the Fund would be $            .

 

86


Table of Contents

The following table summarizes the estimated expenses and compensation that the Fund will pay:

 

     Per Common Share      Total  
     Without
Overallotment
     With
Overallotment
     Without
Overallotment
     With
Overallotment
 

Public offering price

   $ 20.00       $ 20.00       $                          $                      

Sales load

   $ 0.90       $ 0.90       $         $     

Estimated offering expenses

   $ 0.04       $ 0.04       $         $     

Proceeds, after expenses, to the Fund

   $ 19.06       $ 19.06       $         $     

The fees described below under “—Additional Compensation to Be Paid by the Adviser” are not reimbursable to the Adviser by the Fund, and are therefore not reflected in expenses payable by the Fund in the table above.

Offering expenses paid by the Fund (other than sales load) will not exceed $0.04 per common share sold by the Fund in this offering. If the offering expenses referred to in the preceding sentence exceed this amount, the Adviser will pay the excess and will pay all organizational expenses. The aggregate offering expenses (excluding sales load) are estimated to be $             in total, $             of which will be borne by the Fund (or $             if the Underwriters exercise their overallotment option in full). If the Fund issues preferred shares and/or notes, the Fund’s common shareholders will also bear the expenses of such an offering. The total offering expenses for this offering and any offering of preferred shares and/or notes are estimated to be approximately $             per share.

The Underwriters have informed the Fund that they do not intend sales to discretionary accounts to exceed five percent of the total number of common shares offered by them.

In order to meet requirements for listing the common shares on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial owners in the United States. The minimum investment requirement is 100 common shares ($2,000).

The Fund’s common shares have been approved for listing on the NYSE, subject to notice of issuance, under the trading or “ticker” symbol “AFT” and will be required to meet the NYSE’s listing requirements.

The Fund and all Directors and officers and holders of the Fund’s outstanding common shares have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC, on behalf of the Underwriters, the Fund and themselves will not, during the period ending 180 days after the date of this prospectus:

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any common shares or any securities convertible into or exercisable or exchangeable for common shares, or

 

   

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common shares,

whether any such transaction described above is to be settled by delivery of common shares or such other securities, in cash or otherwise; or file any registration statement with the SEC relating to the offering of any common shares or any securities convertible into or exercisable or exchangeable for common shares. Notwithstanding the foregoing, if (i) during the last 17 days of the 180-day restricted period, the Fund issues an earnings release or announces material news or a material event relating to the Fund occurs; or (ii) prior to the expiration of the 180-day restricted period, the Fund announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day restricted period, the restrictions described above shall

 

87


Table of Contents

continue to apply until the expiration of the 18-day period beginning on the date of the earnings release or the announcement of the material news or material event. These lock-up agreements will not apply to the common shares to be sold pursuant to the underwriting agreement for this offering or any common shares issued pursuant to the Fund’s dividend reinvestment plan or any preferred share issuance, if any.

In order to facilitate the offering of the common shares, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common shares. Specifically, the Underwriters may sell more common shares than they are obligated to purchase under the underwriting agreement, creating a short position in the common shares for their own account. A short sale is covered if the short position is no greater than the number of common shares available for purchase by the Underwriters under the overallotment option (exercisable for 45 days from the date of this prospectus). The Underwriters can close out a covered short sale by exercising the overallotment option or purchasing common shares in the open market. In determining the source of common shares to close out a covered short sale, the Underwriters will consider, among other things, the open market price of the common shares compared to the price available under the overallotment option. The Underwriters may also sell common shares in excess of the over-allotment option, creating a naked short position. The Underwriters must close out any naked short position by purchasing common shares in the open market. A naked short position is more likely to be created if the Underwriters are concerned that there may be downward pressure on the price of the common shares in the open market after pricing that could adversely affect investors who purchase in the offering. As an additional means of facilitating the offering, the Underwriters may bid for, and purchase, common shares in the open market to stabilize the price of the common shares. Finally, the underwriting syndicate may also reclaim selling concessions allowed to an Underwriter or a dealer for distributing the common shares in the offering, if the syndicate repurchases previously distributed common shares in transactions to cover syndicate short positions or to stabilize the price of the common shares. Any of these activities may raise or maintain the market price of the common shares above independent market levels or prevent or retard a decline in the market price of the common shares. The Underwriters are not required to engage in these activities, and may end any of these activities at any time.

Prior to this offering, there has been no public or private market for the common shares or any other securities of the Fund. Consequently, the offering price for the common shares was determined by negotiation among the Fund, the Adviser and the Representatives. There can be no assurance, however, that the price at which the common shares trade after this offering will not be lower than the price at which they are sold by the Underwriters or that an active trading market in the common shares will develop and continue after this offering.

The Fund anticipates that certain Underwriters may from time to time act as brokers and dealers in connection with the execution of its portfolio transactions after they have ceased to be Underwriters and, subject to certain restrictions, may act as such brokers while they are Underwriters.

In connection with this offering, certain of the Underwriters or selected dealers may distribute prospectuses electronically. The Fund, the Adviser and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. As a newly organized entity, the Adviser may have limited ability to meet any obligations under the joint and several agreement of the Adviser and the Fund to indemnify the Underwriters.

Prior to the public offering of common shares, the Adviser purchased common shares from the Fund in an amount satisfying the initial capital requirements of Section 14(a) of the Investment Company Act. As of the date of this Prospectus, the Adviser owned 100% of the outstanding common shares.

The principal business address of Morgan Stanley & Co. Incorporated is 1585 Broadway, New York, New York 10036. The principal business address of Citigroup Global Markets Inc. is 388 Greenwich Street, New York, New York 10013. The principal business address of Merrill Lynch, Pierce, Fenner & Smith Incorporated is One Bryant Park, New York, New York 10036. The principal business address of Wells Fargo Securities, LLC is 375 Park Ave, New York, New York 10152.

 

88


Table of Contents

The Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters or their respective affiliates from time to time have provided in the past, and may provide in the future, investment banking, securities trading, hedging, brokerage activities, commercial lending and financial advisory services to the Fund, certain Fund officers and Fund affiliates and the Adviser and its affiliates in the ordinary course of business, for which they have received, and may receive, customary fees and expenses.

No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of the common shares, or the possession, circulation or distribution of this prospectus or any other material relating to the Fund or the common shares in any jurisdiction where action for that purpose is required. Accordingly, the common shares may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the common shares may be distributed or published, in or from any country or jurisdiction except in compliance with the applicable rules and regulations of any such country or jurisdiction.

Additional Compensation to Be Paid by the Adviser

 

The Adviser (and not the Fund) has agreed to pay, from its own assets, upfront structuring fees to Morgan Stanley & Co. Incorporated in the amount of $            , Citigroup Global Markets Inc. in the amount of $             , Merrill Lynch, Pierce, Fenner & Smith Incorporated in the amount of $             and Wells Fargo Securities, LLC in the amount of $            . In contrast to the underwriting discounts and commissions (earned under the underwriting agreement by the underwriting syndicate as a group), the structuring fees will be earned by and paid to Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC by the Adviser for advice to the Adviser relating to the structure, design and organization of the Fund.

The Adviser (and not the Fund) may also pay certain qualifying Underwriters a marketing or structuring fee in connection with this offering. The total amounts of these payments paid to any qualifying Underwriter, including those named above, will not exceed 1.5% of the total price of the common shares sold by that Underwriter in this offering.

The Fund has agreed to pay expenses related to the reasonable fees and disbursements of counsel to the Underwriters in connection with the review by the Financial Industry Regulatory Authority, Inc. (“FINRA”) of the terms of the sale of the shares of common stock, the filing fees incident to the filing of marketing materials with FINRA and the transportation and other expenses incurred by the Underwriters in connection with presentations to prospective purchasers of the shares of common stock. Such expenses will not exceed $10,000 in the aggregate.

Total underwriting compensation determined in accordance with FINRA rules is summarized as follows. The sales load that the Fund will pay of $0.90 per share is equal to 4.5% of gross proceeds. The sum total of all compensation to the Underwriters in connection with this public offering of common shares, including sales load, expense reimbursement and all forms of structuring fee payments to the Underwriters and other expenses will be limited to not more than 9.0% of the gross proceeds.

ADMINISTRATIVE, CUSTODIAN AND TRANSFER AGENT SERVICES

BNY Mellon Investment Servicing (US) Inc., located at 301 Bellevue Parkway Wilmington, Delaware 19809, serves as administrator to the Fund. Under the Administration and Accounting Services Agreement, BNY Mellon Investment Servicing (US) Inc., provides certain administrative services necessary for the operation of

 

89


Table of Contents

the Fund, including maintaining certain Fund books and records, providing accounting services and preparing regulatory filings. BNY Mellon Investment Servicing (US) Inc., will receive an estimated monthly fee of approximately $23,000 for the provision of administrative services; however, this fee could vary depending on, among other things, the total amount of assets of the Fund, the amount and type of leverage used by the Fund and the types of transactions in which the Fund engages.

The Bank of New York Mellon Corporation, located at One Wall Street, New York, NY 10286, serves as the Fund’s custodian pursuant to a Custody Agreement. BNY Mellon Investment Servicing (US) Inc., located at 301 Bellevue Parkway, Wilmington, DE 19089, will serve as the Fund’s transfer agent and dividend paying agent with respect to the common shares.

LEGAL OPINIONS

Certain legal matters in connection with the common shares will be passed upon for the Fund by Willkie Farr & Gallagher LLP, New York, New York, and for the Underwriters by Clifford Chance US LLP. Willkie Farr & Gallagher LLP and Clifford Chance US LLP may rely as to certain matters of Maryland law on the opinion of Venable LLP, Baltimore, Maryland.

FISCAL YEAR

For accounting purposes, the Fund’s fiscal year is the 12-month period ending on December 31. For tax purposes, the Fund has adopted the 12-month period ending December 31 of each year as its taxable year.

 

90


Table of Contents

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Fund has selected Deloitte & Touche LLP as its independent registered public accounting firm. Deloitte & Touche LLP’s principal business address is located at Two World Financial Center, New York, NY 10281.

 

91


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Apollo Senior Floating Rate Fund Inc.

We have audited the accompanying statement of net assets of Apollo Senior Floating Rate Fund Inc. (the “Fund”) as of January 21, 2011. This financial statement is the responsibility of the Fund’s management. Our responsibility is to express an opinion on this financial statement based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audit of the financial statement provides a reasonable basis for our opinion.

In our opinion, such statement of net assets presents fairly, in all material respects, the financial position of Apollo Senior Floating Rate Fund Inc. as of January 21, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

New York, New York

January 25, 2011

 

92


Table of Contents

Apollo Senior Floating Rate Fund Inc.

Statement of Net Assets

As of January 21, 2011

 

     January 21, 2011  

ASSETS:

  

Cash

   $ 100,008   

Deferred offering costs

     213,264   
        

TOTAL ASSETS

   $ 313,272   
        

LIABILITIES:

  

Accrued offering costs

   $ 213,264   
        

TOTAL LIABILITIES

   $ 213,264   
        

NET ASSETS

   $ 100,008   
        

COMPONENTS OF NET ASSETS

  

Common Stock (5,236 issued and outstanding, $.001 par value, 1,000,000,000 shares authorized)

   $ 5   
  
        

Paid in Capital

   $ 100,003   
        

Net asset value per share

   $ 19.10   
        

See notes to the Statement of Net Assets

 

93


Table of Contents

Notes to Statement of Net Assets

As of January 21, 2011

1. ORGANIZATION

Apollo Senior Floating Rate Fund Inc. (the “Fund”) is a corporation organized under the laws of the State of Maryland and registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940 (the “Investment Company Act”) as a closed-end, non-diversified management investment company. The Fund was organized on September 30, 2010, and has no operating history. Apollo Credit Management, LLC (the “Adviser”) serves as the Fund’s investment adviser and is an affiliate of Apollo Global Management LLC (“AGM”). The Fund’s objective is to seek current income and preservation of capital. The Fund will seek to achieve its investment objective by investing primarily in senior, secured loans made to companies whose debt is rated below investment grade (“Senior Loans”) and investments with similar economic characteristics.

The Fund has no operations to date other than matters relating to its organization and the sale and issuance of 5,236 shares of common stock in the Fund to the Adviser at a net asset value of $19.10 per share. Shares to be issued by the Fund are subject to a sales load of 4.50% paid to the underwriters. The Fund has the authority to issue 1,000,000,000 shares of common stock, $.001 par value per share.

2. SIGNIFICANT ACCOUNTING POLICIES

Estimates —The Fund’s financial statement is prepared in accordance with accounting principles generally accepted in the United States of America. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statement. Actual results could differ from these estimates.

Income Taxes —The Fund’s policy is to comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. The Fund plans to file U.S. Federal and various state and local tax returns.

Organizational Expenses —The Adviser has agreed to pay all of the Fund’s organizational expenses. As a result, organizational expenses of the Fund are not reflected in the Fund’s financial statements.

Offering Costs —Offering costs are paid directly by the Fund. The Adviser or an affiliate of the Adviser has agreed to pay the amount, if any, by which the Fund’s offering costs (other than the sales load) exceed $0.04 per share (0.20% of the offering price). Offering costs incurred through January 21, 2011 have been reported on the Statement of Net Assets as deferred offering costs. These offering costs, as well as offering costs incurred subsequent to January 21, 2011, will be charged to paid-in-capital upon sale of the shares to the public or reimbursed by the Adviser.

3. INVESTMENT ADVISORY AND OTHER AGREEMENTS

The Adviser provides certain investment advisory, management and administrative services to the Fund pursuant to an investment advisory and management agreement with the Fund (the “Investment Advisory Agreement”). The Adviser is newly formed and has no operating history. For its services, the Fund will pay the Adviser monthly at the annual rate of 1.00% of the average daily value of the Fund’s managed assets, which includes assets purchased through leverage.

The Fund and the Adviser have also entered into an Administrative Services and Expense Reimbursement Agreement pursuant to which the Adviser will provide certain administrative services, personnel and facilities to the Fund and perform operational services necessary for the operation of the Fund not otherwise provided by

 

94


Table of Contents

other Fund services providers. The Fund will reimburse the Adviser at cost, for certain costs and expenses incurred by the Adviser that are necessary for the administration and operations of the Fund.

4. CONCENTRATION OF CREDIT RISK

Cash at January 21, 2011, is on deposit at the Bank of New York Mellon Corporation, the Fund’s custodian.

 

95


Table of Contents

APPENDIX A

DESCRIPTION OF S&P, MOODY’S AND FITCH RATINGS

Standard & Poor’s Corporation —A brief description of the applicable Standard & Poor’s Corporation (“S&P”) rating symbols and their meanings (as published by S&P) follows:

ISSUE CREDIT RATING DEFINITIONS

A Standard & Poor’s issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poor’s view of the obligor’s capacity and willingness to meet its financial commitments as they come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.

Issue credit ratings can be either long term or short term. Short-term ratings are generally assigned to those obligations considered short-term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days—including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term rating addresses the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.

Long-Term Issue Credit Ratings

 

   

Issue credit ratings are based, in varying degrees, on the following considerations:

 

   

Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;

 

   

Nature of and provisions of the obligation;

 

   

Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights.

Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)

 

“AAA”

An obligation rated ‘AAA’ has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

 

The ratings indicated herein are believed to be the most recent ratings available at the date of this prospectus for the securities listed. Ratings are generally given to securities at the time of issuance. While the rating agencies may from time to time revise such ratings, they undertake no obligation to do so, and the ratings indicated do not necessarily represent ratings which would be given to these securities on the date of the Fund’s fiscal year end.

 

A-1


Table of Contents

“AA”

An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

 

“A”

An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

 

“BBB”

An obligation rated ‘BBB’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

“BB,” “B,” “CCC,” “CC,” and “C”

Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant speculative characteristics. ‘BB’ indicates the least degree of speculation and ‘C’ the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.

 

“BB”

An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

“B”

An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

 

“CCC”

An obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

 

“CC”

An obligation rated ‘CC’ is currently highly vulnerable to nonpayment.

 

“C”

A ‘C’ rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the

 

A-2


Table of Contents
 

instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

“D”

An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation’s rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

 

PLUS (+) OR MINUS (-)

The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

 

“N.R.”

This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor’s does not rate a particular obligation as a matter of policy.

Short-Term Issue Credit Ratings

 

“A-1”

A short-term obligation rated ‘A-1’ is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

 

“A-2”

A short-term obligation rated ‘A-2’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

 

“A-3”

A short-term obligation rated ‘A-3’ exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

 

“B”

A short-term obligation rated ‘B’ is regarded as having significant speculative characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned to indicate finer distinctions within the ‘B’ category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

A-3


Table of Contents

“B-1”

A short-term obligation rated ‘B-1’ is regarded as having significant speculative characteristics, but the obligor has a relatively stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

 

“B-2”

A short-term obligation rated ‘B-2’ is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

 

“B-3”

A short-term obligation rated ‘B-3’ is regarded as having significant speculative characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.

 

“C”

A short-term obligation rated ‘C’ is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.

 

“D”

A short-term obligation rated ‘D’ is in payment default. The ‘D’ rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.

Active Qualifiers (Currently applied and/or outstanding)

 

“i”

This subscript is used for issues in which the credit factors, terms, or both, that determine the likelihood of receipt of payment of interest are different from the credit factors, terms or both that determine the likelihood of receipt of principal on the obligation. The ‘i’ subscript indicates that the rating addresses the interest portion of the obligation only. The ‘i’ subscript will always be used in conjunction with the ‘p’ subscript, which addresses likelihood of receipt of principal. For example, a rated obligation could be assigned ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

 

“L”

Ratings qualified with “L” apply only to amounts invested up to federal deposit insurance limits.

 

“P”

This subscript is used for issues in which the credit factors, the terms, or both, that determine the likelihood of receipt of payment of principal are different from the credit factors, terms or both that determine the likelihood of receipt of interest on the obligation. The ‘p’ subscript indicates that the rating addresses the principal portion of the obligation only. The ‘p’ subscript will always be used in conjunction with the ‘i’ subscript, which addresses likelihood of receipt of interest. For example, a rated obligation could be assigned

 

A-4


Table of Contents
 

ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and the interest portion of the obligation is not rated.

 

“pi”

Ratings with a ‘pi’ subscript are based on an analysis of an issuer’s published financial information, as well as additional information in the public domain. They do not, however, reflect in-depth meetings with an issuer’s management and therefore may be based on less comprehensive information than ratings without a ‘pi’ subscript. Ratings with a ‘pi’ subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event occurs that may affect the issuer’s credit quality.

 

“pr”

The letters ‘pr’ indicate that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful, timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of or the risk of default upon failure of such completion. The investor should exercise his own judgment with respect to such likelihood and risk.

 

“preliminary”

Preliminary ratings are assigned to issues, including financial programs, in the following circumstances.

 

   

Preliminary ratings may be assigned to obligations, most commonly structured and project finance issues, pending receipt of final documentation and legal opinions. Assignment of a final rating is conditional on the receipt and approval by Standard & Poor’s of appropriate documentation. Changes in the information provided to Standard & Poor’s could result in the assignment of a different rating. In addition, Standard & Poor’s reserves the right not to issue a final rating.

 

   

Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific issues, with defined terms, are offered from the master registration, a final rating may be assigned to them in accordance with Standard & Poor’s policies. The final rating may differ from the preliminary rating.

 

   

Preliminary ratings may be assigned to obligations that will likely be issued upon reorganization or emergence from bankruptcy, based on late-stage reorganization plans, documentation and discussions with the obligor. These ratings consider the anticipated general credit quality of the reorganized or postbankruptcy issuer as well as attributes of the anticipated obligation(s). The final rating may differ from the preliminary rating as a result of changes in the reorganization plan or other developments. Standard & Poor’s reserves the right not to issue a final rating.

 

“t”

This symbol indicates termination structures that are designed to honor their contracts to full maturity or, should certain events occur, to terminate and cash settle all their contracts before their final maturity date.

 

A-5


Table of Contents

unsolicited

Unsolicited ratings are those credit ratings assigned at the initiative of Standard & Poor’s and not at the request of the issuer or its agents.

Inactive Qualifiers (No longer applied or outstanding)

 

“*”

This symbol indicated continuance of the ratings is contingent upon Standard & Poor’s receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows. Discontinued use in August 1998.

 

“C”

This qualifier was used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer’s bonds are deemed taxable. Discontinued use in January 2001.

 

“q”

A “q” subscript indicates that the rating is based solely on quantitative analysis of publicly available information. Discontinued use in April 2001.

 

“r”

The “r” modifier was assigned to securities containing extraordinary risks, particularly market risks, that are not covered in the credit rating. The absence of an “r” modifier should not be taken as an indication that an obligation will not exhibit extraordinary non-credit related risks. Standard & Poor’s discontinued the use of the “r” modifier for most obligations in June 2000 and for the balance of obligations (mainly structured finance transactions) in November 2002.

Moody’s Investors Service, Inc .—A brief description of the applicable Moody’s Investors Service, Inc. (“Moody’s”) rating symbols and their meanings (as published by Moody’s) follows:

LONG TERM OBLIGATION RATINGS

Moody’s long-term obligation ratings are opinions of the relative credit risk of a fixed income obligation with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.

Long-Term Rating Definitions:

 

“Aaa”

Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

 

“Aa”

Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

 

“A”

Obligations rated A are considered upper-medium grade and are subject to low credit risk.

 

“Baa”

Obligations rated Baa are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

 

A-6


Table of Contents

“Ba”

Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

 

“B”

Obligations rated B are considered speculative and are subject to high credit risk.

 

“Caa”

Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

 

“Ca”

Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

 

“C”

Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.

MEDIUM TERM NOTE RATINGS

Moody’s assigns long-term ratings to individual debt securities issued from medium term note (MTN) programs, in addition to indicating ratings to MTN programs themselves. Notes issued under MTN programs with such indicated ratings are rated at issuance at the rating applicable to all parí passu notes issued under the same program, at the program’s relevant indicated rating, provided such notes do not exhibit any of the characteristics of listed below:

 

   

Notes containing features that link interest or principal to the credit performance of any third party or parties (i.e., credit-linked notes);

 

   

Notes allowing for negative coupons, or negative principal;

 

   

Notes containing any provision that could obligate the investor to make any additional payments;

 

   

Notes containing provisions that subordinate the claim.

For notes with any of these characteristics, the rating of the individual note may differ from the indicated rating of the program.

For credit-linked securities, Moody’s policy is to “look through” to the credit risk of the underlying obligor. Moody’s policy with respect to non-credit linked obligations is to rate the issuer’s ability to meet the contract as stated, regardless of potential losses to investors as a result of non-credit developments. In other words, as long as the obligation has debt standing in the event of bankruptcy, we will assign the appropriate debt class level rating to the instrument.

Market participants must determine whether any particular note is rated, and if so, at what rating level. Moody’s encourages market participants to contact Moody’s Ratings Desks or visit www.moodys.com directly if they have questions regarding ratings for specific notes issued under a medium-term note program. Unrated notes issued under an MTN program may be assigned an NR (not rated) symbol.

 

A-7


Table of Contents

Short Term Rating Definitions:

Moody’s short term ratings are opinions of the ability of issuers to honor short term financial obligations. Ratings may be assigned to issuers, short term programs or to individual short term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.

Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:

 

“P-1”

Issuers (or supporting institutions) rated Prime 1 have a superior ability to repay short term debt obligations.

 

“P-2”

Issuers (or supporting institutions) rated Prime 2 have a strong ability to repay short term debt obligations.

 

“P-3”

Issuers (or supporting institutions) rated Prime 3 have an acceptable ability to repay short term obligations.

 

“NP”

Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.

Note: Canadian issuers rated P 1 or P 2 have their short term ratings enhanced by the senior most long-term rating of the issuer, its guarantor or support provider.

Fitch IBCA, Inc. —A brief description of the applicable Fitch IBCA, Inc. (“Fitch”) ratings symbols and meanings (as published by Fitch) follows:

INTERNATIONAL ISSUER AND CREDIT RATING SCALES

The Primary Credit Rating Scales (those featuring the symbols ‘AAA’—’D’ and ‘F1’—’D’) are used for debt and financial strength ratings. The below section describes their use for issuers and obligations in corporate, public and structured finance debt markets.

Long-Term Ratings Scales—Issuer Credit Ratings Scales

Rated entities in a number of sectors, including financial and non-financial corporations, sovereigns and insurance companies, are generally assigned Issuer Default Ratings (IDRs). IDRs opine on an entity’s relative vulnerability to default on financial obligations. The “threshold” default risk addressed by the IDR is generally that of the financial obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also address relative vulnerability to bankruptcy, administrative receivership or similar concepts, although the agency recognizes that issuers may also make pre-emptive and therefore voluntary use of such mechanisms.

In aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood of default. For historical information on the default experience of Fitch-rated issuers, please consult the transition and default performance studies available from the Fitch Ratings website.

 

“AAA”

Highest credit quality. “AAA” ratings denote the lowest expectation of default risk. They are assigned only in case of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

 

A-8


Table of Contents

“AA”

Very high credit quality. “AA” ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

 

“A”

High credit quality. “A” ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.

 

“BBB”

Good credit quality. “BBB” ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse changes in circumstances and economic conditions are more likely to impair this capacity.

 

“BB”

Speculative. “BB” ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.

 

“B”

Highly speculative. ‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

 

“CCC”

Substantial credit risk. Default is a real possibility.

 

“CC”

Very high levels of credit risk. Default of some kind appears probable.

 

“C”

Exceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill. Conditions that are indicative of a ‘C’ category rating for an issuer include:

 

  a. the issuer has entered into a grace or cure period following non-payment of a material financial obligation;

 

  b. the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or

 

  c. Fitch Ratings otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement of a coercive debt exchange.

 

A-9


Table of Contents

“RD”

Restricted default. ‘RD’ ratings indicate an issuer that in Fitch Ratings’ opinion has experienced an uncured payment default on a bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased business. This would include:

 

  a. the selective payment default on a specific class or currency of debt;

 

  b. the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;

 

  c. the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or

 

  d. execution of a coercive debt exchange on one or more material financial obligations.

 

“D”

Default. ‘D’ ratings indicate an issuer that in Fitch Ratings’ opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.

Default ratings are not assigned prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a coercive debt exchange.

“Imminent” default typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a coercive debt exchange, but the date of the exchange still lies several days or weeks in the immediate future.

In all cases, the assignment of a default rating reflects the agency’s opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an issuer’s financial obligations or local commercial practice.

Note: The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ Long-Term IDR category, or to Long-Term IDR categories below ‘B’.

Limitations of the Issuer Credit Rating Scale:

Specific limitations relevant to the issuer credit rating scale include:

 

   

The ratings do not predict a specific percentage of default likelihood over any given time period.

 

   

The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.

 

   

The ratings do not opine on the liquidity of the issuer’s securities or stock.

 

A-10


Table of Contents
   

The ratings do not opine on the possible loss severity on an obligation should an issuer default.

 

   

The ratings do not opine on the suitability of an issuer as a counterparty to trade credit.

 

   

The ratings do not opine on any quality related to an issuer’s business, operational or financial profile other than the agency’s opinion on its relative vulnerability to default.

Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk. The above list is not exhaustive, and is provided for the reader’s convenience. Readers are requested to review the section Understanding Credit Ratings—Limitations and Usage for further information on the limitations of the agency’s ratings.

Short-Term Ratings—Short-Term Ratings Assigned to Obligations in Corporate, Public and Structured Finance

A short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short term” based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance markets.

 

“F1”

Highest short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

 

“F2”

Good short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.

 

“F3”

Fair short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.

 

“B”

Speculative short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.

 

“C”

High short-term default risk. Default is a real possibility.

 

“RD”

Restricted default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Applicable to entity ratings only.

 

“D”

Default. Indicates a broad-based default event for an entity, or the default of a specific short-term obligation.

Limitations of the Short-Term Ratings Scale:

Specific limitations relevant to the Short-Term Ratings scale include:

 

   

The ratings do not predict a specific percentage of default likelihood over any given time period.

 

   

The ratings do not opine on the market value of any issuer’s securities or stock, or the likelihood that this value may change.

 

   

The ratings do not opine on the liquidity of the issuer’s securities or stock.

 

   

The ratings do not opine on the possible loss severity on an obligation should an obligation default.

 

A-11


Table of Contents
   

The ratings do not opine on any quality related to an issuer or transaction’s profile other than the agency’s opinion on the relative vulnerability to default of the rated issuer or obligation.

Ratings assigned by Fitch Ratings articulate an opinion on discrete and specific areas of risk. The above list is not exhaustive, and is provided for the reader’s convenience. Readers are requested to review the section Understanding Credit Ratings—Limitations and Usage for further information on the limitations of the agency’s ratings.

NATIONAL RATINGS

National Credit Ratings

For those countries in which foreign and local currency sovereign ratings are below ‘AAA’, and where there is demand for such ratings, Fitch Ratings will provide National Ratings. It is important to note that each National Rating scale is unique and is defined to serve the needs of the local market in question.

The National Rating scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, an ‘AAA’ Long-Term National Rating will be assigned to the lowest relative risk within that country, which, in most but not all cases, will be the sovereign state.

The National Rating scale merely ranks the degree of perceived risk relative to the lowest default risk in that same country. Like local currency ratings, National Ratings exclude the effects of sovereign and transfer risk and exclude the possibility that investors may be unable to repatriate any due interest and principal repayments. It is not related to the rating scale of any other national market. Comparisons between different national scales or between an individual national scale and the international rating scale are therefore inappropriate and potentially misleading. Consequently they are identified by the addition of a special identifier for the country concerned, such as ‘AAA(arg)’ for National Ratings in Argentina.

In certain countries, regulators have established credit rating scales, to be used within their domestic markets, using specific nomenclature. In these countries, the agency’s National Rating definitions may be substituted by the regulatory scales. For instance Fitch’s National Short Term Ratings of ‘F1+(xxx)’, ‘F1(xxx)’, ‘F2(xxx)’ and ‘F3(xxx)’ may be substituted by the regulatory scales, e.g. ‘A1+’, ‘A1’, ‘A2’ and ‘A3’. The below definitions thus serve as a template, but users should consult the individual scales for each country listed on Fitch’s website to determine if any additional or alternative category definitions apply.

National Long-Term Credit Ratings

 

“AAA(xxx)”

‘AAA’ National Ratings denote the highest rating assigned by the agency in its National Rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

 

“AA(xxx)”

‘AA’ National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country’s highest rated issuers or obligations.

 

“A(xxx)”

‘A’ National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

 

A-12


Table of Contents

“BBB(xxx)”

‘BBB’ National Ratings denote a moderate default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions are more likely to affect the capacity for timely repayment than is the case for financial commitments denoted by a higher rated category.

 

“BB(xxx)”

‘BB’ National Ratings denote an elevated default risk relative to other issuers or obligations in the same country. Within the context of the country, payment is uncertain to some degree and capacity for timely repayment remains more vulnerable to adverse economic change over time.

 

“B(xxx)”

‘B’ National Ratings denote a significantly elevated default risk relative to other issuers or obligations in the same country. Financial commitments are currently being met but a limited margin of safety remains and capacity for continued timely payments is contingent upon a sustained, favorable business and economic environment. For individual obligations, this rating may indicate distressed or defaulted obligations with potential for extremely high recoveries.

 

“CCC(xxx)”

‘CCC’ National Ratings denote that default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic conditions.

 

“CC(xxx)”

‘CC’ National Ratings denote that default of some kind appears probable.

 

“C(xxx)”

‘C’ National Ratings denote that default is imminent.

 

“D(xxx)”

‘D’ National Ratings denote an issuer or instrument that is currently in default

National Short-Term Credit Ratings

 

“F1(xxx)”

Indicates the strongest capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Under the agency’s National Rating scale, this rating is assigned to the lowest default risk relative to others in the same country. Where the liquidity profile is particularly strong, a “+” is added to the assigned rating.

 

“F2(xxx)”

Indicates a good capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. However, the margin of safety is not as great as in the case of the higher ratings.

 

“F3(xxx)”

Indicates an adequate capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. However, such capacity is more susceptible to near-term adverse changes than for financial commitments in higher rated categories.

 

A-13


Table of Contents

“B(xxx)”

Indicates an uncertain capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Such capacity is highly susceptible to near-term adverse changes in financial and economic conditions.

 

“C(xxx)”

Indicates a highly uncertain capacity for timely payment of financial commitments relative to other issuers or obligations in the same country. Capacity for meeting financial commitments is solely reliant upon a sustained, favorable business and economic environment.

 

“D(xxx)”

Indicates actual or imminent payment default.

Notes to Long-Term and Short-Term National Ratings:

The ISO International Country Code is placed in parentheses immediately following the rating letters to indicate the identity of the National market within which the rating applies. For illustrative purposes, (xxx) has been used.

“+” or “-” may be appended to a National Rating to denote relative status within a major rating category. Such suffixes are not added to the ‘AAA(xxx)’ Long-Term National Rating category, to categories below ‘CCC(xxx)’, or to Short-Term National Ratings other than ‘F1(xxx)’.

 

A-14


Table of Contents

APPENDIX B

PROXY VOTING POLICIES AND PROCEDURES

The Adviser’s proxy voting policies are not exhaustive and are designed to be responsive to the wide range of issues that may be subject to a proxy vote. In general, the Adviser will vote proxies in accordance with these guidelines unless: (1) it has determined otherwise due to the specific and unusual facts and circumstances with respect to a particular vote, (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) it is necessary to vote contrary to the general guidelines to maximize shareholder value or the best interests of the Adviser’s clients. In reviewing proxy issues, the Adviser generally uses the following guidelines:

Elections of Directors: In general, the Adviser will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on a portfolio company’s board of directors, or the Adviser determines that there are other compelling reasons for withholding a vote, it will determine the appropriate vote on the matter. The Adviser may withhold votes for directors that fail to act on key issues, such as failure to: (1) implement proposals to declassify a board, (2) implement a majority vote requirement, (3) submit a rights plan to a shareholder vote or (4) act on tender offers where a majority of shareholders have tendered their shares. The Adviser may vote differently in respect of those issues proposed for an investment company, for which certain of these matters (particularly (1) and (2)) apply differently than for an operating company. Finally, the Adviser may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement or where, in the Adviser’s discretion, the cost of voting will outweigh the perceived benefit.

Appointment of Auditors: The Adviser believes that the board of an issuer remains in the best position to choose its independent auditors and the Adviser will generally support management’s recommendation in this regard.

Changes in Capital Structure: Changes in an issuer’s charter or by-laws may be required by state or federal regulation. In general, the Adviser will cast client votes in accordance with management on such proposals. However, the Adviser will consider carefully any proposal regarding a change in corporate structure that is not required by state or federal regulation.

Corporate Restructurings, Mergers and Acquisitions: The Adviser believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, the Adviser will analyze such proposals on a case-by-case basis and vote in accordance with its perception of client interests.

Proposals Affecting Shareholder Rights: The Adviser generally will vote in favor of proposals that give shareholders a greater voice in the affairs of an issuer and oppose any measure that seeks to limit such rights. However, when analyzing such proposals, the Adviser will balance the financial impact of the proposal against any impairment of shareholder rights as well as of a client’s investment in the issuer.

Corporate Governance: The Adviser recognizes the importance of good corporate governance. Accordingly, the Adviser generally will favor proposals that promote transparency and accountability within an issuer.

Anti-Takeover Measures : The Adviser will evaluate, on a case-by-case basis, any proposals regarding anti-takeover measures to determine the measure’s likely effect on shareholder value dilution.

Stock Splits: The Adviser generally will vote with management on stock split matters.

Limited Liability of Directors: The Adviser generally will vote with management on matters that could adversely affect the limited liability of directors.

Social and Corporate Responsibility: The Adviser will review proposals related to social, political and environmental issues to determine whether they may adversely affect shareholder value. The Adviser may abstain from voting on such proposals where they do not have a readily determinable financial impact on shareholder value.

 

B-1


Table of Contents

 

             Shares

Apollo Senior Floating Rate Fund Inc.

Common Stock

$20.00 per Share

 

 

PROSPECTUS

                     , 2011

 

 

Morgan Stanley

Citi

BofA Merrill Lynch

Wells Fargo Securities

Janney Montgomery Scott

Ladenburg Thalmann & Co. Inc.

Maxim Group LLC

Oppenheimer & Co.

RBC Capital Markets

Stifel Nicolaus Weisel

Wunderlich Securities

Through and including                     , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 


Table of Contents

PART C

OTHER INFORMATION

 

Item 25. Financial Statements and Exhibits

 

(1) Financial

Statements

   
  Statement of net assets, dated as of January 21, 2011.
(2) Exhibits    
(a)   Articles of Amendment and Restatement.(1)
(b)   Amended and Restated Bylaws.(1)
(c)   Not Applicable.
(d)   Portions of the Articles of Incorporation and By-laws of the Registrant defining the rights of holders of shares of common stock of the Registrant.*
(e)   Form of Dividend Reinvestment Plan.(2)
(f)   Not Applicable.
(g)   Form of Investment Advisory and Management Agreement between the Registrant and Apollo Credit Management, LLC (the “Adviser”). (2)
(h)(1)   Form of Underwriting Agreement.(2)
(h)(2)   Form of Master Agreement Among Underwriters.(2)
(h)(3)   Form of Master Selected Dealers Agreement.(2)
(i)   Not Applicable.
(j)(1)   Form of Custody Agreement.(2)
(j)(2)   Form of Foreign Custody Manager Agreement.(2)
(k)(1)   Form of Service Agreement for Transfer Agency Services.(2)
(k)(2)   Form of Administration and Accounting Services Agreement between Registrant and BNY Mellon Investment Servicing (US) Inc.(2)
(k)(3)   Form of Administrative Services and Reimbursement Agreement between the Registrant and the Adviser.(2)
(k)(4)   Form of License Agreement between the Registrant and the Adviser.(2)
(l)   Opinion and Consent of Venable LLP, Special Maryland Counsel for the Fund.(2)
(m)   Not Applicable.
(n)   Consent of Independent Registered Public Accounting Firm.(2)
(o)   Not Applicable.
(p)   Certificate of Initial Stockholder.(2)
(q)   Not Applicable.
(r)(1)   Code of Ethics of Fund.(2)
(r)(2)   Code of Ethics of Adviser.(2)
(s)   Power of Attorney.(3)

 

(1) Incorporated by reference to the identically numbered exhibit of Amendment No. 4 to the Registration Statement of the Fund on Form N-2 (File Nos. 333-169726 and 811-22481) filed on January 28, 2011.
(2) Filed herewith.
(3) Incorporated by reference to the identically numbered exhibit of Amendment No. 3 to the Registration Statement of the Fund on Form N-2 (File Nos. 333-169726 and 811-22481) filed on January 26, 2011.
* Reference is made to Article VII of the Registrant’s Articles of Amendment and Restatement, filed as Exhibit 2(a) to this Registration Statement; and to Article XI of the Registrant’s amended and restated Bylaws, filed as Exhibit 2(b) to this Registration Statement.

 

C-1


Table of Contents
Item 26. Marketing Arrangements

Reference is made to the form of the underwriting agreement included as Exhibit (h)(1) hereto.

 

Item 27. Other Expenses of Issuance and Distribution

 

Securities and Exchange Commission registration fee

   $ 34,785   

Exchange listing fees

     30,000   

Financial Industry Regulatory Authority fees

     32,500   

Printing expenses

     525,000   

Promotion

     650,000   

Accounting fees and expenses

     42,500   

Legal fees and expenses

     410,000   

Underwriters Expense Reimbursement

     10,000   

Miscellaneous

     5,215   
        

Total

     1,740,000   
        

 

Item 28. Persons Controlled by or Under Common Control with Registrant

Immediately prior to this offering, Apollo Credit Management, LLC, will own shares of the Registrant, representing 100% of the common stock outstanding. Following the completion of this offering, Apollo Credit Management, LLC’s share ownership is expected to represent less than 1% of the common stock outstanding.

 

Item 29. Number of Holders of Securities

 

Title of Class:

   Common Stock ($.001 par value per share)

Number of Record Holders:

   As of the date of this registration statement, the Fund had one shareholder of record. (The Fund anticipates that as the result of its offering of shares that the number of record holders will be approximately the number of Underwriters listed in the “Underwriting” section of the prospectus.)

 

Item 30. Indemnification

 

Maryland law permits a Maryland corporation to include a provision in its charter limiting the liability of its directors and officers to the corporation and its stockholders for money damages, except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty that is established by a final judgment and is material to the cause of action. The Registrant’s charter contains a provision that eliminates its directors’ and officers’ liability to the maximum extent permitted by Maryland law and the Investment Company Act of 1940 (the “1940 Act”).

The Registrant’s charter authorizes it to obligate itself, and its Bylaws require it, to the maximum extent permitted by Maryland law and subject to the requirements of the 1940 Act, to indemnify any present or former director or officer or any individual who, while a director or officer of the Registrant and at the request of the Registrant, serves or has served another corporation, real estate investment trust, partnership, joint venture, limited liability company, trust, employee benefit plan or other enterprise as a director, officer, partner, manager, managing member or trustee, from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any of the foregoing capacities and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding, without requiring a preliminary determination of the ultimate entitlement to indemnification. The Registrant’s charter and bylaws also permit it to indemnify and advance expenses to any individual who served any predecessor of the Registrant

 

C-2


Table of Contents

in any of the capacities described above and any employee or agent of the Registrant or any predecessor of the Registrant. In accordance with the 1940 Act, the Registrant will not indemnify any person for any liability to which such person would be subject by reason of such person’s willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.

Maryland law requires a Maryland corporation (unless its charter provides otherwise, which the Registrant’s charter does not) to indemnify a director or officer who has been successful in the defense of any proceeding to which he or she is made or threatened to be made a party by reason of his or her service in that capacity. Maryland law permits a Maryland corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made or threatened to be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. A Maryland corporation may not indemnify a director or officer who has been adjudged liable in a suit by or in the right of the corporation or in which the director or officer was adjudged liable to the corporation or on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification, even though the director or officer did not meet the prescribed standard of conduct, was adjudged liable to the corporation or was adjudged liable on the basis that personal benefit was improperly received; however, indemnification for an adverse judgment in a suit by or in the right of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses.

In addition, Maryland law permits a Maryland corporation to advance reasonable expenses to a director or officer upon the corporation’s receipt of (a) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or her or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

Underwriting Agreement Indemnification.  Please refer to Section 8 of the Underwriting Agreement among the Fund, Apollo Credit Management, LLC, and Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and each of the other Underwriters named in Schedule I thereto. In Section 8 of the Underwriting Agreement, each of the Fund and the Adviser agrees to indemnify each Underwriter, each person who controls the Underwriter, each agent of any Underwriter and each director, officer or affiliate of any Underwriter against certain liabilities arising in connection with the Fund’s Registration Statement. Section 8 also contains a reciprocal provision whereby the Underwrites agree to indemnify the Adviser the Fund and the Adviser against certain liabilities arising in connection with the Fund’s Registration Statement with reference to information provided by the Underwriters.

Advisory Agreement Indemnification . Please refer to Section 13 of the Investment Management and Advisory Agreement (“Advisory Agreement”) between the Fund and the Adviser. In Section 13 of the Advisory Agreement, the Fund agrees to indemnify the Adviser (and its officers, managers, partners, agents, employees, controlling persons, members and any person or entity affiliated with the Adviser”), against certain liabilities arising in connection with Adviser’s performance as an investment adviser to the Fund.

Administrative Services and Reimbursement Agreement . Please refer to Section 3 of the Administrative Services and Reimbursement Agreement (the “Services Agreement”) between the Fund and the Adviser. In Section 3 of the Services Agreement, the Fund agrees to indemnify the Adviser, as administrator, (and its officers, managers, partners, agents, employees, controlling persons, members and any person or entity affiliated with the Adviser), against certain liabilities arising in connection with Adviser’s provision of services under the Services Agreement.

 

C-3


Table of Contents

Indemnification Agreement Indemnification . Reference is made to an Indemnification Agreement between the Fund and each Director and Officer of the Fund. Under the Indemnification Agreement, the Fund agrees to indemnify each Director and Officer for certain liabilities arising in connection with their duties as Directors or Officers, as applicable, of the Fund.

Insofar as indemnification for liability arising under the Securities Act of 1933 (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 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 Adviser

The description of the Adviser under the caption “Management of the Fund” in the prospectus, which forms part of this registration statement, is incorporated by reference herein. Information as to the directors and officers of the Adviser together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers of the Adviser in the last two years, is included in its application for registration as an investment adviser on Form ADV (File No. 801-72098) filed under the Investment Advisers Act of 1940, as amended, and is incorporated herein by reference. The Adviser’s principal business address is 9 West 57th Street, 43rd Floor, New York, NY 10019.

 

Item 32. Locations of Accounts and Records

All accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and the rules thereunder are maintained at the offices of:

 

  (1)

the Registrant, Apollo Senior Floating Rate Fund Inc., 9 West 57 th Street, 43 rd Floor, New York, New York 10019;

 

  (2) the Transfer Agent, BNY Mellon Investment Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, DE 19089;

 

  (3) the Custodian, The Bank of New York Mellon Corporation, One Wall Street, New York, NY 10286; and

 

  (4)

the Adviser, Apollo Credit Management, LLC, 9 West 57 th Street, 43 rd Floor, New York, New York 10019.

 

Item 33. Management Services

Not applicable.

 

Item 34. Undertakings

 

1. The Registrant undertakes to suspend the offering of shares until the prospectus is amended if (1) subsequent to the effective date of its registration statement, the net asset value declines more than ten percent from its net asset value as of the effective date of the registration statement; or (2) the net asset value increases to an amount greater than the net proceeds as stated in the prospectus.

 

C-4


Table of Contents
2. The Registrant undertakes that:

 

  (a) For the purpose 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 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

  (b) For the purpose 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 such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

C-5


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on the 22 nd day of February 2011.

 

APOLLO SENIOR FLOATING RATE FUND INC.
By:       / S /    J OSEPH M ORONEY        
Name:  

Joseph Moroney

Title:   President

Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/ S /    J OSEPH M ORONEY        

(Joseph Moroney)

  

President (Principal Executive Officer)

  February 22, 2011

/ S /    J ODI S ARSFIELD        

(Jodi Sarsfield)

  

Treasurer and Chief Financial Officer (Principal Financial Officer)

  February 22, 2011

/ S /    B ARRY C OHEN *        

(Barry Cohen)

  

Director

  February 22, 2011

/ S /    G LENN N. M ARCHAK *        

(Glenn N. Marchak)

  

Director

  February 22, 2011

/ S /    C ARL J. R ICKERTSEN *        

(Carl John Rickertsen)

  

Director

  February 22, 2011

/ S /    T ODD J. S LOTKIN *        

(Todd Slotkin)

  

Director

  February 22, 2011

 

* This filing has been signed by each of the persons so indicated by the undersigned as Attorney-in-Fact.

 

/ S /    J OSEPH D. G LATT        

(Joseph D. Glatt)

  

Attorney-in-Fact

  February 22, 2011


Table of Contents

SCHEDULE OF EXHIBITS

 

Exhibit
No.

   

Description

  2(e)     

Form of Dividend Reinvestment Plan.

  2(g)     

Form of Investment Advisory and Management Agreement.

 
2(h)(1)
  
  Form of Underwriting Agreement.
  2(h)(2)      Form of Master Agreement Among Underwriters.
  2(h)(3)      Form of Master Selected Dealers Agreement.
  2 (j)(1)    Form of Custody Agreement.
  2 (j)(2)    Form of Foreign Custody Manager Agreement.
  2(k)(1)      Form of Transfer Agency Agreement.
  2(k)(2)      Form of Administration Agreement.
  2(k)(3)      Form of Reimbursement Agreement.
  2(k)(4)      Form of License Agreement.
  2(l)      Opinion of Venable, Special Maryland Counsel for the Fund.
  2(n)      Consent of Deloitte & Touche LLP, independent registered public accounting firm for the Fund.
  2(p)      Certificate of Initial Stockholder.
  2(r)(1)      Code of Ethics of Fund.
  2(r)(2)      Code of Ethics of Adviser.

Exhibit 2(e)

FORM OF

DIVIDEND REINVESTMENT PLAN

OF

APOLLO SENIOR FLOATING RATE FUND INC.

Apollo Senior Floating Rate Fund Inc., a Maryland corporation (the “Fund”), hereby adopts the following plan (the “Plan”) with respect to net investment income dividends and capital gains distributions declared by its Board of Directors on shares of its Common Stock:

1. Unless a shareholder specifically elects to receive Common Stock of the Fund as set forth below, all net investment income dividends and all capital gains distributions hereafter declared by the Board of Directors shall be payable in cash.

2. Such net investment income dividends and capital gains distributions shall be payable on such date or dates as may be fixed from time to time by the Board of Directors to shareholders of record at the close of business on the record date(s) established by the Board of Directors for the net investment income dividend and/or capital gains distribution involved.

3. A shareholder may elect to receive net investment income dividends and capital gains distributions in Common Stock of the Fund. To exercise this option, such shareholder must notify the BNY Mellon Investment Servicing (US) Inc., the plan administrator and the Fund’s transfer agent and registrar (the “Plan Administrator”), in writing so that such notice is received by the Plan Administrator not less than 10 days prior to the record date fixed by the Board of Directors for the net investment income dividend and/or capital gains distribution involved.

4. The Plan Administrator will set up an account for shares acquired pursuant to the Plan for each shareholder that elects to receive Common Stock of the Fund (each a “Participant”). The Plan Administrator may hold each Participant’s shares, together with the shares of other Participants, in non-certificated form in the Plan Administrator’s name or that of its nominee.

5. The shares are acquired by the Plan Administrator for a Participant’s account, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized shares of Common Stock from the Fund (“Newly Issued Shares”) or (ii) by purchase of outstanding shares of Common Stock on the open market (“Open-Market Purchases”) on the New York Stock Exchange, Inc. or elsewhere. If, on the dividend payment date, the net asset value per share of the Common Stock is equal to or less than the market price per share of the Common Stock plus estimated brokerage commissions (such condition being referred to as “Market Premium”), the Plan Administrator will invest the dividend amount in Newly Issued Shares on behalf of the Participant. The number of Newly Issued Shares of Common Stock to be credited to the Participant’s account will be determined by dividing the dollar amount of the dividend by the net asset value per share on the date the shares are issued, unless the net asset value is less than 95% of the then current market price per share, in which case the dollar amount of the dividend will be divided by 95% of the then current market price per share. If on the dividend payment date the net asset value per share is greater than the market value (such condition being referred to as “Market Discount”), the Plan Administrator will invest the dividend amount in shares acquired on behalf of the Participant in Open-Market Purchases.


6. The Plan Administrator will confirm to each Participant each acquisition made pursuant to the Plan as soon as practicable but not later than 10 business days after the date thereof. Each Participant may from time to time have an undivided fractional interest (computed to three decimal places) in a share of Common Stock of the Fund. Dividends and distributions on fractional shares will be credited to each Participant’s account. In the event of termination of a Participant’s account under the Plan, the Plan Administrator will adjust for any such undivided fractional interest in cash at the market value of the Fund’s shares at the time of termination.

7. The Plan Administrator will forward to each Participant any Fund related proxy solicitation materials and each Fund report or other communication to shareholders, and will vote any shares held by it under the Plan in accordance with the instructions set forth on proxies returned by Participants to the Fund.

8. In the event that the Fund makes available to its shareholders rights to purchase additional shares or other securities, the shares held by the Plan Administrator for each Participant under the Plan will be added to any other shares held by the Participant in calculating the number of rights to be issued to the Participant.

9. The Plan Administrator’s service fee, if any, and expenses for administering the Plan will be paid for by the Fund.

10. Each Participant may terminate the Participant’s account under the Plan by so notifying the Plan Administrator via the Plan Administrator’s website at www.bnymellon.com/shareowner, by filling out the transaction request form located at the bottom of the Participant’s Statement and sending it to the Plan Administrator at P.O. Box 358035, Pittsburgh, PA 15252-8035 or by calling the Plan Administrator at 800-331-1710. Such termination will be effective immediately if the Participant’s notice is received by the Plan Administrator at least 2 days prior to any dividend or distribution record date; otherwise, such termination will be effective only with respect to any subsequent dividend or distribution. The Plan may be terminated by the Fund upon notice in writing mailed to each Participant at least 30 days prior to any record date for the payment of any dividend or distribution by the Fund. If a Participant elects by the Participant’s written notice to the Plan Administrator in advance of termination to have the Plan Administrator sell part or all of the shares held by the Plan Administrator in the Participant’s account and remit the proceeds to the Participant, the Plan Administrator is authorized to deduct a $15 transaction fee plus a 5¢ per share brokerage commission from the proceeds.

11. These terms and conditions may be amended or supplemented by the Fund at any time but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to each Participant appropriate written notice at least 30 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by each Participant unless, prior to the effective date thereof, the Plan Administrator receives written notice of the termination of the Participant’s account under the Plan. Any such amendment may include an appointment by the Plan Administrator in its place and stead of a successor agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Plan

 

- 2 -


Administrator under these terms and conditions. Upon any such appointment of any agent for the purpose of receiving dividends and distributions, the Fund will be authorized to pay to such successor agent, for each Participant’s account, all dividends and distributions payable on shares of the Fund held in the Participant’s name or under the Plan for retention or application by such successor agent as provided in these terms and conditions.

12. The Plan Administrator will at all times act in good faith and use its best efforts within reasonable limits to ensure its full and timely performance of all services to be performed by it under this Plan and to comply with applicable law, but assumes no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by the Plan Administrator’s negligence, bad faith, or willful misconduct or that of its employees or agents.

13. These terms and conditions shall be governed by applicable federal securities laws and the laws of the State of New York.

 

 

- 3 -

Exhibit 2(g)

FORM OF

INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT

ENTERED INTO BETWEEN

APOLLO CREDIT MANAGEMENT, LLC

AND

APOLLO SENIOR FLOATING RATE FUND INC.

This Investment Advisory Agreement (the “Agreement”) is entered into as of                      , by and between APOLLO SENIOR FLOATING RATE FUND INC. (the “Fund”), a corporation duly organized and existing under the laws of the State of Maryland, and APOLLO CREDIT MANAGEMENT, LLC, a limited liability company duly organized and existing under the laws of the State of Delaware (the “Adviser”).

WHEREAS, the Fund is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”); and

WHEREAS, the Adviser is engaged in rendering management and investment advisory services and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and

WHEREAS, the Adviser is willing to provide management and investment advisory services to the Fund on the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual covenants and agreements set out in this Agreement, the Fund and the Adviser agree as follows:

1. Investment Description; Appointment

(a) Investment Description . The Fund will invest and reinvest its assets in accordance with the investment objective(s), policies and limitations specified in the prospectus (the “Prospectus”) filed with the Securities and Exchange Commission (the “SEC”) as part of the Fund’s Registration Statement on Form N-2, as it may be periodically amended or supplemented.

(b) Appointment of Adviser . The Fund hereby employs the Adviser to act as a manager and investment adviser of the Fund and to furnish, or arrange for its affiliates or subadvisers to furnish, the management and investment advisory services described below, subject to the policies of, review by and overall control of the Board of Directors of the Fund (the “Board”), for the period and on the terms and conditions set forth in this Agreement. The Adviser hereby accepts such employment and agrees during such period, at its own expense (unless otherwise provided herein), to render, or arrange for the rendering of, such services and to assume the obligations herein for the compensation provided for herein. The Adviser and its affiliates for all purposes herein shall be deemed to be independent contractors and, unless otherwise expressly provided or authorized, shall have no authority to act for or represent the Fund in any way or otherwise be deemed agents of the Fund.

 

1


2. Duties of the Investment Adviser

(a) Management Services . The Adviser shall perform, or arrange for its affiliates to perform, the management services necessary for the operation of the Fund, including providing the Fund necessary personnel and such other services as the Adviser, subject to review by the Board, from time to time shall determine to be necessary or useful to perform its obligations under this Agreement. The Adviser, also on behalf of the Fund, shall conduct relations with custodians, depositories, transfer agents, pricing agents, dividend disbursing agents, other shareholder servicing agents, accountants, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable.

(b) Investment Advisory Services . Subject to the supervision, direction and approval of the Board, the Adviser will conduct a continual program of investment, evaluation, sale, and reinvestment of the Fund’s assets. Subject to paragraph (c) below, the Adviser is authorized, in its sole discretion, to: (i) obtain and evaluate pertinent economic, financial, and other information affecting the economy generally and certain investment assets as such information relates to securities or other financial instruments that are purchased for or considered for purchase by the Fund; (ii) make investment decisions for the Fund (including the exercise or disposition of rights accompanying portfolio securities (such as tender offers or exchanges) and other attendant rights thereto); (iii) place purchase and sale orders for portfolio transactions on behalf of the Fund and manage otherwise uninvested cash assets of the Fund; (iv) arrange for the pricing of Fund securities; (v) execute account documentation, agreements, contracts and other documents as may be requested by brokers, dealers, counterparties and other persons in connection with the Adviser’s management of the assets of the Fund (in such respect, the Adviser will act as the Fund’s agent and attorney-in-fact); (vi) employ professional portfolio managers and securities analysts who provide research services to the Fund; (vii) engage certain third party professionals, consultants, experts or specialists in connection with the Adviser’s management of the assets of the Fund (in such respect, the Adviser will act as the Fund’s agent and attorney-in-fact); and (viii) make decisions with respect to the use by the Fund of borrowing for leverage or other investment purposes. The Adviser will in general take such action as is appropriate to effectively manage the Fund’s investment practices. In addition:

(i) The Adviser will maintain and preserve the records specified in Section 14 of this Agreement and any other records related to the Fund’s transactions as are required under any applicable state or federal securities law or regulation, including: the 1940 Act, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Advisers Act.

(ii) The Adviser will comply with procedures of the Fund (“Fund Procedures”) provided to the Adviser by the Fund. The Adviser will notify the Fund as soon as reasonably practicable upon detection of any material breach of such Fund Procedures.

(iii) The Adviser will maintain a written code of ethics (the “Code of Ethics”), a copy of which will be provided to the Fund, and will adhere to such Code of Ethics in performing its services under this Agreement.

 

2


(iv) The Adviser, as directed by the Board, will manage the investment and reinvestment of the assets of the Fund in a manner consistent with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, subject to the best interests of the Fund. In addition, the Adviser will manage the Fund’s assets in material compliance with the Fund’s investment objectives and policies as stated in the Prospectus.

(c) Subadvisers . In carrying out its responsibilities hereunder, the Adviser may employ, retain or otherwise avail itself of the services of other persons or entities including without limitation, affiliates of the Adviser, on such terms as the Adviser shall determine to be necessary, desirable or appropriate. However, if the Adviser chooses to retain or avail itself of the services of another person or entity to provide investment advice with respect to assets of the Fund (a “Subadviser”), such other person or entity must be (i) registered as an investment adviser under the Advisers Act, (ii) retained at the Adviser’s own cost and expense and (iii) retained subject to the requirements of Section 15 of the 1940 Act.

3. Information and Reports

(a) The Adviser will keep the Fund informed of developments relating to its duties as investment adviser of which the Adviser has, or should have, knowledge that would materially affect the Fund. In this regard, the Adviser will provide the Fund and its officers with such periodic reports concerning the obligations the Adviser has assumed under this Agreement as the Fund may from time to time reasonably request.

(b) The Adviser also will provide the Fund with any information reasonably requested regarding its management of the Fund required for any shareholder report, amended registration statement, or prospectus supplement to be filed by the Fund with the SEC. The Adviser will promptly inform the Fund if any information in the Prospectus or Statement of Additional Information, as amended from time to time (“SAI”), is (or will become) inaccurate or incomplete.

4. Standard of Care

The Adviser will exercise its reasonable judgment and will act in good faith and use reasonable care and in a manner consistent with applicable federal and state laws and regulations in rendering the services it agrees to provide under this Agreement. The Adviser shall not be liable for any error of judgment or mistake of law or for any loss arising out of any investment or for any act or omission in the management of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. As used in this Section 4, the term “Adviser” shall include any affiliates of the Adviser performing services for the Fund contemplated hereby, and directors, officers and employees of the Adviser and of such affiliates. The Adviser assumes no responsibility under this Agreement other than to render the services called for hereunder.

5. Adviser’s Duties Regarding Fund Transactions

(a) Placement of Orders . The Adviser will take all actions that it considers necessary

 

3


to implement the investment policies of the Fund, and, in particular, to place all orders for the purchase or sale of securities or other investments for the Fund with brokers or dealers the Adviser, in its sole discretion, selects. To that end, the Adviser is authorized as the Fund’s agent to give instructions to the Fund’s custodian as to deliveries of securities or other investments and payments of cash for the Fund’s account. In connection with the selection of brokers or dealers and the placement of purchase and sale orders, the Adviser is subject to the supervision of the Board and is directed at all times to seek to obtain best execution and price within the policy guidelines determined by the Board and set out in the Fund’s current Prospectus, subject to provisions (b) and (c) of this Section 5.

(b) Selection of Brokers and Dealers . In the selection of brokers and dealers to execute portfolio transactions, the Adviser is authorized to consider not only the available prices and rates of brokerage commissions, but also other relevant factors, which may include, without limitation: the execution capabilities of the brokers and dealers; the research and other services provided by the brokers and dealers that the Adviser believes will enhance its general portfolio management capabilities; the size of the transaction; the difficulty of execution; the operational facilities of these brokers and dealers; the risk to a broker or dealer of positioning a block of securities; and the overall quality of brokerage and research services provided by the brokers and dealers. In connection with the foregoing, the Adviser is specifically authorized to pay those brokers and dealers who provide brokerage and research services to the Adviser a higher commission than that charged by other brokers and dealers if the Adviser determines in good faith that the amount of the commission is reasonable in relation to the value of the services in terms of either the particular transaction or in terms of the Adviser’s overall responsibilities with respect to the Fund and to any other client accounts or portfolios that the Adviser advises. The execution of such transactions will not be considered to represent an unlawful breach of any duty created by this Agreement or otherwise. To the extent permitted by applicable law, the Adviser may select affiliated brokers and dealers to execute portfolio transactions.

(c) Aggregated Transactions . On occasions when the Adviser deems the purchase or sale of a security or other financial instrument to be in the best interest of the Fund, as well as other clients, the Adviser is authorized, but not required, to aggregate purchase and sale orders for securities or other financial instruments held (or to be held) by the Fund with similar orders being made on the same day for other client accounts or portfolios that the Adviser manages. When an order is so aggregated, the Adviser may allocate the recommendations or transactions among all accounts and portfolios for whom the recommendation is made or transaction is effected on a basis that the Adviser reasonably considers equitable and consistent with its fiduciary obligations to the Fund and its other clients. The Adviser and the Fund recognize that in some cases this procedure may adversely affect the size of the position obtainable for the Fund.

6. Compensation

For the services rendered and the expenses assumed by the Adviser, the Fund shall pay to the Adviser at the end of each calendar month a fee at the annual rate of 1.0% of the Fund’s average daily Managed Assets. “Managed Assets” means the total assets of the Fund (including any assets attributable to any preferred shares that may be issued or to money borrowed or notes

 

4


issued by the Fund) minus the sum of the Fund’s accrued liabilities, including accrued interest and accumulated dividends (other than liabilities for money borrowed or notes issued). It is understood that the liquidation preference of any outstanding preferred stock (other than accumulated dividends) is not considered a liability in determining the Fund’s Managed Assets. The fee for the period from the Effective Date (defined below) of the Agreement to the end of the month during which the Effective Date occurs will be prorated according to the proportion that such period bears to the full monthly period. Upon any termination of this Agreement before the end of a month, the fee for such part of that month will be prorated according to the proportion that such period bears to the full monthly period and will be payable upon the date of termination of this Agreement. For the purpose of determining fees payable to the Adviser, the value of the Fund’s assets will be computed at the times and in the manner specified in the Prospectus, and on days on which the value of Fund assets are not so determined, the asset value computation to be used will be as determined on the immediately preceding day on which the assets were determined.

7. Expenses

(a) The Adviser . All investment professionals of the Adviser and its staff, when and to the extent engaged in providing investment advisory and management services hereunder, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by the Adviser and not by the Fund.

(b) The Fund . The Fund will bear all other expenses to be incurred in its operation (including to the extent such operations are performed by the Adviser or its affiliates), including, but not limited to, (i) interest and taxes; (ii) brokerage commissions and other costs in connection with the purchase or sale of securities and other investment instruments (including, without limitation, security settlement costs); (iii) calculating the Fund’s net asset value (including the cost and expenses of any independent valuation firm, or agent or service provider of the Fund (including, without limitation, Fund administrators, custodians and pricing services)); (iv) interest payable on debt and dividends and distributions on preferred stock, as applicable, if any, incurred to finance the Fund’s investments; (v) custodian, registrar and transfer agent fees and fee and expenses of other service providers; (vi) all costs of registration and listing the Fund’s shares on any securities exchange; (vii) direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; fees and expenses of the Fund’s directors who are not “interested persons” of the Fund; (viii) the cost of office facilities, equipment and certain systems (including, but not limited to application licensing, development and maintenance, data licensing and reporting); (ix) the cost incurred to implement and monitor ISDA, Prime Brokerage and other agreements governing the Fund’s financing or borrowing facilities; (x) legal and audit expenses; (xi) fees and expenses related to the registration and qualification of the Fund and the Fund’s shares for distribution under state and federal securities laws; (xii) expenses of printing and mailing reports and notices and proxy material to shareholders of the Fund; (xiii) all other expenses incidental to holding meetings of the Fund’s shareholders, including proxy solicitations therefor; (xiv) insurance premiums for fidelity bond and other insurance coverage; (xv) investment management fees; (xvi) expenses of typesetting for printing prospectuses and statements of additional information and supplements to these documents; (xvii) expenses of

 

5


printing and mailing prospectuses and supplements thereto; (xviii) expenses related to the engagement of any third-party professionals, consultants, experts or specialists hired to perform work in respect of the Fund; (xix) all other expenses incurred by the Fund in connection with administering the Fund’s business, including the Fund’s allocable portion of the cost of the Fund’s chief compliance officer, chief financial officer, chief legal officer, investor relations personnel and their respective staffs; and (xx) such non-recurring or extraordinary expenses as may arise, including those relating to actions, suits or proceedings to which the Fund is a party and legal obligations that the Fund may have to indemnify the Fund’s directors, officers and/or employees or agents with respect to these actions, suits or proceedings. It also is understood that if the Adviser or any of its affiliates provide accounting services to the Fund, the Fund will reimburse the Adviser and its affiliates for their costs in providing such accounting services to the Fund using a methodology for determining costs approved by the Board.

8. Services to Other Companies or Accounts

The Fund understands that the Adviser and its affiliates now act, will continue to act and may act in the future as investment manager or adviser to fiduciary and other managed accounts, and as an investment manager or adviser to other investment companies that have the same, similar or different investment objectives and strategies as the Fund, including any offshore entities or private accounts. The Fund understands that the persons employed by the Adviser to assist in the performance of the Adviser’s duties under this Agreement may not devote their full time to such service, and that nothing contained in this Agreement will be deemed to limit or restrict the right of the Adviser to engage in and devote time and attention to other businesses or to render services of whatever kind or nature. This Agreement will not in any way limit or restrict the Adviser or any of its directors, officers, employees, or agents from buying, selling or trading any securities or other investment instruments for its or their own account or for the account of others for whom it or they may be acting, provided that such activities will not adversely affect or otherwise impair the performance by the Adviser of its duties and obligations under this Agreement. It is understood that directors, officers, employees and stockholders of the Fund are or may become interested in the Adviser and its affiliates, as directors, officers, employees, partners, stockholders, members, managers or otherwise, and that the Adviser and directors, officers, employees, partners, stockholders, members and managers of the Adviser and its affiliates are or may become similarly interested in the Fund as stockholders or otherwise. If any person who is a manager, partner, officer or employee of the Adviser is or becomes a director, officer and/or employee of the Fund and acts as such in any business of the Fund, then such manager, partner, officer and/or employee of the Adviser shall be deemed to be acting in such capacity solely for the Fund, and not as a manager, partner, officer or employee of the Adviser or under the control or direction of the Adviser, even if paid by the Adviser.

9. Custody

Nothing in this Agreement will require the Adviser to take or receive physical possession of cash, securities, or other investments of the Fund.

10. Term of Agreement; Termination of Agreement; Amendment of Agreement

 

6


(a) Term . This Agreement will become effective                      (the “Effective Date”), and, unless terminated in accordance with its terms, will continue for an initial two-year term and thereafter so long as such continuance is specifically approved at least annually as required by the 1940 Act.

(b) Termination . This Agreement may be terminated, without penalty, (i) by the Board or by vote of holders of a majority of the outstanding shares of the Fund upon sixty (60) days’ written notice to the Adviser, and (ii) by the Adviser upon sixty (60) days’ written notice to the Fund. This Agreement also will terminate automatically in the event of its assignment.

(c) Amendment . This Agreement may be amended by the parties only if the amendment is specifically approved by: (i) a majority of those directors of the Fund who are not parties to this Agreement or “interested persons” of any party cast in person at a meeting called for the purpose of voting on the Agreement’s approval; and (ii) if required by applicable law, the vote of a majority of the outstanding shares of the Fund.

11. Representations and Covenants of the Fund

The Fund represents and covenants to the Adviser as follows:

(a) The Fund is duly organized and validly existing under the laws of the State of Maryland with the power to own and possess its assets and carry on its business as the business is now being conducted.

(b) The execution, delivery and performance by the Fund of this Agreement are within the Fund’s powers and have been duly authorized by all necessary actions of the Board, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Fund’s governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon the Fund.

(c) The Fund is, or will be prior to commencing operations, registered as a closed-end management investment company under the 1940 Act and the Fund’s shares are (or will be prior to commencing operations) registered under the Securities Act of 1933, as amended, and under any applicable state securities laws.

12. Representations and Covenants of the Adviser

The Adviser represents and covenants to the Fund that as of the commencement of operations of the Fund:

(a) It is duly organized and validly existing under the laws of the State of Delaware with the power to own and possess its assets and carry on its business as this business is now being conducted.

(b) The execution, delivery and performance by the Adviser of this Agreement are

 

7


within the Adviser’s powers and have been duly authorized by all necessary action, and no action by or in respect of, or filing with, any governmental body, agency or official is required on the part of the Adviser for the execution, delivery and performance of this Agreement by the parties to this Agreement, and the execution, delivery and performance of this Agreement by the parties to this Agreement do not contravene or constitute a default under (i) any provision of applicable law, rule or regulation, (ii) the Adviser’s governing instruments, or (iii) any agreement, judgment, injunction, order, decree or other instruments binding upon the Adviser.

(c) It is not prohibited by the 1940 Act or the Advisers Act from performing the services contemplated by this Agreement.

(d) It is registered with the SEC as an investment adviser under the Advisers Act.

13. Indemnification

Indemnification of Adviser . The Fund shall indemnify, defend and protect the Adviser (and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser (collectively, the “Indemnified Parties”) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Fund or its security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under this Agreement or otherwise as an investment adviser of the Fund. Notwithstanding anything contained herein to the contrary, nothing in this Agreement shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Fund or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Adviser’s duties or by reason of the reckless disregard of the Adviser’s duties and obligations under this Agreement (as the same shall be determined in accordance with the 1940 Act and any interpretations or guidance by the SEC or its staff thereunder).

14. Records

(a) Maintenance of Records . The Adviser hereby undertakes and agrees to maintain for the Fund, in the form and for the period required by Rule 31a-2 under the 1940 Act, all records relating to the Fund’s investments that are required to be maintained by the Fund pursuant to the 1940 Act with respect to the Adviser’s responsibilities under this Agreement (the “Fund’s Books and Records”).

(b) Ownership of Records . The Adviser agrees that the Fund’s Books and Records are the Fund’s property and further agrees to surrender them promptly to the Fund upon the request of the Fund; provided , however , that the Adviser may retain copies of the Fund’s Books and Records at its own cost. The Fund’s Books and Records will be made available, within two

 

8


(2) business days of a written request, to the Fund’s accountants or auditors during regular business hours at the Adviser’s offices. The Fund or its authorized representatives will have the right to copy any records in the Adviser’s possession that pertain to the Fund. These books, records, information, or reports will be made available to properly authorized government representatives consistent with state and federal law and/or regulations. In the event of the termination of this Agreement, the Fund’s Books and Records will be returned to the Fund.

15. Governing Law

This Agreement will be governed by, construed under and interpreted and enforced in accordance with the laws of the state of New York, without regard to principles of conflicts of laws.

16. Severability

If any provision of this Agreement is held or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement shall not be affected thereby.

17. Definitions

The terms “assignment,” “affiliated person,” and “interested person,” when used in this Agreement, will have the respective meanings specified in Section 2(a) of the 1940 Act. The term “majority of the outstanding shares” means the lesser of (a) sixty-seven percent (67%) or more of the shares present at a meeting if more than fifty percent (50%) of these shares are present or represented by proxy, or (b) more than fifty percent (50%) of the outstanding shares.

18. Counterparts

This Agreement may be executed in one or more counterparts, each of which will be deemed an original, and all of such counterparts together will constitute one and the same instrument.

[Remainder of Page Intentionally Left Blank]

 

9


IN WITNESS WHEREOF , the parties to this Agreement have executed and delivered this Agreement as of the date first above written.

 

APOLLO SENIOR FLOATING RATE FUND INC.
  By:  

 

    Name:
    Title:
APOLLO CREDIT MANAGEMENT, LLC
  By:  

 

    Name:
    Title:

 

10

Exhibit 2(h)(1)

FORM OF

[ Ÿ ] Shares

Apollo Senior Floating Rate Fund Inc.

Common Stock ($0.001 par value per share)

UNDERWRITING AGREEMENT

February [ Ÿ ], 2011

 

- 1 -


February [ ], 2011

Morgan Stanley & Co. Incorporated

Citigroup Global Markets Inc.

Merrill Lynch, Pierce, Fenner & Smith

Incorporated

Well Fargo Securities, LLC

 

c/o  

Morgan Stanley & Co. Incorporated

1585 Broadway

New York, New York 10036

Ladies and Gentlemen:

Apollo Senior Floating Rate Fund Inc., a corporation organized under the laws of the State of Maryland (the “ Fund ”), is a newly organized, non-diversified closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “ Investment Company Act ”). The Fund proposes to issue and sell to the several Underwriters named in Schedule I hereto (the “ Underwriters ”) [ ] shares of its common stock ($0.001 par value per share) (the “ Firm Shares ”). The Fund also proposes to issue and sell to the several Underwriters not more than an additional [ ] shares of its common stock ($0.001 par value per share) (the “ Additional Shares ”) if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares granted to the Underwriters in Section 3 hereof. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the “ Shares .” The shares of common stock ($0.001 par value per share) of the Fund to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the “ Common Shares .”

Apollo Credit Management, LLC (the “Adviser”) acts as the Fund’s investment adviser pursuant to an Investment Advisory Agreement between the Adviser and the Fund (the “ Investment Advisory Agreement ”).

The Fund has filed with the Securities and Exchange Commission (the “ Commission ”) a notification on Form N-8A (the “ Notification ”) of registration of the Fund as an investment company and a registration statement on Form N-2, including a prospectus and a statement of additional information incorporated in the prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the “ Securities Act ”), is

 

- 1 -


hereinafter referred to as the “ Registration Statement; ” the prospectus first used to confirm sales of Shares, including the statement of additional information incorporated therein, in the form filed with the Commission in accordance with Rule 497, is hereinafter referred to as the “ Prospectus; ” any prospectus delivered to any person by the Fund, the Adviser or at the direction of the Fund or the Adviser by any agent or affiliate thereof before such Registration Statement became effective, and any prospectus that omitted the information included in any such Prospectus that was omitted from such Registration Statement at the time it became effective pursuant to paragraph (b) of Rule 430A that was delivered after such effectiveness and prior to the execution and delivery of this Agreement, including the statement of additional information contained therein, is herein after referred to as a “ preliminary prospectus .” If the Fund has filed an abbreviated registration statement to register additional Common Shares pursuant to Rule 462(b) under the Securities Act (the “ Rule 462 Registration Statement ”), then any reference herein to the term “ Registration Statement ” shall be deemed to include such Rule 462 Registration Statement. The Investment Company Act and the Securities Act are hereinafter referred to collectively as the “ Acts ,” and the rules and regulations of the Commission under the Acts and under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) are hereinafter referred to collectively as the “ Rules and Regulations .”

For purposes of this Agreement, “ Omitting Prospectus ” means any advertisement used in the public offering of the Shares pursuant to Rule 482 of the Rules and Regulations (“ Rule 482 ”) and “ Time of Sale Prospectus ” means the preliminary prospectus, dated February [ ], 2011, and each Omitting Prospectus, if any, identified on Schedule II hereto as a Retail Omitting Prospectus. As used herein, the terms “Registration Statement,” “preliminary prospectus,” “Time of Sale Prospectus” and Prospectus shall include the documents, if any, incorporated by reference therein, including a statement of additional information, if any.

1. Representations and Warranties of the Fund and the Adviser . The Fund and the Adviser, jointly and severally, represent and warrant to and agree with each of the Underwriters that:

(a) The Fund meets the requirements for the use of Form N-2 under the Acts. The Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement has been issued under the Securities Act, nor has there been any order of suspension or revocation of registration of the Fund under the Investment Company Act pursuant to Section 8(e) of the Investment Company Act, and no proceedings for any such purpose, have been instituted or are pending or threatened by the Commission.

 

- 2 -


(b) (i) The Registration Statement, when it became effective under the Securities Act, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Acts and the applicable Rules and Regulations thereunder, (iii) the Time of Sale Prospectus does not, and at the time of each sale of the Shares in connection with the offering when the Prospectus is not yet available to prospective purchasers, and at the Closing Date (as defined in Section 5), the Time of Sale Prospectus, as amended or supplemented, if applicable, will not, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and (iv) the Prospectus, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph do not apply to statements or omissions in the Registration Statement, the Time of Sale Prospectus or the Prospectus based upon information relating to any Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use therein.

(c) The Fund has been duly organized, is validly existing as a corporation in good standing under the laws of the State of Maryland, has the power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, business or properties of the Fund, whether or not arising from transactions in the ordinary course of business of the Fund (“ Fund Material Adverse Effect ”). The Fund has no subsidiaries.

(d) The Fund is registered with the Commission as a non-diversified, closed-end management investment company under the Investment Company Act and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or threatened by the Commission. No person is serving or acting as an

 

- 3 -


officer or trustee of, or investment adviser to, the Fund except in accordance with the provisions of the Investment Company Act and the Investment Advisers Act of 1940, as amended (the “ Advisers Act ”). Except as otherwise disclosed in the Registration Statement, the Time of Sale Prospectus and the Prospectus, no trustee of the Fund is an “interested person” of the Fund or an “affiliated person” of any Underwriter (each as defined in the Investment Company Act).

(e) Each of this Agreement, the Investment Advisory and Management Agreement, the Master Custodian Agreement between [ ] (the “ Custodian ”) and the Fund (the “ Custodian Agreement ”), the Administration Agreement between [ ] and the Fund (the “ Administration Agreement ”) and the Transfer Agency, Registrar and Dividend Disbursing Agency Agreement between [ ] (the “ Transfer Agent ”) and the Fund (the “ Transfer Agency Agreement ”) 1 (this Agreement, the Investment Advisory Agreement, the Administration Agreement, the Custodian Agreement and the Transfer Agency Agreement being referred to herein collectively as the “ Fundamental Agreements ”) has been duly authorized, executed and delivered by the Fund and complies with all applicable provisions of the Acts, the Advisers Act and the applicable Rules and Regulations. The Fund has adopted the Dividend Reinvestment Plan (the “ Plan ”). Each Fundamental Agreement, other than this Agreement, assuming due authorization, execution and delivery by the other parties therto, is a valid and binding agreement of the Fund, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to applicable bankruptcy, insolvency, reorganization, moritorium and similar laws affecting creditors’ rights generally and equitable principles of general applicability.

(f) None of (1) the execution and delivery by the Fund of, and the performance by the Fund of its obligations under, each Fundamental Agreement or the adoption by the Fund of the Plan, or (2) the issue and sale by the Fund of the Shares as contemplated by this Agreement contravenes or will contravene (i) any provision of applicable law, (ii) the charter and bylaws of the Fund, (iii) any agreement or (iv) other instrument binding upon the Fund that is material to the Fund, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Fund, whether foreign or domestic. No

 

1 [Rep will include any other agreements entered into by Fund in connection with offering.]

 

- 4 -


consent, approval, authorization, order or permit of, or qualification with, any governmental body or agency, self-regulatory organization or court or other tribunal, whether foreign or domestic, is required for the performance by the Fund of its obligations under the Fundamental Agreements or the Plan, except such as have been obtained and as may be required by the Acts, the Advisers Act, the Exchange Act, or the applicable Rules and Regulations, or by the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the offer and sale of the Shares.

(g) The authorized capital stock of the Fund conforms in all material respects to the description thereof contained in each of the Time of Sale Prospectus and the Prospectus, and the charter and bylaws of the Fund, the Fundamental Agreements and the Plan conform in all material respects to the descriptions thereof contained in each of the Time of Sale Prospectus and the Prospectus.

(h) The charter and bylaws of the Fund, the Fundamental Agreements and the Plan comply with all applicable provisions of the Acts and the applicable Rules and Regulations, and all approvals of such documents required under the Investment Company Act by the Fund’s stockholders and Board of Directors have been obtained and are in full force and effect.

(i) The Fundamental Agreements (other than this Agreement) and the Plan are in full force and effect and neither the Fund nor any other party is in default thereunder, and no event has occurred which with the passage of time or the giving of notice or both would constitute a default thereunder. The Fund is not currently in breach of, or default under, any other written agreement or instrument to which it or its property is bound or affected.

(j) The Common Shares outstanding prior to the issuance of the Shares have been duly authorized and are validly issued, fully paid and non-assessable.

(k) The Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of the Shares will not be subject to any preemptive or similar rights.

(l) The Shares and any Common Shares outstanding prior to the issuance of the Shares have been approved for listing on the New York

 

- 5 -


Stock Exchange, subject to official notice of issuance. The Fund’s registration statement on Form 8-A under the Exchange Act is effective.

(m) Each Omitting Prospectus (i) complies with the requirements of Rule 482 of the Rules and Regulations, (ii) does not contain any untrue statement of a material fact or omit to state any material fact necessary to make such information, in light of the circumstances under which it was made, not misleading, (iii) complied and will comply in all material respects with the Acts, the Rules and Regulations and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“ FINRA ”) and (iv) if required to be filed with FINRA, has been delivered to the Underwriters to be filed with FINRA and FINRA has issued no objections with respect to such Omitting Prospectus. Except for the Omitting Prospectuses, if any, identified on Schedule II hereto, the Fund has not prepared, used or referred to and will not, without your prior written consent, prepare, use or refer to any Omitting Prospectus.

(n) The questionnaires relating to the FINRA Corporate Financing Rule provided to the Underwriters or to counsel for the Underwriters in connection with letters, filings or other supplemental information provided to FINRA pursuant to FINRA’s conduct rules is true, complete and correct in all material respects.

(o) The Fund intends to direct the investment of the proceeds of the offering described in the Time of Sale Prospectus and the Prospectus in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “ Code ”), and the Fund intends to qualify as a regulated investment company under Subchapter M of the Code.

(p) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in or affecting the condition (financial or otherwise), earnings, business or prospects of the Fund from that set forth in the Time of Sale Prospectus, and there have been no transactions entered into by the Fund which are material to the Fund other than those in the ordinary course of its business or as described in the Time of Sale Prospectus.

(q) There are no legal or governmental proceedings pending or threatened to which the Fund is a party or to which any of the properties of the Fund is subject (i) other than proceedings accurately described in all material respects in the Time of Sale Prospectus and proceedings that would not have a Fund Material Adverse Effect, or an adverse effect on

 

- 6 -


the power or ability of the Fund to perform its obligations under this Agreement or to consummate the transactions contemplated by the Time of Sale Prospectus or (ii) that are required to be described in the Registration Statement or the Prospectus and are not so described; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required by the Acts and the applicable Rules and Regulations.

(r) The Fund has all necessary consents, authorizations, approvals, orders (including exemptive orders), certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, self-regulatory organizations and courts and other tribunals, whether foreign or domestic, to own and use its assets and to conduct its business in the manner described in the Time of Sale Prospectus and the Prospectus, except to the extent that the failure to obtain or file the foregoing would not have a Fund Material Adverse Effect.

(s) Each preliminary prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 497 of the Rules and Regulations, complied when so filed in all material respects with the Acts and the applicable Rules and Regulations.

(t) The statement of assets and liabilities included in the Registration Statement, the Time of Sale Prospectus and the Prospectus presents fairly the financial position of the Fund as of the date indicated and said statement has been prepared in conformity with generally accepted accounting principles. Deloitte & Touche LLP, whose report appears in the Time of Sale Prospectus and the Prospectus and who have certified the financial statements and supporting schedules, if any, included in the Registration Statement, is an independent registered public accounting firm as required by the Acts and the applicable Rules and Regulations.

(u) There are no material restrictions, limitations or regulations with respect to the ability of the Fund to invest its assets as described in the Time of Sale Prospectus and the Prospectus, other than as described therein.

(v) All advertisements authorized by the Fund for use in the offering of the Shares complied and will comply with the requirements of the Acts, the applicable Rules and Regulations and the rules and regulations of FINRA and there are no such advertisements other than (i)

 

- 7 -


any Omitting Prospectuses identified in Schedule II hereto and (ii) any advertisement that complies with Rule 135a of the Rules and Regulations.

(w) There are no contracts, agreements or understandings between the Fund and any person granting such person the right to require the Fund to file a registration statement under the Securities Act with respect to any securities of the Fund or to require the Fund to include such securities with the Shares registered pursuant to the Registration Statement.

(x) The expense summary information set forth in the Time of Sale Prospectus and the Prospectus in the Fee Table has been prepared in accordance with the requirements of Form N-2 and any fee projections or estimates, if applicable, are reasonably based and attainable.

(y) Subsequent to the respective dates as of which information is given in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, (i) the Fund has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction; (ii) the Fund has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock (other than, in the event this representation and warranty is made after the Closing Date, ordinary and customary dividends declared and payable after the Closing Date); and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Fund except in each case as described in each of the Registration Statement, the Time of Sale Prospectus and the Prospectus, respectively.

(z) The Fund owns or possesses, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by it, and the Fund has not received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Fund Material Adverse Effect.

(aa) The Fund maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit

 

- 8 -


preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Time of Sale Prospectus, since the date of the Fund’s most recent audited financial statements included or incorporated by reference in the Prospectus, there has been (i) no material weakness in the Fund’s internal control over financial reporting (whether or not remediated) and (ii) no change in the Fund’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Fund’s internal control over financial reporting.

(bb) The Fund maintains “disclosure controls and procedures” (as such term is defined in Rule 30a-3 under the Investment Company Act); such disclosure controls and procedures are effective as required by the Investment Company Act and the Rules and Regulations.

(cc) Neither the Fund nor any employee nor agent of the Fund has made any payment of funds of the Fund or received or retained any funds, which payment, receipt or retention is of a character that is required to be disclosed in the Time of Sale Prospectus, the Prospectus or the Registration Statement.

(dd) Neither the Fund nor any of its subsidiaries or affiliates, nor any director, officer, or employee, nor, to knowledge of the Fund, any agent or representative of the Fund or of any of its subsidiaries or affiliates, has taken or will take any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any “government official” (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; and the Fund and its subsidiaries and affiliates have conducted their businesses in compliance with applicable anti-corruption laws and have instituted and maintain and will continue to maintain policies and procedures designed to promote and achieve compliance with such laws and with the representation and warranty contained herein.

 

- 9 -


(ee) The operations of the Fund and its subsidiaries are and have been conducted at all times in material compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money laundering statutes of jurisdictions where the Fund and its subsidiaries conducts business, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Anti-Money Laundering Laws ”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Fund or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Fund or the Adviser, threatened.

(ff) (i) The Fund Entity represents that neither the Fund nor any of its subsidiaries (collectively, the “Fund Entity”), nor any director, officer, or employee, nor any agent, affiliate or representative of the Fund Entity, is an individual or entity (“ Fund Person ”) that is, or is owned or controlled by a Fund Person that is:

(A) the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“ OFAC ”), the United Nations Security Council (“ UNSC ”), the European Union (“ EU ”), Her Majesty’s Treasury (“ HMT ”), or other relevant sanctions authority (collectively, “ Sanctions ”), nor

(B) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria).

(ii) The Fund Entity represents that it will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Fund Person:

(A) to fund or facilitate any activities or business of or with any Fund Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or

(B) in any other manner that will result in a violation of Sanctions by any Fund Person (including any Fund Person

 

- 10 -


participating in the offering, whether as underwriter, adviser, investor or otherwise).

(iii) The Fund Entity represents that for the past five years, it has not knowingly engaged in, is not now knowingly engaged in, and will not engage in, any dealings or transactions with any Fund Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.

(gg) To the knowledge of the Fund and the Adviser, [ ] is duly enrolled as a participant in the Fast Automated Transfer Program (FAST) of The Depository Trust Company (“ DTC ”).

2. Representations and Warranties of the Adviser . The Adviser represents and warrants to and agrees with each of the Underwriters that:

(a) The Adviser has been duly formed, is validly existing as a limited liability company in good standing under the laws of the jurisdiction of its formation, has the limited liability company power and authority to own its property and to conduct its business as described in the Time of Sale Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise, earnings, business properties, management or personnel of the Adviser whether or not arising from transactions in the ordinary course of business of such Adviser (an “Adviser Material Adverse Effect). The Adviser has no subsidiaries.

(b) The Adviser is duly registered as an investment adviser under the Advisers Act, and is not prohibited by the Advisers Act or the Investment Company Act from acting under the Investment Advisory Agreement as an investment adviser to the Fund as contemplated by the Time of Sale Prospectus or from acting under the [Administration Agreement] as [administrator] and no order of suspension or revocation of such registration has been issued or proceedings therefor initiated or, to the knowledge of the Adviser, threatened by the Commission.

(c) Each of this Agreement, the Investment Advisory Agreement, the Administration Agreement, the Structuring Fee Agreement between Morgan Stanley & Co. Incorporated and the Adviser, dated February [ ], 2011 (the “ Morgan Stanley Fee Agreement ”), the Structuring Fee Agreement between Citigroup Global Markets Inc. and the

 

- 11 -


Adviser, dated February [ ], 2011 (the “ Citi Fee Agreement ”), the Structuring Fee Agreement between Merrill Lynch, Pierce, Fenner & Smith Incorporated and the Adviser, dated February [ ], 2011 (the “ Merrill Lynch Fee Agreement ”), he Structuring Fee Agreement between Wells Fargo Securities, LLC and the Adviser, dated February, 2011 (the “ Wells Fee Agreement ,” and together with the other fee agreements, the “ Fee Agreements ” ) and [other agreements executed by the Adviser] (this Agreement, the Investment Advisory Agreement, the Administration Agreement, the Fee Agreements and [other agreements executed by the Adviser] are referred to herein, collectively, as the “ Adviser Agreements ”) has been duly authorized, executed and delivered by the Adviser and complies with all applicable provisions of the Acts, the Advisers Act and the applicable Rules and Regulations. Each of the Adviser Agreements, assuming the due authorization, execution and delivery by the other parties thereto, is a valid and binding agreement of the Adviser, enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights generally and by equitable principles of general applicability.

(d) The execution and delivery by the Adviser of, and the performance by the Adviser of its obligations under the Adviser Agreements will not contravene (i) the certificate of formation or limited liability company agreement of the Adviser, (ii) any agreement or other instrument binding upon the Adviser, (iii) any provision of applicable law or (iv) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Adviser, whether foreign or domestic. No consent, approval, authorization, order or permit of, or qualification with, any governmental body or agency, self-regulatory organization or court or other tribunal, whether foreign or domestic, is required for the performance by the Adviser of its obligations under the Adviser Agreements, except such as have been obtained and as may be required by the Acts, the Advisers Act, the Exchange Act or the applicable Rules and Regulations, or by the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the purchase and distribution of the Shares.

(e) There are no legal or governmental proceedings pending or threatened to which the Adviser is a party or to which any of the properties of the Adviser is subject (i) other than proceedings accurately described in all material respects in the Time of Sale Prospectus and proceedings that would not have an Adviser Material Adverse Effect, or an adverse effect

 

- 12 -


on the power or ability of the Adviser to perform its obligations under this Agreement or to consummate the transactions contemplated by the Time of Sale Prospectus or (ii) that are required to be described in the Registration Statement or the Prospectus and are not so described; and there are no statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.

(f) The Adviser has all necessary consents, authorizations, approvals, orders (including exemptive orders), certificates and permits of and from, and has made all declarations and filings with, all governmental authorities, self-regulatory organizations and courts and other tribunals, whether foreign or domestic, to own and use its assets and to conduct its business in the manner described in the Time of Sale Prospectus, except to the extent that the failure to obtain or file the foregoing would not have a Fund Material Adverse Effect or an Adviser Material Adviser Effect.

(g) The Adviser has the financial resources available to it necessary for the performance of its services and obligations as contemplated in the Time of Sale Prospectus and by the Adviser Agreements.

(h) The Investment Advisory Agreement is in full force and effect and the Adviser is not in default thereunder, and, no event has occurred which with the passage of time or the giving of notice or both would constitute a default under such document.

(i) All information furnished by the Adviser in the Registration Statement, the Time of Sale Prospectus and Prospectus does not, and on the Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading.

(j) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in or affecting the condition (financial or otherwise), earnings, business properties, management or personnel of the Adviser from that set forth in the Time of Sale Prospectus, and there have been no transactions entered into by the Adviser which are material to the Adviser other than those in the ordinary course of its business or as described in the Time of Sale Prospectus.

 

- 13 -


(k) Neither the Adviser nor any its subsidiaries or affiliates, nor any director, officer, or employee, nor, to the Adviser’s knowledge, any agent or representative of the Adviser or of any of its subsidiaries or affiliates, has taken or will take any action in furtherance of an offer, payment, promise to pay, or authorization or approval of the payment or giving of money, property, gifts or anything else of value, directly or indirectly, to any “government official” (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) to influence official action or secure an improper advantage; and the Adviser and its subsidiaries and affiliates have conducted their businesses in compliance with applicable anti-corruption laws and have instituted and maintain and will continue to maintain policies and procedures designed to promote and achieve compliance with such laws and with the representation and warranty contained herein.

(l) The operations of the Adviser and its subsidiaries are and have been conducted at all times in material compliance with the Anti-Money Laundering Laws, and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Adviser or any of its subsidiaries with respect to the Anti-Money Laundering Laws is pending or, to the knowledge of the Adviser, threatened.

(m) (i) The Adviser represents that neither the Adviser nor its affiliates, nor any of its subsidiaries (collectively, the “Adviser Entity”) nor any director, officer, or employee, nor any agent or representative of the Adviser Entity, is an individual or entity (“ Adviser Person ”) that is, or is owned or controlled by an Adviser Person that is:

(A) the subject of any Sanctions, nor

(B) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria).

(ii) The Adviser Entity will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner or other Adviser Person:

 

- 14 -


(A) to fund or facilitate any activities or business of or with any Adviser Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or

(B) in any other manner that will result in a violation of Sanctions by any Adviser Person (including any Adviser Person participating in the offering, whether as underwriter, advisor, investor or otherwise).

(iii) The Adviser Entity represents that for the past five years, it has not knowingly engaged in, is not now knowingly engaged in, and will not engage in, any dealings or transactions with any Adviser Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.

3. Agreements to Sell and Purchase. The Fund hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to purchase from the Fund the respective numbers of Firm Shares set forth in Schedule I hereto opposite its name at $[19.10] a share (the “ Purchase Price ”).

On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Fund agrees to sell to the Underwriters the Additional Shares, and the Underwriters shall have the right to purchase, severally and not jointly, up to [ ] Additional Shares at the Purchase Price, less an amount per share equal to any dividends or distributions declared by the Fund and payable on the Firm Shares but not payable on the Option Shares. You may exercise this right on behalf of the Underwriters in whole or from time to time in part by giving written notice not later than 45 days after the date of this Agreement. Any exercise notice shall specify the number of Additional Shares to be purchased by the Underwriters and the date on which such shares are to be purchased. Each purchase date must be at least one business day after the written notice is given and may not be earlier than the closing date for the Firm Shares nor later than ten business days after the date of such notice. Additional Shares may be purchased as provided in Section 5 hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. On each day, if any, that Additional Shares are to be purchased (an “ Option Closing Date ”), each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased on such Option Closing Date as the

 

- 15 -


number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares.

The Fund hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith, Incorporated and Wells Fargo Securities, LLC on behalf of the Underwriters, it will not, during the period ending 180 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Shares, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Shares or such other securities, in cash or otherwise or (3) file any registration statement with the Commission relating to the offering of any Common Shares or any securities convertible into or exercisable or exchangeable for Common Shares; provided that nothing in this paragraph shall prevent the Fund from issuing Common Shares pursuant to the Plan. Notwithstanding the foregoing, if (x) during the last 17 days of the 180-day restricted period the Fund issues an earnings release or material news or a material event relating to the Fund occurs, or (y) prior to the expiration of the 180-day restricted period, the Fund announces that it will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions imposed in this clause shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event. The Fund will provide Morgan Stanley & Co. Incorporated on behalf of the Underwriters with prior notice of any such announcement that gives rise to an extension of the restricted period. The agreements contained in this paragraph shall not apply to the Shares to be sold hereunder or any Common Shares issued pursuant to the Plan.

4. Terms of Public Offering . The Fund and the Adviser are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Fund and the Adviser are further advised by you that the Shares are to be offered to the public initially at $[20.00] a share (the “ Public Offering Price ”), and to certain dealers selected by you at a price that represents a concession not in excess of $[0.60] a share under the Public Offering Price.

5. Payment and Delivery. Payment for the Firm Shares shall be made to the Fund in Federal or other funds immediately available in New York City

 

- 16 -


against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 A.M. (New York City time), on [ ], 2011, or at such other time on the same or such other date, not later than [10 business days after Closing Date], as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the “ Closing Date .”

Payment for any Additional Shares shall be made to the Fund in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 A.M. (New York City time), on the date specified in the corresponding notice described in Section 3 or at such other time on the same or on such other date, in any event not later than 45 days after [ ], 2011 plus 10 business days, as shall be designated in writing by you.

The Firm Shares and Additional Shares shall be registered in such names and in such denominations as you shall request in writing not later than one full business day prior to the Closing Date or the applicable Option Closing Date, as the case may be. The Firm Shares and Additional Shares shall be delivered to you through the facilities of DTC on the Closing Date or an Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in connection with the transfer of the Shares to the Underwriters duly paid, against payment of the Purchase Price therefor.

6. Conditions to the Underwriters’ Obligations . The respective obligations of the Fund and the Adviser and the several obligations of the Underwriters hereunder are subject to the condition that the Registration Statement shall have become effective not later than [ ] P.M. (New York City time) on the date hereof.

The several obligations of the Underwriters are subject to the following further conditions:

(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Fund or the Adviser, from that set forth in the Time of Sale Prospectus that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus.

(b) The Underwriters shall have received on the Closing Date certificates, dated the Closing Date of an executive officer of each of the Fund and the Adviser, to the effect (i) that no stop order suspending the

 

- 17 -


effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are, as of the Closing Date, pending before or threatened by the Commission, (ii) that the representations and warranties of the Fund and the Adviser contained in this Agreement are true and correct as of the Closing Date, and (iii) that each of the Fund and the Adviser has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date.

Each officer signing and delivering such a certificate may rely upon the best of his or her knowledge as to proceedings threatened.

(c) Each of the Adviser and the Fund shall have performed all of their respective obligations to be performed hereunder on or prior to the Closing Date.

(d) The Underwriters shall have received on the Closing Date an opinion of Willkie Farr & Gallagher LLP, special counsel for the Fund, dated the Closing Date, to the effect set forth in Exhibit A hereto. The Underwriters shall have received on the Closing Date an opinion of Venable LLP, special counsel for the Fund, dated the Closing Date, to the effect set forth in Exhibit A-2 hereto.

(e) The Underwriters shall have received on the Closing Date an opinion of [NAME OF THE ADVISER’S COUNSEL], counsel for the Adviser, dated the Closing Date, to the effect set forth in Exhibit B hereto.

(f) The Underwriters shall have received on the Closing Date the favorable opinion of Clifford Chance US LLP, counsel for the Underwriters, dated the Closing Date, and covering such matters as the Underwriters shall reasonably request.

The opinions of Willkie Farr & Gallagher LLP, Venable LLP and [NAME OF THE ADVISER’S COUNSEL] described in Sections 6(d) and 6(e) above, respectively, shall be rendered to the Underwriters at the request of the Fund and shall so state therein.

(g) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date, from a duly authorized officer of the Custodian, certifying that the Custodian Agreement is in full force and effect and is a valid and binding agreement of the Custodian.

(h) The Underwriters shall have received on the Closing Date a certificate from a duly authorized officer of [the Administrator] certifying

 

- 18 -


that the Administration Agreement is in full force and effect and is a valid and binding agreement of the Administrator.

(i) The Underwriters shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to the Underwriters, from Deloitte & Touche LLP, independent public accountants, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Time of Sale Prospectus, provided that the letter delivered on the Closing Date shall use a “cut-off date” not earlier than the date hereof.

(j) All filings, applications and proceedings taken by the Fund and the Adviser in connection with the organization and registration of the Fund and the Shares under the Acts and the applicable Rules and Regulations shall be satisfactory in form and substance to you and counsel for the Underwriters.

(k) No action, suit, proceeding, inquiry or investigation shall have been instituted or, to the knowledge of the Fund or the Adviser, threatened by the Commission which would adversely affect the Fund’s standing as a registered investment company under the Investment Company Act or the standing of the Adviser as a registered investment adviser under the Advisers Act.

(l) The Shares shall have been duly authorized for listing on the New York Stock Exchange, subject only to official notice of issuance thereof

(m) On the Closing Date, the Adviser shall deliver to each of the other parties to the Fee Agreements copies of the Fee Agreements, executed by such Adviser and dated the Closing Date, together with reproduced copies of such agreements executed by the Adviser for each of the other parties thereto.

The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the applicable Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Fund and the Adviser, the due authorization and issuance of the Additional Shares to be sold on such Option Closing Date and other matters related to the issuance of such Additional Shares, and officers’ certificates and opinions of Willkie Farr & Gallagher LLP, [NAME OF THE ADVISER’S

 

- 19 -


COUNSEL], Venable LLP and Clifford Chance US LLP to the effect set forth above, except that such certificates and opinions shall be dated as of the applicable Option Closing Date and statements and opinions above contemplated to be given as of the Closing Date shall instead be made and given as of such Option Closing Date.

7. Covenants of the Fund and the Adviser . In further consideration of the agreements of the Underwriters herein contained, the Fund and the Adviser, jointly and severally, covenant and agree with each Underwriter as follows:

(a) To notify you immediately, and confirm such notice in writing, (i) of the institution of any proceedings pursuant to Section 8(e) of the Investment Company Act and (ii) of the happening of any event during the period mentioned in Section 7(h) below which in the judgment of the Fund makes any statement in the Notification, the Registration Statement the Time of Sale Prospectus, any Omitting Prospectus or the Prospectus untrue in any material respect or which requires the making of any change in or addition to the Notification, the Registration Statement, the Time of Sale Prospectus, any Omitting Prospectus or the Prospectus in order to make the statements therein not misleading in any material respect. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement or an order pursuant to Section 8(e) of the Investment Company Act, the Fund will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment.

(b) To furnish to you, without charge, three signed copies of each of the Notification and the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of each of the Notification and the Registration Statement (without exhibits thereto) and to furnish to you in New York City, without charge, prior to 10:00 A.M. (New York City time) on the business day next succeeding the date of this Agreement and during the period mentioned in Section 7(d) below, as many copies of the Time of Sale Prospectus, Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request.

(c) Before amending or supplementing the Registration Statement, the Time of Sale Prospectus or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and not to file any such proposed amendment or supplement to which you reasonably object, and to file with the Commission within the applicable period

 

- 20 -


specified in Rule 497 of the Rules and Regulations any prospectus required to be filed pursuant to such Rule.

(d) To furnish to you a copy of each proposed Omitting Prospectus to be prepared by or on behalf of, used by, or referred to by the Fund and not to use or refer to any proposed Omitting Prospectus to which you reasonably object.

(e) If the Time of Sale Prospectus is being used to solicit offers to buy the Shares at a time when the Prospectus is not yet available to prospective purchasers and any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Time of Sale Prospectus in order to make the statements therein, in the light of the circumstances, not misleading, or if any event shall occur or condition exist as a result of which the Time of Sale Prospectus conflicts with the information contained in the Registration Statement then on file, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Time of Sale Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to any dealer upon request, either amendments or supplements to the Time of Sale Prospectus so that the statements in the Time of Sale Prospectus as so amended or supplemented will not, in the light of the circumstances when delivered to a prospective purchaser, be misleading or so that the Time of Sale Prospectus, as amended or supplemented, will no longer conflict with the Registration Statement, or so that the Time of Sale Prospectus, as amended or supplemented, will comply with applicable law.

(f) The Fund will use the net proceeds received by it from the sale of the Shares in the manner specified in the Time of Sale Prospectus.

(g) The Fund and the Adviser will not take any action designed to cause or result in the manipulation of the price of any security of the Fund to facilitate the sale of Shares in violation of the Acts or the Securities Act and the applicable Rules and Regulations, or the securities or Blue Sky laws of the various states and foreign jurisdictions in connection with the offer and sale of Shares.

(h) If, during such period after the first date of the public offering of the Shares as in the opinion of counsel for the Underwriters the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances

 

- 21 -


when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of counsel for the Underwriters, it is necessary to amend or supplement the Prospectus to comply with applicable law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Fund) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law.

(i) To use its best efforts to qualify as a regulated investment company under Subchapter M of the Code and to maintain such qualification as a regulated investment company.

(j) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request.

(k) To make generally available to the Fund’s security holders and to you as soon as practicable an earning statement covering a period of at least twelve months beginning with the first fiscal quarter of the Fund occurring after the date of this Agreement which shall satisfy the provisions of Section 11(a) of the Securities Act and the Rules and Regulations, including Rule 158, of the Commission thereunder.

(l) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all expenses incident to the performance of the obligations of the Fund and the Adviser under this Agreement, including: (i) the fees, disbursements and expenses of the Fund’s counsel and the Fund’s accountants in connection with the registration and delivery of the Shares under the Securities Act and all other fees or expenses in connection with the preparation and filing of the Notification, the Registration Statement, any preliminary prospectus, the Time of Sale Prospectus, the Prospectus, and any Omitting Prospectus prepared by or on behalf of, used by, or referred to by the Fund and amendments and supplements to any of the foregoing, including all printing costs associated therewith, and the mailing and delivering of copies thereof to the Underwriters and dealers, in the quantities hereinabove specified, (ii) all costs and expenses related to the transfer and delivery of the Shares to the

 

- 22 -


Underwriters, including any transfer or other taxes payable thereon, (iii) the cost of printing or producing any Blue Sky memorandum in connection with the offer and sale of the Shares under state securities laws and all expenses in connection with the qualification of the Shares for offer and sale under state securities laws as provided in Section 7(j) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky memorandum, (iv) all filing fees and the reasonable fees and disbursements of counsel to the Underwriters incurred in connection with the review and qualification of the offering of the Shares by FINRA, (v) all fees and expenses in connection with the preparation and filing of the registration statement on Form 8-A relating to the Common Shares and all costs and expenses incident to listing the Shares on the New York Stock Exchange, (vi) the cost, if any, of printing certificates representing the Shares, (vii) the costs and charges of any transfer agent, registrar or depositary, (viii) the costs and expenses of the Fund relating to furnishing any investor PowerPoint presentation materials on any “road show” undertaken in connection with the marketing of the offering of the Shares, including, without limitation, expenses associated with the design, productions, shipping and mailing or other dissemination of such presentation materials, expenses associated with the production of any audio-visual presentations related to any road show presentations, fees and expenses of any consultants engaged in connection with the road show presentations with the prior approval of the Fund, and transportation expenses (including, without limitation, associated travel and lodging expenses) of the representatives and officers of the Fund and any such consultants, in relation to any such road show and (ix) all other costs and expenses reasonably incident to the performance of the obligations of the Fund hereunder for which provision is not otherwise made in this Section. The Fund and the Adviser agree that the Fund will pay the foregoing costs and expenses incident to the performance of the obligations of the Fund under this Agreement to the extent such costs and expenses do not exceed, in the aggregate, $[ ] per Share sold under this Agreement, and the Adviser or an affiliate agrees to pay (a) all the foregoing costs and expenses incident to the performance of the obligations of the Fund under this Agreement that exceed, in the aggregate, $[ ] per Share sold under this Agreement and (b) the foregoing costs and expenses incident to the performance of the obligations of the Adviser under this Agreement. It is understood, however, that except as provided in this Section, Section 8 entitled “Indemnity and Contribution” and the last paragraph of Section 10 below, the Underwriters will pay all of their costs and expenses, including fees and disbursements of their counsel, stock transfer taxes payable on

 

- 23 -


resale of any of the Shares by them and any advertising expenses connected with any offers they may make.

(m) The Fund will not declare or pay any dividend or other distribution on any of the Common Shares unless a holder of such Common Shares that was not a holder of record until the close of business on the day 45 days after [ ], 2011 plus 10 business days would be entitled to receive the full amount thereof.

8. Indemnity and Contribution. (a) Each of the Fund and the Adviser, jointly and severally, agrees to indemnify and hold harmless each Underwriter, each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, each agent of any Underwriter and each director, officer or affiliate of any Underwriter within the meaning of Rule 405 under Rules and Regulations 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), caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any Omitting Prospectus, any preliminary prospectus (including any statement of additional information incorporated therein by reference), the Time of Sale Prospectus, or the Prospectus or any amendment or supplement thereto, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use therein.

(b) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless each of the Fund and the Adviser, its officers, directors, trustees or agents (as the case may be), and each officer of the Fund who signs the Registration Statement and each person, if any, who controls the Fund or the Adviser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Fund and the Adviser to such Underwriter, but only with reference to information relating to such Underwriter furnished to the Fund in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus (including any statement of additional information incorporated therein by reference), the Time of Sale Prospectus, any

 

- 24 -


Omitting Prospectus or Prospectus or any amendments or supplements thereto.

(c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b), such person (the “ indemnified party ”) shall promptly notify the person against whom such indemnity may be sought (the “ indemnifying party ”) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, all persons who are agents of any Underwriters or all persons who are directors, officers and affiliates of any Underwriters within the meaning of Rule 405 of the Rules and Regulations, (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Fund, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Fund within the meaning of either such Section, and (iii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Adviser, its directors or trustees, as the case may be, and each person, if any, who controls the Adviser within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons, agents, directors, offices and affiliates of any Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated, Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Wells Fargo Securities, LLC. In the case of any such

 

- 25 -


separate firm for the Fund, and such directors, officers and control persons of the Fund, such firm shall be designated in writing by the Fund. In the case of any such separate firm for the Adviser, and such directors and control persons of the Adviser, such firm shall be designated in writing by the Adviser. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.

(d) To the extent the indemnification provided for in Section 8(a) or 8(b) is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Adviser on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Fund and the Adviser on the one hand and of the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Adviser on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by the Fund and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate Public Offering Price of the Shares. The relative fault of the Fund and the Adviser on the one hand and the Underwriters on the other

 

- 26 -


hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Fund or the Adviser or by the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters’ respective obligations to contribute pursuant to this Section 8 are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. The Adviser agrees to pay any amounts that are payable by the Fund pursuant to this paragraph to the extent that the Fund fails to make all contributions required to be made by the Fund pursuant to this Section 8.

(e) The Fund, the Adviser and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 8(d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.

 

- 27 -


(f) The indemnity and contribution provisions contained in this Section 8 and the representations, warranties and other statements of the Fund and the Adviser contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter, any person controlling any Underwriter, or any agent of any Underwriter or any director, officer or affiliate of any Underwriter or by or on behalf of the Adviser, their officers or directors or any person controlling the Adviser or by or on behalf of the Fund, its officers or directors or any person controlling the Fund and (iii) acceptance of and payment for any of the Shares.

9. Termination . The Underwriters may terminate this Agreement by notice given by you to the Fund, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the NASDAQ Stock Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Fund shall have been suspended on any exchange or in any over-the-counter market, (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred, (iv) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets, currency exchange rates or controls or any calamity or crisis that, in your judgment, is material and adverse and which, singly or together with any other event specified in this clause (v), makes it, in your judgment, impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Time of Sale Prospectus or the Prospectus.

10. Effectiveness; Defaulting Underwriters . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.

If, on the Closing Date or an Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it has or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which

 

- 28 -


such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 10 by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Firm Shares and the aggregate number of Firm Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Firm Shares to be purchased on such date, and arrangements satisfactory to you and the Fund for the purchase of such Firm Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter or the Fund or the Adviser. In any such case either you or the Fund shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement, in the Time of Sale Prospectus, in the Prospectus or in any other documents or arrangements may be effected. If, on an Option Closing Date, any Underwriter or Underwriters shall fail or refuse to purchase Additional Shares and the aggregate number of Additional Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Additional Shares to be purchased on such Option Closing Date, the non-defaulting Underwriters shall have the option to (i) terminate their obligation hereunder to purchase the Additional Shares to be sold on such Option Closing Date or (ii) purchase not less than the number of Additional Shares that such non-defaulting Underwriters would have been obligated to purchase in the absence of such default. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of the Fund or the Adviser to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Fund or the Adviser shall be unable to perform its obligations under this Agreement, the Fund and the Adviser, jointly and severally, will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder.

11. Entire Agreement . (a) This Agreement, together with any contemporaneous written agreements and any prior written agreements (to the extent not superseded by this Agreement) that relate to the offering of the Shares, represents the entire agreement between the Fund, the Adviser and the Underwriters with respect to the preparation of any preliminary prospectus, the

 

- 29 -


Time of Sale Prospectus, the Prospectus, the conduct of the offering, and the purchase and sale of the Shares.

(b) The Fund and the Adviser acknowledge that in connection with the offering of the Shares: (i) the Underwriters have acted at arms length, are not agents of, and owe no fiduciary duties to, the Fund, the Adviser or any other person affiliated with the Fund or the Adviser, (ii) the Underwriters owe the Fund and the Adviser only those duties and obligations set forth in this Agreement and prior written agreements (to the extent not superseded by this Agreement), if any, and (iii) the Underwriters may have interests that differ from those of the Fund and the Adviser. The Fund and the Adviser waive to the full extent permitted by applicable law any claims any of them may have against the Underwriters arising from an alleged breach of fiduciary duty in connection with the offering of the Shares.

12. Counterparts . This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

13. Applicable Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York.

14. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.

15. Notices . All communications hereunder shall be in writing and effective only upon receipt and if to the Underwriters shall be delivered, mailed or sent to you in care of Morgan Stanley & Co. Incorporated, 1585 Broadway, New York, New York 10036, Attention: Equity Syndicate Desk, with a copy to the Legal Department, Citigroup Global Markets Inc., 388 Greenwich Street, New York, New York, 10013, Attention: General Counsel; Merrill Lynch, Pierce, Fenner & Smith Incorporated, One Bryant Park, New York, New York, 10036, Attention: Syndicate Department; Wells Fargo Securities, LLC 375 Park Avenue, New York, New York 10152, Attention: Equity Syndicate Department; if to the Fund, shall be delivered, mailed or sent to Apollo Senior Floating Rate Fund Inc., 9 West 57 th Street, 43 rd Floor, New York, New York 10019; and if to the Adviser, shall be delivered, mailed or sent to Apollo Credit Management, LLC, 9 West 57 th Street, 43 rd Floor, New York, New York 10019.

 

- 30 -


Very truly yours,

Apollo Senior Floating Rate Fund Inc.

By:

 

 

  Name:
  Title:

Apollo Credit Management, LLC

By:

 

 

  Name:
  Title:

Accepted as of the date hereof

Morgan Stanley & Co. Incorporated

Citigroup Global Markets Inc.

Merrill Lynch, Pierce, Fenner & Smith

Incorporated

Well Fargo Securities, LLC

 

Acting severally on behalf of themselves and
the several Underwriters named in
Schedule I hereto

 

By:

  Morgan Stanley & Co. Incorporated

 

- 31 -


By:  

 

  Name:
  Title:
By:   Citigroup Global Markets Inc.
By:  

 

  Name:
  Title:
By:  

Merrill Lynch, Pierce, Fenner & Smith

Incorporated

By:  

 

  Name:
  Title:
By:   Wells Fargo Securities, LLC
By:  

 

  Name:
  Title:

 

- 32 -


Exhibit 2(h)(1)

SCHEDULE I

 

Underwriter

   Number of Firm
Shares To Be
Purchased
 

Morgan Stanley & Co. Incorporated

  

Citigroup Global Markets Inc.

  

Merrill Lynch, Pierce, Fenner & Smith Incorporated

  

Wells Fargo Securities, LLC

  
        

Total:

  
        

 

- 1 -


SCHEDULE II

Omitting Prospectuses

 

1. Retail Omitting Prospectus:

[Client guide] dated                  , 2011.

 

2. The following documents labeled “ For Registered Representative Use Only ”:

[Broker-dealer guide] dated                  , 2011.

 

 

- 2 -


SCHEDULE III

Pricing Information

 

1. Price per share to the Public: $[20.00]

 

2. Number of Shares Sold: [    ]

 

3. Number of Additional Shares: [    ]

 

- 3 -

Exhibit 2(h)(2)

Morgan Stanley & Co. Incorporated

FORM OF MASTER AGREEMENT AMONG UNDERWRITERS

REGISTERED SEC OFFERINGS

( INCLUDING MULTIPLE SYNDICATE OFFERINGS )

AND

EXEMPT OFFERINGS

( OTHER THAN OFFERINGS OF MUNICIPAL SECURITIES )

April 1, 2009


This Master Agreement Among Underwriters (this “ Master AAU ”), dated as of April 1, 2009, is by and between Morgan Stanley & Co. Incorporated (“ Morgan Stanley ,” or “ we ”) and the party named on the signature page hereof (an “ Underwriter ,” as defined in Section 1.1 hereof, or “ you ”). From time to time we or one or more of our affiliates may invite you (and others) to participate on the terms set forth herein as an underwriter or an initial purchaser, or in a similar capacity, in connection with certain offerings of securities that are managed solely by us or with one or more other co-managers. If we invite you to participate in a specific offering and sale of securities (an “ Offering ”) to which this Master AAU will apply, we will send the information set forth in Section 1.1 hereof to you by one or more wires, telexes, telecopy or electronic data transmissions, or other written communications (each, a “ Wire ,” and collectively, an “ AAU ”), unless you are otherwise deemed to have accepted an AAU with respect to such Offering pursuant to Section 1.2 hereof. Each Wire will indicate that it is a Wire pursuant to this Master AAU. The Wire inviting you to participate in an Offering is referred to herein as an “ Invitation Wire .” You and we hereby agree that by the terms hereof the provisions of this Master AAU automatically will be incorporated by reference in each AAU, except that any such AAU may also exclude or revise such provisions of this Master AAU in respect of the Offering to which such AAU relates, and may contain such additional provisions as may be specified in any Wire relating to such AAU. You and we further agree as follows:

I. GENERAL

1.1. Terms of AAU; Certain Definitions; Construction.  Each AAU will relate to an Offering, and will identify: (i) the securities to be offered in the Offering (the “ Securities ”), their principal terms, the issuer or issuers (each, an “ Issuer ”) and any guarantor (each, a “ Guarantor ”) thereof, and, if different from the Issuer, the seller or sellers (each, a “ Seller ”) of the Securities, (ii) the underwriting agreement, purchase agreement, standby underwriting agreement, distribution agreement, or similar agreement (as identified in such AAU and as amended or supplemented, including a terms agreement or pricing agreement pursuant to any of the foregoing, collectively, the “ Underwriting Agreement ”) providing for the purchase, on a several and not joint basis, of the Securities by the several underwriters, initial purchasers, or others acting in a similar capacity (the “ Underwriters ”) on whose behalf the Manager (as defined below) executes the Underwriting Agreement, and whether such agreement provides for: (x) an option to purchase Additional Securities (as defined below) to cover over-allotments, or (y) an offering in multiple jurisdictions or markets involving two or more syndicates (an “ International Offering ”), each of which will offer and sell Securities subject to such restrictions as may be specified in any Intersyndicate Agreement (as defined below) referred to in such AAU, (iii) the price at which the Securities are to be purchased by the several Underwriters from any Issuer or Seller thereof (the “ Purchase Price ”), (iv) the offering terms, including, if applicable, the price or prices at which the Securities initially will be offered by the Underwriters (the “ Offering Price ”), any selling concession to dealers (the “ Selling Concession ”), reallowance (the “ Reallowance ”), management fee, global coordinators’ fee, praecipium, or other similar fees, discounts, or commissions (collectively, the “ Fees and Commissions ”) with respect to the Securities, and (v) other principal terms of the Offering, which may include, without limitation: (A) the proposed or actual pricing date (“ Pricing Date ”) and settlement date (the “ Settlement Date ”), (B) any contractual restrictions on the offer and sale of the Securities pursuant to the Underwriting Agreement, Intersyndicate Agreement, or otherwise, (C) any co-managers for such Offering (the “ Co-Managers ”), (D) your proposed


participation in the Offering, and (E) any trustee, fiscal agent, or similar agent (the “ Trustee ”) for the indenture, trust agreement, fiscal agency agreement, or similar agreement (the “ Indenture ”) under which such Securities will be issued.

Manager ” means Morgan Stanley, except as set forth in Section 9.9 hereof. “ Representative ” means the Manager and any Co-Manager that signs the applicable Underwriting Agreement on behalf of the Underwriters or is identified as a Representative in the applicable Underwriting Agreement. “ Underwriters ” includes the Representative(s), the Manager, and the Co-Managers. “ Firm Securities ” means the number or amount of Securities that the several Underwriters are initially committed to purchase under the Underwriting Agreement (which may be expressed as a percentage of an aggregate number or amount of Securities to be purchased by the Underwriters, as in the case of a standby Underwriting Agreement). “ Additional Securities ” means the Securities, if any, that the several Underwriters have an option to purchase under the Underwriting Agreement to cover over-allotments. The number, amount, or percentage of Firm Securities set forth opposite each Underwriter’s name in the Underwriting Agreement plus any additional Firm Securities which such Underwriter has made a commitment to purchase, irrespective of whether such Underwriter actually purchases or sells such number, amount, or percentage of Securities under the Underwriting Agreement or Article XI hereof, is hereinafter referred to as the “ Original Underwriting Obligation ” of such Underwriter, and the ratio which such Original Underwriting Obligation bears to the total of all Firm Securities set forth in the Underwriting Agreement (or, in the case of a standby Underwriting Agreement, to 100%) is hereinafter referred to as the “ Underwriting Percentage ” of such Underwriter. For the avoidance of doubt, each Underwriter acknowledges and agrees that, for all purposes under this Agreement and otherwise (including, to the extent applicable, for purposes of Section 11(e) under the U.S. Securities Act of 1933 (the “ 1933 Act ”)), each Underwriter’s Underwriting Percentage of the total number, amount, or percentage of Securities offered and sold in the Offering (including any Additional Securities), and only such number, amount, or percentage, constitutes the securities underwritten by such Underwriter and distributed to investors.

References herein to laws, statutory and regulatory sections, rules, regulations, forms, and interpretive materials will be deemed to include any successor provisions.

1.2. Acceptance of AAU.   You will have accepted an AAU for an Offering if: (a) we receive your acceptance, prior to the time specified in the Invitation Wire for such Offering, by wire, telex, telecopy or electronic data transmission, or other written communication (any such communication being deemed “ In Writing ”) or orally (if promptly confirmed In Writing), in the manner specified in the Invitation Wire, of our invitation to participate in the Offering, or (b) notwithstanding that we did not send you an Invitation Wire or you have not otherwise responded In Writing to any such Wire, you: (i) agree (orally or by a Wire) to be named as an Underwriter in the relevant Underwriting Agreement executed by us as Manager, or (ii) receive and retain an economic benefit for participating in the Offering as an Underwriter. Your acceptance of the invitation to participate will cause such AAU to constitute a valid and binding contract between us. Your acceptance of the AAU as provided above or an Invitation Wire will also constitute acceptance by you of the terms of subsequent Wires to you relating to the Offering unless we receive In Writing, within the time and in the manner specified in such subsequent Wire, a notice from you to the effect that you do not accept the terms of such

 

3


subsequent Wire, in which case you will be deemed to have elected not to participate in the Offering.

1.3. Underwriters’ Questionnaire. Your acceptance of the Invitation Wire for an Offering or your participation in an Offering as an Underwriter will confirm that you have no exceptions to the Underwriters’ Questionnaire attached as Exhibit A hereto (or to any other questions addressed to you in any Wires relating to the Offering previously sent to you), other than exceptions noted by you In Writing in connection with the Offering and received from you by us before the time specified in the Invitation Wire or any subsequent Wire.

II. OFFERING MATERIALS; OFFERING AGREEMENTS

2.1. Registered Offerings.  In the case of an Offering that will be registered in whole or in part (a “ Registered Offering ”) under the 1933 Act, you acknowledge that the Issuer has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement, including a prospectus relating to the Securities. “ Registration Statement ” means such registration statement as amended to the effective date of the Underwriting Agreement and, in the event that the Issuer files an abbreviated registration statement to register additional Securities pursuant to Rule 462(b) or 462(e) under the 1933 Act, such abbreviated registration statement. “ Prospectus ” means the prospectus, together with the final prospectus supplement, if any, containing the final terms of the Securities and, in the case of a Registered Offering that is an International Offering, “ Prospectus ” means, collectively, each prospectus or offering circular, together with each final prospectus supplement or final offering circular supplement, if any, relating to the Offering, in the respective forms containing the final terms of the Securities. “ Preliminary Prospectus ” means any preliminary prospectus relating to the Offering or any preliminary prospectus supplement together with a prospectus relating to the Offering and, in the case of a Registered Offering that is an International Offering, “ Preliminary Prospectus ” means, collectively, each preliminary prospectus or preliminary offering circular relating to the Offering or each preliminary prospectus supplement or preliminary offering circular supplement, together with a prospectus or offering circular, respectively, relating to the Offering. “ Free Writing Prospectus ” means, in the case of a Registered Offering, a “free writing prospectus” as defined in Rule 405 under the 1933 Act. As used herein the terms “ Registration Statement ,” “ Prospectus ,” “ Preliminary Prospectus ,” and “ Free Writing Prospectus ” will include in each case the material, if any, incorporated by reference therein, and as used herein, the term “ Registration Statement ” includes information deemed to be part thereof pursuant to, and as of the date and time specified in, Rules 430A, 430B, or 430C under the 1933 Act, while the terms “ Prospectus ” and “ Preliminary Prospectus ” include information deemed to be a part thereof pursuant to the rules and regulations under the 1933 Act, but only as of the actual time that information is first used or filed with the Commission pursuant to Rule 424(b) under the 1933 Act. The Manager will furnish, make available to you, or make arrangements for you to obtain copies (which may, to the extent permitted by law, be in electronic form) of each Prospectus and Preliminary Prospectus (as amended or supplemented, if applicable, but excluding, for this purpose, unless otherwise required pursuant to rules or regulations under the 1933 Act, documents incorporated therein by reference) as soon as practicable after sufficient quantities thereof have been made available by the Issuer.

 

4


As used herein, in the case of an Offering that is an offering of asset-backed securities, the term “ ABS Underwriter Derived Information ” means any analytical or computational materials as described in clause (5) of footnote 271 of Commission Release No. 33-8591, issued July 19, 2005 (Securities Offering Reform) (the “ Securities Offering Reform Release ”).

2.2. Non-Registered Offerings.  In the case of an Offering other than a Registered Offering, you acknowledge that no registration statement has been filed with the Commission. “ Offering Circular ” means the final offering circular or memorandum, if any, or any other final written materials authorized by the Issuer to be used in connection with an Offering that is not a Registered Offering. “ Preliminary Offering Circular ” means any preliminary offering circular or memorandum, if any, or any other written preliminary materials authorized by the Issuer to be used in connection with such an Offering. As used herein, the terms “ Offering Circular ” and “ Preliminary Offering Circular ” include the material, if any, incorporated by reference therein. We will either, as soon as practicable after the later of the date of the Invitation Wire or the date made available to us by the Issuer, furnish to you (or make available for your review) a copy of any Preliminary Offering Circular or any proof or draft of the Offering Circular. In any event, in any Offering involving an Offering Circular, the Manager will furnish, make available to you, or make arrangements for you to obtain, as soon as practicable after sufficient quantities thereof are made available by the Issuer, copies (which may, to the extent permitted by law, be in electronic form) of the Preliminary Offering Circular and Offering Circular, as amended or supplemented, if applicable (but excluding, for this purpose, documents incorporated therein by reference).

2.3. Authority to Execute Underwriting and Intersyndicate Agreements.  You authorize the Manager, on your behalf: (a) to determine the form of the Underwriting Agreement and to execute and deliver to the Issuer, Guarantor, or Seller the Underwriting Agreement to purchase: (i) up to the number, amount, or percentage of Firm Securities set forth in the applicable AAU, and (ii) if the Manager elects on behalf of the several Underwriters to exercise any option to purchase Additional Securities, up to the number, amount, or percentage of Additional Securities set forth in the applicable AAU, subject, in each case, to reduction pursuant to Article IV; and (b) to determine the form of any agreement or agreements, including, but not limited to, underwriting agreements, between or among the syndicates participating in the Offering or International Offering, respectively (each, an “ Intersyndicate Agreement ”), and to execute and deliver any such Intersyndicate Agreement.

III. MANAGER’S AUTHORITY

3.1. Terms of Offering. You authorize the Manager to act as manager of the Offering of the Securities by the Underwriters (the “ Underwriters’ Securities ”) or by the Issuer or Seller pursuant to delayed delivery contracts (the “ Contract Securities ”), if any, contemplated by the Underwriting Agreement. You authorize the Manager: (i) to purchase any or all of the Additional Securities for the accounts of the several Underwriters pursuant to the Underwriting Agreement, (ii) to agree, on your behalf and on behalf of the Co-Managers, to any addition to, change in, or waiver of any provision of, or the termination of, the Underwriting Agreement or any Intersyndicate Agreement (other than an increase in the Purchase Price or in your Original Underwriting Obligation to purchase Securities, in either case from that contemplated by the applicable AAU), (iii) to add prospective or remove existing Underwriters from the syndicate, (iv) to exercise, in the Manager’s discretion, all of the authority vested in the Manager in the

 

5


Underwriting Agreement, (v) except as described below in this Section 3.1, to take any other action as may seem advisable to the Manager in respect of the Offering (including, in the case of an Offering of asset-backed securities, the preparation and delivery of ABS Underwriter Derived Information), including actions and communications with the Commission, the Financial Industry Regulatory Authority (“ FINRA ,” formerly known as the National Association of Securities Dealers, Inc., and NASD, Inc., or “ NASD ”), state blue sky or securities commissions , stock exchanges, and other regulatory bodies or organizations.   Furthermore, the Manager will have exclusive authority, on your behalf and on behalf of the Co-Managers, to exercise powers and pursue enforcement of the terms and conditions of the Underwriting Agreement and any Intersyndicate Agreement, whether or not actually exercised, except as otherwise specified herein or therein. If, in accordance with the terms of the applicable AAU, the Offering of the Securities is at varying prices based on prevailing market prices, or prices related to prevailing market prices, or at negotiated prices, you authorize the Manager to determine, on your behalf in the Manager’s discretion, any Offering Price and the Fees and Commissions applicable to the Offering from time to time. You authorize the Manager on your behalf to arrange for any currency transactions (including forward and hedging currency transactions) as the Manager may deem necessary to facilitate settlement of the purchase of the Securities, but you do not authorize the Manager on your behalf to engage in any other forward or hedging transactions (including interest rate hedging transactions) in connection with the Offering unless such transactions are specified in an applicable AAU or are otherwise consented to by you. You further authorize the Manager, subject to the provisions of Section 1.2 hereof: (i) to vary the offering terms of the Securities in effect at any time, including, if applicable, the Offering Price, Fees, and Commissions set forth in the applicable AAU, (ii) to determine, on your behalf, the Purchase Price, and (iii) to increase or decrease the number, amount, or percentage of Securities being offered. Notwithstanding the foregoing provisions of this Section 3.1, the Manager will notify the Underwriters, prior to the signing of the Underwriting Agreement, of any provision in the Underwriting Agreement that could result in an increase in the number, amount, or percentage of Firm Securities set forth opposite each Underwriter’s name in the Underwriting Agreement by more than 25% (or such other percentage as will have been specified in the applicable Invitation Wire or otherwise consented to by you) as a result of the failure or refusal of another Underwriter or Underwriters to perform its or their obligations thereunder.   The Manager may, at its discretion, delegate to any Underwriter any and all authority vested in the applicable AAU, including, but not limited to, the powers set forth in Sections 5.1 and 5.2 hereof.

3.2. Offering Date.   The Offering is to be made on or about the time the Underwriting Agreement is entered into by the Issuer, Guarantor, or Seller and the Manager as in the Manager’s judgment is advisable, on the terms and conditions set forth in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU. You will not sell any Securities prior to the time the Manager releases such Securities for sale to purchasers. The date on which such Securities are released for sale is referred to herein as the “ Offering Date .”

3.3. Communications. Any public announcement or advertisement of the Offering will be made by the Manager on behalf of the Underwriters on such date as the Manager may determine. You will not announce or advertise the Offering prior to the date of the Manager’s announcement or advertisement thereof without the Manager’s consent. If the Offering is made in whole or in part in reliance on any applicable exemption from registration under the 1933 Act, you will not engage in any general solicitation, announcement, or advertising in connection with

 

6


the Offering, and will abide by any other restrictions in the AAU or the Underwriting Agreement in connection therewith relating to any announcement, advertising, or publicity. Any announcement or advertisement you may make of the Offering after such date will be your own responsibility, and at your own expense and risk. In addition to your compliance with restrictions on the Offering pursuant to Sections 10.9, 10.10, 10.11, and 10.12 hereof, you will not, in connection with the offer and sale of the Securities in the Offering, without the consent of the Manager, give, send, or otherwise convey to any prospective purchaser or any purchaser of the Securities or other person not in your employ any written communication (as defined in Rule 405 under the 1933 Act) other than:

(i) any Preliminary Prospectus, Prospectus, Preliminary Offering Circular, or Offering Circular,

(ii) (A) written confirmations and notices of allocation delivered to your customers in accordance with Rules 172 or 173 under the 1933 Act, and written communications based on the exemption provided by Rule 134 under the 1933 Act, and (B) in the case of Offerings not registered under the 1933 Act, such written communications (1) as would be permitted by Section 3.3(v)(D)(1) below were such Offering registered under the 1933 Act, or (2) that the Manager or Underwriting Agreement may permit; provided, however , that such written communication under this clause (B) would not have otherwise constituted “ Issuer Information ” as defined below, or would have qualified for the exemption provided by Rule 134 under the 1933 Act, in each case, if such communication had been furnished in the context of a Registered Offering (“ Supplemental Materials ”),

(iii) any “issuer free writing prospectus” (as defined in Rule 433(h) under the 1933 Act, an “ Issuer Free Writing Prospectus ”), so long as such issuance or use has been permitted or consented to by the Issuer and the Manager,

(iv) information contained in any computational materials, or in the case of an Offering of asset backed securities, the ABS Underwriter Derived Information, or any other offering materials not constituting a Free Writing Prospectus concerning the Offering, the Issuer, the Guarantor, or the Seller, in each case, prepared by or with the permission of the Manager for use by the Underwriters in connection with the Offering, and, in the case of a Registered Offering, filed (if required) with the Commission or FINRA, as applicable, and

(v) a Free Writing Prospectus prepared by or on behalf of, or used or referred to by, an Underwriter in connection with the Offering, so long as: (A) such Free Writing Prospectus is not required to be filed with the Commission, (B) the proposed use of such Free Writing Prospectus is permitted by the Underwriting Agreement, (C) such Free Writing Prospectus complies with the legending condition of Rule 433 under the 1933 Act, and you comply with the record-keeping condition of Rule 433, and (D) (1) such Free Writing Prospectus contains only information describing the preliminary terms of the Securities and other pricing data that is not “ Issuer Information ” (as defined in Rule 433(h)

 

7


under the 1933 Act, including footnote 271 of the Securities Offering Reform Release), or (2) the Issuer has agreed in the Underwriting Agreement to file a final term sheet under Rule 433 within the time period necessary to avoid a requirement for any Underwriter to file the Free Writing Prospectus to be used by such Underwriter, and the Free Writing Prospectus used by such Underwriter contains only information describing the terms of the Securities or their offering that is included in such final term sheet of the Issuer and other pricing data that is not Issuer Information (a Free Writing Prospectus meeting the requirements of (A) through (D) above used, or referred to by you, is referred to herein as an “ Underwriter Free Writing Prospectus ” of yours). Without limiting the foregoing, any Underwriter Free Writing Prospectus that you use or refer to will not be distributed by you or on your behalf in a manner reasonably designed to lead to its broad unrestricted dissemination. You will comply in all material respects with the applicable requirements of the 1933 Act and the rules and regulations thereunder in connection with your use of any Underwriter Free Writing Prospectus.

Any advertisement or written information published, given, sent, or otherwise conveyed by you in violation of this Section 3.3 is referred to as “ Unauthorized Material .”

3.4. Institutional and Retail Sales. You authorize the Manager to sell to institutions and retail purchasers such Securities purchased by you pursuant to the Underwriting Agreement as the Manager will determine. The Selling Concession on any such sales will be credited to the accounts of the Underwriters as the Manager will determine.

3.5. Sales to Dealers. You authorize the Manager to sell to Dealers (as defined below) such Securities purchased by you pursuant to the Underwriting Agreement as the Manager will determine. A “ Dealer ” will be a person who is: (a) a broker or dealer (as defined by FINRA) actually engaged in the investment banking or securities business, and (i) a member in good standing of FINRA, or (ii) a non-U.S. bank, broker, dealer, or other institution not eligible for membership in FINRA that, in the case of either clause (a)(i) or (a)(ii), makes the representations and agreements applicable to such institutions contained in Section 10.5 hereof, or (b) in the case of Offerings of Securities that are exempt securities under Section 3(a)(12) of the Securities Exchange Act of 1934 (the “ 1934 Act ”), and such other Securities as from time to time may be sold by a “bank” (as defined in Section 3(a)(6) of the 1934 Act (a “ Bank ”)), a Bank that is not a member of FINRA and that makes the representations and agreements applicable to such institutions contained in Section 10.5 hereof. If the price for any such sales by the Manager to Dealers exceeds an amount equal to the Offering Price less the Selling Concession set forth in the applicable AAU, the amount of such excess, if any, will be credited to the accounts of the Underwriters as the Manager will determine.

3.6. Direct Sales.  The Manager will advise you promptly, on the Offering Date, as to the Securities purchased by you pursuant to the Underwriting Agreement that you will retain for direct sale. At any time prior to the termination of the applicable AAU, any such Securities that are held by the Manager for sale but not sold may, on your request and at the Manager’s discretion, be released to you for direct sale, and Securities so released to you will no longer be deemed held for sale by the Manager. You may allow, and Dealers may reallow, a discount on

 

8


sales to Dealers in an amount not in excess of the Reallowance set forth in the applicable AAU. You may not purchase Securities from, or sell Securities to, any other Underwriter or Dealer at any discount or concession other than the Reallowance, except with the prior consent of the Manager.

3.7. Release of Unsold Securities. From time to time prior to the termination of the applicable AAU, at the request of the Manager, you will advise the Manager of the number or amount of Securities remaining unsold which were retained by or released to you for direct sale, and of the number or amount of Securities and Other Securities (as defined below) purchased for your account remaining unsold which were delivered to you pursuant to Article V hereof or pursuant to any Intersyndicate Agreement, and, on the request of the Manager, you will release to the Manager any such Securities and Other Securities remaining unsold: (a) for sale by the Manager to institutions, Dealers, or retail purchasers, (b) for sale by the Issuer or Seller pursuant to delayed delivery contracts, or (c) if, in the Manager’s opinion, such Securities or Other Securities are needed to make delivery against sales made pursuant to Article V hereof or any Intersyndicate Agreement.

3.8. International Offerings.  In the case of an International Offering, you authorize the Manager: (i) to make representations on your behalf as set forth in any Intersyndicate Agreement, and (ii) to purchase or sell for your account pursuant to the Intersyndicate Agreement: (a) Securities, (b) any other securities of the same class and series, or any securities into which the Securities may be converted or for which the Securities may be exchanged or exercised, and (c) any other securities designated in the applicable AAU or applicable Intersyndicate Agreement (the securities referred to in clauses (b) and (c) above being referred to collectively as the “ Other Securities ”).

IV. DELAYED DELIVERY CONTRACTS

4.1. Arrangements for Sales.  Arrangements for sales of Contract Securities will be made only through the Manager acting either directly or through Dealers (including Underwriters acting as Dealers), and you authorize the Manager to act on your behalf in making such arrangements. The aggregate number or amount of Securities to be purchased by the several Underwriters will be reduced by the respective number or amounts of Contract Securities attributed to such Underwriters as hereinafter provided. Subject to the provisions of Section 4.2 hereof, the aggregate number or amount of Contract Securities will be attributed to the Underwriters as nearly as practicable in proportion to their respective Underwriting Percentages, except that, as determined by the Manager in its discretion: (a) Contract Securities directed and allocated by a purchaser to specific Underwriters will be attributed to such Underwriters, and (b) Contract Securities for which arrangements have been made for sale through Dealers will be attributed to each Underwriter approximately in the proportion that Securities of such Underwriter held by the Manager for sales to Dealers bear to all Securities so held. The fee with respect to Contract Securities payable to the Manager for the accounts of the Underwriters pursuant to the Underwriting Agreement will be credited to the accounts of the respective Underwriters in proportion to the Contract Securities attributed to such Underwriters pursuant to the provisions of this Section 4.1, less, in the case of each Underwriter, the concession to Dealers on Contract Securities sold through Dealers and attributed to such Underwriter.

 

9


4.2. Excess Sales. If the number or amount of Contract Securities attributable to an Underwriter pursuant to Section 4.1 hereof would exceed such Underwriter’s Original Underwriting Obligation reduced by the number or amount of Underwriters’ Securities sold by or on behalf of such Underwriter, such excess will not be attributed to such Underwriter, and such Underwriter will be regarded as having acted only as a Dealer with respect to, and will receive only the concession to Dealers on, such excess.

V. PURCHASE AND SALE OF SECURITIES

5.1. Facilitation of Distribution. In order to facilitate the distribution and sale of the Securities, you authorize the Manager to buy and sell Securities and any Other Securities, in addition to Securities sold pursuant to Article III hereof, in the open market or otherwise (including, without limitation, pursuant to any Intersyndicate Agreement), for long or short account, on such terms as it may deem advisable, and to over-allot in arranging sales. Such purchases and sales and over-allotments will be made for the accounts of the several Underwriters as nearly as practicable to their respective Underwriting Percentages or, in the case of an International Offering, such purchases and sales will be for such accounts as set forth in the applicable Intersyndicate Agreement. Any Securities or Other Securities which may have been purchased by the Manager for stabilizing purposes in connection with the Offering prior to the acceptance of the applicable AAU will be treated as having been purchased pursuant to this Section 5.1 for the accounts of the several Underwriters or, in the case of an International Offering, for such accounts as are set forth in the applicable Intersyndicate Agreement. Your net commitment pursuant to the foregoing authorization will not exceed at the close of business on any day an amount equal to 20% of your Underwriting Percentage of the aggregate initial Offering Price of the Firm Securities, it being understood that, in calculating such net commitment, the initial Offering Price will be used with respect to the Securities so purchased or sold and, in the case of all Other Securities, will be the purchase price thereof. For purposes of determining your net commitment for short account ( i.e. , “naked short”), any short position that can be covered with: (a) Securities that may be purchased upon exercise of any over-allotment option then exercisable, (b) in the case of an International Offering, any Securities or Other Securities that the Manager has agreed to purchase for your account pursuant to any applicable Intersyndicate Agreement, and (c) Securities that may be purchased pursuant to a forward sale contract or similar arrangement with the Issuer or any selling security holder in the Offering, will be disregarded. On demand you will take up and pay for any Securities or Other Securities so purchased for your account and any Securities released to you pursuant to Section 3.7 hereof, and will deliver to the Manager against payment any Securities or Other Securities so sold or over-allotted for your account or released to you. The Manager will notify you if it engages in any stabilization transaction in accordance with Rule 17a-2 under the 1934 Act, and will notify you of the date of termination of stabilization. You will not stabilize or engage in any syndicate covering transaction (as defined in Rule 100 of Regulation M under the 1934 Act (“ Regulation M ”)) in connection with the Offering without the prior consent of the Manager. You will provide to the Manager any reports required of you pursuant to Rule 17a-2 of the 1934 Act not later than the date specified therein.

5.2. Penalty With Respect to Securities Repurchased by the Manager.  If pursuant to the provisions of Section 5.1 hereof and prior to the termination of the Manager’s authority to cover any short position incurred under the applicable AAU or such other date as the Manager

 

10


may specify in a Wire, either: (a) the Manager purchases or contracts to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, you for direct sale or any Securities sold pursuant to Section 3.4 hereof for which you received a portion of the Selling Concession set forth in the applicable AAU, or any Securities which may have been issued on transfer or in exchange for such Securities, and which Securities were therefore not effectively placed for investment, or (b) if the Manager has advised you by Wire that trading in the Securities will be reported to the Manager pursuant to the “Initial Public Offering Tracking System” of The Depository Trust Company (“ DTC ”) and the Manager determines, based on notices from DTC, that your customers sold a number or amount of Securities during any day that exceeds the number or amount previously notified to you by Wire, then you authorize the Manager either to charge your account with an amount equal to such portion of the Selling Concession set forth in the applicable AAU received by you with respect to such Securities or, in the case of clause (b), such Securities as exceed the number or amount specified in such Wire, or to require you to repurchase such Securities or, in the case of clause (b), such Securities as exceed the number or amount specified in such Wire, at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends, and commissions, if any.

5.3. Compliance with Regulation M.  You represent that, at all times since you were invited to participate in the Offering, you have complied with the provisions of Regulation M applicable to the Offering, in each case as interpreted by the Commission and after giving effect to any applicable exemptions. If you have been notified in a Wire that the Underwriters may conduct passive market making in compliance with Rule 103 of Regulation M in connection with the Offering, you represent that, at all times since your receipt of such Wire, you have complied with the provisions of such Rule applicable to such Offering, as interpreted by the Commission and after giving effect to any applicable exemptions.   You will comply with any additional provisions of Regulation M if and to the extent set forth in the Invitation Wire or other Wire.

5.4. Standby Underwritings . You authorize the Manager in its discretion, at any time on, or from time to time prior to, the expiration of the conversion right of convertible securities identified in the applicable AAU in the case of securities called for redemption, or the expiration of rights to acquire securities in the case of rights offerings, for which, in either case, standby underwriting arrangements have been made: (i) to purchase convertible securities or rights to acquire Securities for your account, in the open market or otherwise, on such terms as the Manager determines, and to convert convertible securities or exercise rights so purchased; and (ii) to offer and sell the underlying common stock or depositary shares for your account, in the open market or otherwise, for long or short account (for purposes of such commitment, such common stock or depositary shares being considered the equivalent of convertible securities or rights), on such terms consistent with the terms of the Offering set forth in the Prospectus or Offering Circular as the Manager determines. On demand, you will take up and pay for any securities so purchased for your account or you will deliver to the Manager against payment any securities so sold, as the case may be. During such period, you may offer and sell the underlying common stock or depositary shares, but only at prices set by the Manager from time to time, and any such sales will be subject to the Manager’s right to sell to you the underlying common stock or depositary shares as above provided and to the Manager’s right to reserve your securities purchased, received, or to be received upon conversion. You agree not to otherwise bid for, purchase, or attempt to induce others to purchase or sell, directly or indirectly, any convertible

 

11


securities or rights or underlying common stock or depositary shares, provided , however , that no Underwriter will be prohibited from: (a) selling underlying common stock owned beneficially by such Underwriter on the day the convertible securities were first called for redemption, (b) converting convertible securities owned beneficially by such Underwriter on such date or selling underlying common stock issued upon conversion of convertible securities so owned, (c) exercising rights owned beneficially by such Underwriter on the record date for a rights offering, or selling the underlying common stock or depositary shares issued upon exercise of rights so owned, or (d) purchasing or selling convertible securities or rights or underlying common stock or depositary shares as a broker pursuant to unsolicited orders.

VI. PAYMENT AND SETTLEMENT

You will deliver to the Manager on the date and at the place and time specified in the applicable AAU (or on such later date and at such place and time as may be specified by the Manager in a subsequent Wire) the funds specified in the applicable AAU, payable to the order of Morgan Stanley & Co. Incorporated, for: (a) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of the Firm Securities to be purchased by you, (b) an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the Prospectus or Offering Circular, less the applicable Selling Concession in respect of such of the Firm Securities to be purchased by you as will have been retained by or released to you for direct sale as contemplated by Section 3.6 hereof, or (c) the amount set forth or indicated in the applicable AAU, as the Manager will advise. You will make similar payment as the Manager may direct for Additional Securities, if any, to be purchased by you on the date specified by the Manager for such payment. The Manager will make payment to the Issuer or Seller against delivery to the Manager for your account of the Securities to be purchased by you, and the Manager will deliver to you the Securities paid for by you which will have been retained by or released to you for direct sale. If the Manager determines that transactions in the Securities are to be settled through DTC or another clearinghouse facility and payment in the settlement currency is supported by such facility, payment for and delivery of Securities purchased by you will be made through such facilities, if you are a participant, or, if you are not a participant, settlement will be made through your ordinary correspondent who is a participant.

VII. EXPENSES

7.1. Management Fee . You authorize the Manager to charge your account as compensation for the Manager’s and Co-Managers’ services in connection with the Offering, including the purchase from the Issuer or Seller of the Securities, as the case may be, and the management of the Offering, the amount, if any, set forth as the management fee, global coordinators’ fee, praecipium, or other similar fee in the applicable AAU. Such amount will be divided among the Manager and any Co-Managers named in the applicable AAU as they may determine. Each Underwriter acknowledges that such fees are being paid by the Underwriters, and are not a benefit received directly or indirectly from the Issuer of the type referred to in Section 11(e) of the 1933 Act.

 

12


7.2. Offering Expenses.  You authorize the Manager to charge your account with your Underwriting Percentage of all expenses agreed to be paid by the Underwriters in the Underwriting Agreement and all expenses of a general nature incurred by the Manager and Co-Managers under the applicable AAU in connection with the Offering, including the negotiation and preparation thereof, or in connection with the purchase, carrying, marketing, sale and distribution of any securities under the applicable AAU and any Intersyndicate Agreement, including, without limitation, legal fees and expenses, transfer taxes, costs associated with approval of the Offering by FINRA, and the costs of currency transactions (including forward and hedging currency transactions) or, if permitted pursuant to Section 3.1 hereof, any other forward or hedging transactions (including interest rate swaps) entered into to facilitate settlement of the purchase of Securities permitted hereunder.

VIII. MANAGEMENT OF SECURITIES AND FUNDS

8.1. Advances; Loans; Pledges.  You authorize the Manager to advance the Manager’s own funds for your account, charging current interest rates, and to arrange loans for your account for the purpose of carrying out the provisions of the applicable AAU and any Intersyndicate Agreement, and in connection therewith, to hold or pledge as security therefor all or any securities which the Manager may be holding for your account under the applicable AAU and any Intersyndicate Agreement, to execute and deliver any notes or other instruments evidencing such advances or loans, and to give all instructions to the lenders with respect to any such loans and the proceeds thereof. The obligations of the Underwriters under loans arranged on their behalf will be several in proportion to their respective Original Underwriting Obligations, and not joint. Any lender is authorized to accept the Manager’s instructions as to the disposition of the proceeds of any such loans. In the event of any such advance or loan, repayment thereof will, in the discretion of the Manager, be effected prior to making any remittance or delivery pursuant to Section 8.2, 8.3, or 9.2 hereof.

8.2. Return of Amount Paid for Securities.  Out of payment received by the Manager for Securities sold for your account which have been paid for by you, the Manager will remit to you promptly an amount equal to the price paid by you for such Securities.

8.3. Delivery and Redelivery of Securities for Carrying Purposes.  The Manager may deliver to you from time to time prior to the termination of the applicable AAU pursuant to Section 9.1 hereof against payment, for carrying purposes only, any Securities or Other Securities purchased by you under the applicable AAU or any Intersyndicate Agreement which the Manager is holding for sale for your account but which are not sold and paid for. You will redeliver to the Manager against payment any Securities or Other Securities delivered to you for carrying purposes at such times as the Manager may demand.

IX. TERMINATION; INDEMNIFICATION; CONTRIBUTION; SETTLEMENT

9.1. Termination.  Each AAU will terminate at the close of business on the later of: (a) the date on which the Underwriters pay the Issuer or Seller for the Securities, and (b) 45 calendar days after the applicable Offering Date, unless sooner terminated by the Manager. The Manager may at its discretion by notice to you prior to the termination of such AAU alter any of the terms or conditions of the Offering to the extent permitted by Articles III and IV hereof, or

 

13


terminate or suspend the effectiveness of Article V hereof, or any part thereof. No termination or suspension pursuant to this paragraph will affect the Manager’s authority under Section 3.1 hereof to take actions in respect of the Offering or under Article V hereof to cover any short position incurred under such AAU or in connection with covering any such short position to require you to repurchase Securities as specified in Section 5.2 hereof.   For the avoidance of doubt, unless otherwise agreed in a Wire or an Intersyndicate Agreement, the Manager’s authority to purchase Securities or Other Securities, for long account, pursuant to Section 5.1 hereof, will terminate or be suspended upon the termination or suspension, as the case may be, of the applicable AAU (or any provision and or term thereof in respect of trading, price or offering restrictions as set forth in a Wire that is sent by the Manager following the time the Securities are released for sale to purchasers) or Article V or Section 5.1 hereof pursuant to this paragraph.

9.2. Delivery or Sale of Securities; Settlement of Accounts. Upon termination of each AAU, or prior thereto at the Manager’s discretion, the Manager will deliver to you any Securities paid for by you pursuant to Article VI hereof and held by the Manager for sale pursuant to Section 3.4 or 3.5 hereof but not sold and paid for and any Securities or Other Securities that are held by the Manager for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement. Notwithstanding the foregoing, at the termination of such AAU, if the aggregate initial Offering Price of any such Securities and the aggregate purchase price of any Other Securities so held and not sold and paid for does not exceed an amount equal to 20% of the aggregate initial Offering Price of the Securities, the Manager may, in its discretion, sell such Securities and Other Securities for the accounts of the several Underwriters, at such prices, on such terms, at such times, and in such manner as it may determine. Within the period specified by applicable FINRA Rules or, if no period is so specified, as soon as practicable after termination of such AAU, your account will be settled and paid. The Manager may reserve from distribution such amount as the Manager deems advisable to cover possible additional expenses. The determination by the Manager of the amount so to be paid to or by you will be final and conclusive. Any of your funds under the Manager’s control may be held with the Manager’s general funds without accountability for interest.

Notwithstanding any provision of this Master AAU other than Section 10.11 hereof, upon termination of each AAU, or prior thereto at the Manager’s discretion, the Manager may: (i) allocate to the accounts of the Underwriters the expenses described in Section 7.2 hereof and any losses incurred upon the sale of Securities or Other Securities pursuant to the applicable AAU or any Intersyndicate Agreement (including any losses incurred upon the sale of securities referred to in Section 5.4(ii) hereof), (ii) deliver to the Underwriters any unsold Securities or Other Securities purchased pursuant to Section 5.1 hereof or any Intersyndicate Agreement, and (iii) deliver to the Underwriters any unsold Securities purchased pursuant to the applicable Underwriting Agreement, in each case in the Manager’s discretion. The only limitations on such discretion will be as follows: (a) no Underwriter that is not the Manager or a Co-Manager will bear more than its share of such expenses, losses, or Securities (such share will not exceed such Underwriter’s Underwriting Percentage and will be determined pro rata among all such Underwriters based on their Underwriting Percentages), (b) no such Underwriter will receive Securities that, together with any Securities purchased by such Underwriter pursuant to Article VI (but excluding any Securities that such Underwriter is required to repurchase pursuant to Section 5.2 hereof) exceed such Underwriter’s Original Underwriting Obligation, and (c) no Co-Manager will bear more than its share of such expenses, losses, or Securities (such share to be

 

14


determined pro rata among the Manager and all Co-Managers based on their Underwriting Percentages). If any Securities or Other Securities returned to you pursuant to clause (ii) or (iii) above were not paid for by you pursuant to Article VI hereof, you will pay to the Manager an amount per security equal to the amount set forth in clause (i) of Article VI, in the case of Securities returned to you pursuant to clause (iii) above, or the purchase price of such securities, in the case of Securities or Other Securities returned to you pursuant to clause (ii) above.

9.3. Certain Other Expenses. You will pay your Underwriting Percentage of: (i) all expenses incurred by the Manager in investigating, preparing to defend, and defending against any action, claim, or proceeding which is asserted, threatened, or instituted by any party, including any governmental or regulatory body (each, an “ Action ”), relating to: (A) the Registration Statement, any Preliminary Prospectus or Prospectus (and any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (and any amendment or supplement thereto), any Supplemental Materials, any Issuer Free Writing Prospectus, and any ABS Underwriter Derived Information used by any Underwriter other than the Manager, (B) the violation of any applicable restrictions on the offer, sale, resale, or purchase of Securities or Other Securities imposed by U.S. Federal or state laws or non-U.S. laws and the rules and regulations of any regulatory body promulgated thereunder or pursuant to the terms of the applicable AAU, the Underwriting Agreement, or any Intersyndicate Agreement, and (C) any claim that the Underwriters constitute a partnership, an association, or an unincorporated business or other separate entity, and (ii) any Losses (as defined in Section 9.4 hereof) incurred by the Manager in respect of any such Action, whether such Loss will be the result of a judgment or arbitrator’s determination or as a result of any settlement agreed to by the Manager. Notwithstanding the foregoing, you will not be required to pay your Underwriting Percentage of any such expense or liability: (1) to the extent that such expense or liability was caused by the Manager’s gross negligence or willful misconduct as determined in a final judgment of a court of competent jurisdiction; (2) as to which, and to the extent, the Manager actually receives (a) indemnity pursuant to Section 9.4 hereof, (b) contribution pursuant to Section 9.5 hereof, (c) indemnity or contribution pursuant to the Underwriting Agreement, or (d) damages from an Underwriter for breach of its representations, warranties, agreements, or covenants contained in the applicable AAU; or (3) of the Manager (other than fees of Syndicate Counsel) that relates to a settlement entered into by the Manager on a basis that results in a settlement of such Action against it and fewer than all the Underwriters . None of the foregoing provisions of this Section 9.3 will relieve any defaulting or breaching Underwriter from liability for its defaults or breach. Failure of any party to give notice under Section 9.10 hereof will not relieve any Underwriter of an obligation to pay expenses pursuant to the provisions of this Section 9.3.

9.4. Indemnification.  Notwithstanding any settlement on the termination of the applicable AAU, you agree to indemnify and hold harmless each other Underwriter and each person, if any, who controls any such Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act (each, an “ Indemnified Party ”), to the extent and upon the terms which you agree to indemnify and hold harmless any of the Issuer, the Guarantor, the Seller, any person controlling the Issuer, the Guarantor, the Seller, its directors, and, in the case of a Registered Offering, its officers who signed the Registration Statement and, in the case of an Offering other than a Registered Offering, its officers, in each case as set forth in the Underwriting Agreement. You further agree to indemnify and hold harmless each Indemnified Party from and against any and all losses, claims, damages, liabilities, and expenses not

 

15


reimbursed pursuant to Section 9.3 hereof (collectively, “ Losses ”) related to, arising out of, or in connection with the breach or violation by you of the terms of Section 3.3 hereof, including any and all Losses under Section 5 of the 1933 Act, and any litigation, investigation, and proceeding (collectively, “ Litigation ”) relating to any of the foregoing. You will also reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing. You will indemnify and hold harmless each Indemnified Party from and against any and all Losses related to, arising out of, or in connection with, any untrue statement or alleged untrue statement of a material fact contained in any Underwriter Free Writing Prospectus or Supplemental Material of yours or Unauthorized Material used by you, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any Litigation relating to any of the foregoing, and to reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing. In addition, you will indemnify and hold harmless each Indemnified Party from and against any and all Losses related to, arising out of, or in connection with any untrue statement or alleged untrue statement of a material fact contained in any ABS Underwriter Derived Information used by you, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and any Litigation relating to any of the foregoing, and to reimburse each such Indemnified Party upon demand for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, or defending any of the foregoing; provided , however , that any Losses, joint or several, paid or incurred by any Underwriter, arising out of or based upon any ABS Underwriter Derived Information which was used only by such Underwriter, or in connection with the preparation of which an Underwriter is found to have acted with gross negligence or willful misconduct in a final judgment of a court of competent jurisdiction, will be paid solely by such Underwriter.

Each Underwriter will further indemnify and hold harmless any investment banking firm identified in a Wire as the qualified independent underwriter as defined in NASD Conduct Rule 2720 or any FINRA successor rule thereto (in such capacity, a “ QIU ”) for an Offering and each person, if any, who controls such QIU within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all Losses related to, arising out of, or in connection with such investment banking firm’s activities as QIU for the Offering. Each Underwriter will reimburse such QIU for all expenses, including fees and expenses of counsel, as they are incurred, in connection with investigating, preparing for, and defending any Action related to, arising out of, or in connection with such QIU’s activities as a QIU for the Offering. Each Underwriter will be responsible for its Underwriting Percentage of any amount due to such QIU on account of the foregoing indemnity and reimbursement. Such QIU will have no additional liability to any Underwriter or otherwise as a result of its serving as QIU in connection with the Offering. To the extent the indemnification provided to a QIU under this Section 9.4 is unavailable to such QIU or is insufficient in respect of any Losses related thereto, whether as a matter of law or public policy or as a result of the default of any Underwriter in performing its obligations under this Section 9.4, each other Underwriter will contribute to the amount paid or payable by such QIU as a result of such Losses related thereto in proportion to its Underwriting Percentage.

 

16


9.5. Contribution.  Notwithstanding any settlement on the termination of the applicable AAU, you will pay upon request of the Manager, as contribution, your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or in connection with the breach or violation of the terms of Section 3.3 hereof, including any and all Losses under Section 5 of the 1933 Act, and any Litigation relating to the foregoing. Further, you will pay upon request of the Manager, your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus or Prospectus (and any amendment or supplement thereto), any Preliminary Offering Circular or Offering Circular (and any amendment or supplement thereto), any Issuer Free Writing Prospectus, any Supplemental Materials, any other materials prepared or used by an Underwriter in accordance with Section 3.3 hereof, or any Underwriter Free Writing Prospectus of yours or Unauthorized Material used by you, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company In Writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein), or any act or omission to act or any alleged act or omission to act by the Manager or, if applicable, a Representative, as the Manager or a Representative, in connection with any transaction contemplated by this Agreement or undertaken in preparing for the purchase, sale, and delivery of the Securities (provided, that you will not be required to pay in any such case to the extent that any such Loss resulted from the Manager’s or such Representative’s gross negligence or willful misconduct as determined in a final judgment of a court of competent jurisdiction), and your Underwriting Percentage of any legal or other expenses, including fees and expenses of counsel, as they are incurred, reasonably incurred by the Underwriter (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating or defending any such Loss or any action in respect thereof; provided , however , that no request will be made on behalf of any Underwriter guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) from any Underwriter who was not guilty of such fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act); provided , further , that any Losses, joint or several, paid or incurred by any Underwriter, arising out of or based upon such Underwriter’s Underwriter Free Writing Prospectus that does not breach Section 3.3 hereof, will be paid by only the Underwriters that used such Underwriter Free Writing Prospectus (the “ Contributing Underwriters ”), and the amount to be paid by each Contributing Underwriter will be determined pro rata among the Contributing Underwriters based on their Underwriting Percentages. None of the foregoing provisions of this Section 9.5 will relieve any defaulting or breaching Underwriter from liability for its defaults or breach.

In addition, you will pay your Underwriting Percentage of any Losses, joint or several, paid or incurred by any Underwriter to any person other than an Underwriter, arising out of or in connection with any untrue statement or alleged untrue statement of a material fact contained in any ABS Underwriter Derived Information, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company In

 

17


Writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein) and your Underwriting Percentage of any expenses, including fees and expenses of counsel, as they are incurred, reasonably incurred by the Underwriter (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating, preparing for, or defending any such Loss or any action in respect thereof; provided , however , that any Losses, joint or several, paid or incurred by any Underwriter, arising out of or based upon any ABS Underwriter Derived Information which was used only by such Underwriter, or in connection with the preparation of which the Underwriter is found to have acted with gross negligence or willful misconduct in a final judgment of a court of competent jurisdiction, will be paid solely by the Underwriter.

9.6. Separate Counsel.  If any Action is asserted or commenced pursuant to which the indemnity provided in Section 9.4 hereof or the right of contribution provided in Section 9.5 hereof may apply, the Manager may take such action in connection therewith as it deems necessary or desirable, including retention of counsel for the Underwriters (“ Syndicate Counsel ”), and in its discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained will be allocated among the several Underwriters as determined by the Manager. Any such Syndicate Counsel retained by the Manager will be counsel to the Underwriters as a group and, in the event that: (a) the Manager settles any Action on a basis that results in the settlement of such Action against it and fewer than all the Underwriters, or (b)(i) a conflict develops between the Manager and the other Underwriters, or (ii) differing defenses are available to the other Underwriters and not available to the Manager, and as a result of either (b)(i) or (b)(ii) such Syndicate Counsel concludes that it is unable to continue to represent the Manager and the other Underwriters, then in each such case, after notification to the Manager and the other Underwriters, Syndicate Counsel will remain counsel to the other Underwriters and will withdraw as counsel to the Manager. The Manager hereby consents to such arrangement and undertakes to take steps to: (i) ensure that any engagement letters with Syndicate Counsel are consistent with such arrangement; (ii) issue a notice to all other Underwriters promptly following receipt of any advice (whether oral or written) from Syndicate Counsel regarding its inability to represent the Manager and the other Underwriters jointly; and (iii) facilitate Syndicate Counsel’s continued representation of the other Underwriters. Any Underwriter may elect to retain at its own expense its own counsel and, on advice of such counsel, may settle or consent to the settlement of any such Action, but only in compliance with Section 9.7 hereof, and in each case, only after notification to every other Underwriter. The Manager may settle or consent to the settlement of any such Action, but only in compliance with Section 9.7 hereof.

9.7. Settlement of Actions.  Neither the Manager nor any other Underwriter party to this Master AAU may settle or agree to settle any Action related to or arising out of the Offering, nor may any other Underwriter settle or agree to settle any such Action without the consent of the Manager, nor may any other Underwriter seek the Manager’s consent to any such settlement agreement, nor may the Manager consent to any such settlement agreement, unless: (A) the Manager, together with such other Underwriters as constitute a majority in aggregate interest based on the Underwriting Percentage of the Underwriters as a whole (including the Manager’s interest), approve the settlement of such Action, in which case the Manager is authorized to settle for all Underwriters, provided , however , that the settlement agreement results in the settlement of the Action against all Underwriters raised by the plaintiffs party thereto; or (B) (i) such

 

18


settlement agreement expressly provides that the non-settling Underwriters will be given a judgment credit (or credit in settlement) with respect to all such Actions for which the non-settling Underwriters may be found liable (or will pay in subsequent settlement), in an amount that is the greatest of: (x) the dollar amount paid in such initial settlement to settle such Actions, (y) the proportionate share of the settling Underwriter’s fault in respect of common damages arising in connection with such Actions as proven at trial, if applicable, or (z) the amount by which the settling Underwriter would have been required to make contribution had it not settled, under Sections 9.5 and 11.2 hereof in respect of the final non-appealable judgment (or settlement) subsequently entered into by the non-settling Underwriters (such greatest amount of either (x), (y), or (z), the “ Judgment Credit ”); (ii) such settlement agreement expressly provides that in the event that the applicable court does not approve the Judgment Credit as part of the settlement, the settlement agreement will automatically terminate; and (iii) the final judgment entered with respect to the settlement agreement contains the Judgment Credit.

9.8. Survival. Except as set forth in the last sentence of Section 9.1, your agreements contained in Article V and Sections 3.1, 9.3, 9.4, 9.5, 9.6, 9.7, 9.8, 9.9, 9.10, and 11.2 hereof will remain operative and in full force and effect regardless of any termination of an AAU and: (a) any termination of the Underwriting Agreement, (b) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Issuer, the Guarantor, the Seller, its directors or officers, or any person controlling the Issuer, the Guarantor or the Seller, and (c) acceptance of any payment for any Securities.

9.9. Replacement of Manager.  If at any time after any Action is brought the Manager settles the Action on a basis that results in the settlement of such Action against it and fewer than all the Underwriters (whether or not such settlement complies with Section 9.7 hereof), the Manager will, at such time, for purposes of Sections 9.3, 9.4, 9.5, 9.6, and 9.7 hereof, cease to be the Manager. The non-settling Underwriters will, by vote of holders of a majority of the Underwriting Percentage of such non-settling Underwriters, select a new Manager, which will become the new “ Manager ” for all purposes of Sections 9.3, 9.4., 9.5, 9.6, and 9.7 hereof as well as this section; provided that the non-settling Underwriter(s) with the largest Underwriting Percentage will act as Manager until such vote occurs and a new Manager is selected.

Notwithstanding such a settlement, the Manager and the other settling Underwriters will remain obligated to the non-settling Underwriters to assist and cooperate fully, in good faith, and at their own expense, in the defense of any Actions, including, without limitation, by providing, upon reasonable request of any non-settling Underwriter, and without the necessity of court process, access to or copies of all relevant records, and reasonable access to all witnesses under control of the Manager or the other settling Underwriters, for the purpose of interviews, depositions, and testimony at trial, subject in each case to the applicable legal and procedural obligations of such Manager and such other settling Underwriter.

In addition, if at any time, the Manager is unwilling or unable for any reason to assume or discharge its duties as Manager under the applicable AAU, whether resulting from its insolvency (voluntary or involuntary), resignation or otherwise, to the extent permitted by applicable law, the remaining Underwriters will, by vote of holders of a majority of the Underwriting Percentage of such Underwriters, be entitled to select a new Manager, which will become the new Manager for all purposes under this Agreement.

 

19


Notwithstanding the foregoing, a Manager replaced pursuant to this Section 9.9 shall continue to benefit from and be subject to all other terms and conditions of this Agreement applicable to an Underwriter.

9.10. Notice.  When the Manager receives notice of the assertion of any Action to which the provisions of Sections 9.4, 9.5, 9.6, or 9.7 hereof would apply, it will give prompt notice thereof to each Underwriter, and whenever an Underwriter receives notice of the assertion of any claim or commencement of any Action to which the provisions of Sections 9.4, 9.5, 9.6, or 9.7 hereof would apply, such Underwriter will give prompt notice thereof to the Manager. The Manager also will furnish each Underwriter with periodic reports, at such times as it deems appropriate, as to the status of such Action, and the actions taken by it in connection therewith. If the Manager or any other Underwriter engages in any settlement discussion that involves or contemplates settlement on any basis other than settlement of all Actions against all Underwriters on a pro rata basis according to their Underwriting Percentages, the Manager (or other Underwriter engaging in such discussions) will notify all other Underwriters promptly and provide reasonable details about such discussions.

X. REPRESENTATIONS AND COVENANTS OF UNDERWRITERS

10.1. Knowledge of Offering.  You acknowledge that it is your responsibility to examine the Registration Statement, the Prospectus, or the Offering Circular, as the case may be, any amendment or supplement thereto relating to the Offering, any Preliminary Prospectus or Preliminary Offering Circular, and the material, if any, incorporated by reference therein, any Issuer Free Writing Prospectus, any Supplemental Materials, and any ABS Underwriter Derived Information, and you will familiarize yourself with the terms of the Securities, any applicable Indenture, and the other terms of the Offering thereof which are to be reflected in the Prospectus or the Offering Circular, as the case may be, and the applicable AAU and Underwriting Agreement. The Manager is authorized, with the advice of counsel for the Underwriters, to approve on your behalf any amendments or supplements to the documents described in the preceding sentence.

10.2. Accuracy of Underwriters’ Information.  You confirm that the information that you have given and are deemed to have given in response to the Underwriters’ Questionnaire attached as Exhibit A hereto (and to any other questions addressed to you in the Invitation Wire or other Wires), which information has been furnished to the Issuer for use in the Registration Statement, Prospectus, or Offering Circular, as the case may be, or has otherwise been relied upon in connection with the Offering, is complete and accurate. You will notify the Manager immediately of any development before the termination of the applicable AAU which makes untrue or incomplete any information that you have given or are deemed to have given in response to the Underwriters’ Questionnaire (or such other questions).

10.3. Name; Address.  Unless you have promptly notified the Manager In Writing otherwise, your name as it should appear in the Registration Statement, Prospectus or Offering Circular and any advertisement, if different, and your address, are as set forth on the signature pages hereof.

 

20


10.4. Compliance with Capital Requirements.  You represent that your commitment to purchase the Securities will not result in a violation of the financial responsibility requirements of Rule 15c3-1 under the 1934 Act or of any similar provision of any applicable rules of any securities exchange to which you are subject or, if you are a financial institution subject to regulation by the Board of Governors of the U.S. Federal Reserve System, the U.S. Comptroller of the Currency, or the U.S. Federal Deposit Insurance Corporation, will not place you in violation of any applicable capital requirements or restrictions of such regulator or any other regulator to which you are subject.

10.5. FINRA Requirements.  You represent that you are a member in good standing of FINRA, or a non-U.S. bank, broker, dealer, or institution not eligible for membership in FINRA or a Bank. If you are a member of FINRA, you will comply with all applicable rules of FINRA, including, without limitation: (a) the requirements of FINRA Rule 5130, and (b) the requirements of NASD Conduct Rule 2740 or any FINRA successor rule thereto, and you will not grant any concessions, discounts, or other allowances which are not permitted by that Rule. If you are a non-U.S. bank, broker, dealer, or institution not eligible for membership in FINRA, you will not make any sales of the Securities in, or to nationals or residents of, the United States, its territories, or its possessions, except to the extent permitted by Rule 15a-6 or any successor rule thereto, and that in making any sales of the Securities you will comply, as though you are a member of FINRA, with the requirements of the following rules (including any FINRA successor rules thereto): (a) FINRA Rule 5130, (b) NASD Conduct Rules 2730, 2740, and 2750, and (c) NASD Conduct Rule 2420, as that Rule applies to a non-member broker/dealer in a non-U.S. country. If you are a Bank, you will not accept any portion of the management fee paid by the Underwriters with respect to any Offering or, in connection with any Offering of Securities that do not constitute “exempted securities” within the meaning of Section 3(a)(12) of the 1934 Act, purchase any Securities at a discount from the offering price from any Underwriter or Dealer or otherwise accept any Fees and Commissions from any Underwriter or Dealer, which in any such case is not permitted under NASD’s Rules of Fair Practice (or any FINRA successor rules thereto), and you will comply with NASD Conduct Rule 2420 (or any FINRA successor rule thereto) as though you were a member.

10.6. Further State Notice.  The Manager will file a Further State Notice with the Department of State of New York, if required.

10.7. Compliance with Rule 15c2-8.  In the case of a Registered Offering and any other Offering to which the provisions of Rule 15c2-8 under the 1934 Act are made applicable pursuant to the AAU or otherwise, you will comply with such Rule in connection with the Offering. In the case of an Offering other than a Registered Offering, you will comply with applicable Federal and state laws and the applicable rules and regulations of any regulatory body promulgated thereunder governing the use and distribution of offering circulars by underwriters.

10.8. Discretionary Accounts.  In the case of a Registered Offering of Securities issued by an Issuer that was not, immediately prior to the filing of the Registration Statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you will not make sales to any account over which you exercise discretionary authority in connection with such sale, except as otherwise permitted by the applicable AAU for such Offering.

 

21


10.9. Offering Restrictions.  You will not make any offers or sales of Securities or any Other Securities in jurisdictions outside the United States except under circumstances that will result in compliance with (i) applicable laws, including private placement requirements, in each such jurisdiction and (ii) the restrictions on offers or sales set forth in any AAU or the Prospectus, Preliminary Prospectus, Offering Circular, or Preliminary Offering Circular, as the case may be.

It is understood that, except as specified in the Prospectus or Offering Circular or applicable AAU, no action has been taken by the Manager, the Issuer, the Guarantor, or the Seller to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.

10.10. Representations, Warranties, and Agreements.  You will make to each other Underwriter participating in an Offering the same representations, warranties, and agreements, if any, made by the Underwriters to the Issuer, the Guarantor, or the Seller in the applicable Underwriting Agreement or any Intersyndicate Agreement, and you authorize the Manager to make such representations, warranties, and agreements to the Issuer, the Guarantor, or the Seller on your behalf.

10.11. Limitation on the Authority of the Manager to Purchase and Sell Securities for the Account of Certain Underwriters.  Notwithstanding any provision of this AAU authorizing the Manager to purchase or sell any Securities or Other Securities (including arranging for the sale of Contract Securities) or over-allot in arranging sales of Securities for the accounts of the several Underwriters, the Manager may not, in connection with the Offering of any Securities, make any such purchases, sales, and/or over-allotments for the account of any Underwriter that, not later than its acceptance of the Invitation Wire relating to such Offering, has advised the Manager that, due to its status as, or relationship to, a bank or bank holding company such purchases, sales, and/or over-allotments are prohibited by applicable law. If any Underwriter so advises the Manager, the Manager may allocate any such purchases, sales, and over-allotments (and the related expenses) which otherwise would have been allocated to your account based on your respective Underwriting Percentage to your account based on the ratio of your Original Underwriting Obligation to the Original Underwriting Obligations of all Underwriters other than the advising Underwriter or Underwriters, or in such other manner as the Manager will determine.

10.12. Electronic Distribution.  By participating in the Offering or accepting the Invitation Wire, you will be deemed to be representing that either: (a) you are not making an on-line distribution; or (b) if you are making an on-line distribution, you are following procedures for on-line distributions previously reviewed by members of the Staff of the Division of Corporation Finance of the Commission, such members raised no objections to the procedures reviewed, and there have been no material changes to your procedures since that review.

10.13. Agreement Regarding Oral Due Diligence . By participating in an Offering, each Underwriter agrees that it, each of its affiliates participating in an Offering as Underwriter or financial intermediary and each controlling person of it and each such participating affiliate are bound by the Agreement Regarding Oral Due Diligence currently in effect between Morgan Stanley and the accounting firm or firms that participate in oral due diligence in such offering.

 

22


XI. DEFAULTING UNDERWRITERS

11.1. Effect of Termination.  If the Underwriting Agreement is terminated as permitted by the terms thereof, your obligations hereunder with respect to the Offering of the Securities will immediately terminate except: (a) as set forth in Section 9.8 hereof, (b) that you will remain liable for your Underwriting Percentage (or such other percentage as may be specified pursuant to Section 9.2 hereof) of all expenses, and for any purchases or sales which may have been made for your account pursuant to the provisions of Article V hereof or any Intersyndicate Agreement, and (c) that such termination will not affect any obligations of any defaulting or breaching Underwriter.

11.2. Sharing of Liability. If any Underwriter defaults in its obligations: (a) pursuant to Section 5.1, 5.2 or 5.4 hereof, (b) to pay amounts charged to its account pursuant to Section 7.1, 7.2, or 8.1 hereof, or (c) pursuant to Section 9.2, 9.3, 9.4, 9.5, 9.6, or 11.1 hereof, you will assume your proportionate share (determined on the basis of the respective Underwriting Percentages of the non-defaulting Underwriters) of such obligations, but no such assumption will relieve any defaulting Underwriter from liability to the non-defaulting Underwriters, the Issuer, the Guarantor, or the Seller for its default.

11.3. Arrangements for Purchases.  The Manager is authorized to arrange for the purchase by others (including the Manager or any other Underwriter) of any Securities not purchased by any defaulting Underwriter in accordance with the terms of the applicable Underwriting Agreement or, if the applicable Underwriting Agreement does not provide arrangements for defaulting Underwriters, in the discretion of the Manager. If such arrangements are made, the respective amounts of Securities to be purchased by the remaining Underwriters and such other person or persons, if any, will be taken as the basis for all rights and obligations hereunder, but this will not relieve any defaulting Underwriter from liability for its default.

XII. MISCELLANEOUS

12.1. Obligations Several.  Nothing contained in this Master AAU or any AAU constitutes you partners with the Manager or with the other Underwriters, and the obligations of you and each of the other Underwriters are several and not joint. Each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the U.S. Internal Revenue Code of 1986. Each Underwriter authorizes the Manager, on behalf of such Underwriter, to execute such evidence of such election as may be required by the U.S. Internal Revenue Service.

12.2. Liability of Manager.  The Manager will not be liable to you for any act or omission, except for obligations expressly assumed by the Manager in the applicable AAU.

12.3. Termination of Master AAU.  This Master AAU may be terminated by either party hereto upon five business days’ written notice to the other party; provided , however , that with respect to any Offering for which an AAU was sent prior to such notice, this Master AAU as it applies to such Offering will remain in full force and effect and will terminate with respect to such Offering in accordance with Section 9.1 hereof.

 

23


12.4. Governing Law.  This Master AAU and each AAU will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State, without giving effect to principles of conflicts of law. You hereby irrevocably: (a) submit to the jurisdiction of any court of the State of New York located in the City of New York or the U.S. District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Master AAU, or any of the agreements or transactions contemplated hereby (each, a “ Proceeding ”), (b) agree that all claims in respect of any Proceeding may be heard and determined in any such court, (c) waive, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (d) agree not to commence any Proceeding other than in such courts, and (e) waive, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum.

12.5. Amendments.  This Master AAU may be amended from time to time by consent of the parties hereto. Your consent will be deemed to have been given to an amendment to this Master AAU, and such amendment will be effective, five business days following written notice to you of such amendment if you do not notify us In Writing prior to the close of business on such fifth business day that you do not consent to such amendment. Upon effectiveness, the provisions of this Master AAU as so amended will apply to each AAU thereafter entered into, except as otherwise specifically provided in any such AAU.

12.6. Notices.  Any notice to any Underwriter will be deemed to have been duly given if mailed, sent by wire, telecopy or electronic transmission or other written communication, or delivered in person to such Underwriter at the address set forth in its Underwriters’ Questionnaire, or if no address is provided in an Underwriters’ Questionnaire, then at the address set forth in reports filed by such Underwriter with FINRA. Any such notice will take effect upon receipt thereof.

12.7. Severability . In case any provision in this Master AAU is deemed invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired thereby.

12.8. Counterparts . This Master AAU may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which taken together constitute one and the same instrument. Transmission by telecopy of an executed counterpart of this Master AAU will constitute due and sufficient delivery of such counterpart.

Please confirm your acceptance of this Master AAU by signing and returning to us the enclosed duplicate copy hereof.

 

Morgan Stanley & Co. Incorporated
By:  

 

  Name:  

 

  Title:  

 

  (Authorized Officer)

 

24


Confirmed and accepted
as of                  , 20     

 

(Legal Name of Underwriter)

 

(Address)
By:  

 

Name:  

 

Title:  

 

(Authorized Officer)
(If person signing is not an officer or a partner, please attach instrument of authorization)

 

25


GUIDE TO DEFINED TERMS

 

Term

   Section Reference

1933 Act

     1.1      

1934 Act

     3.5      

AAU

     Foreword      

ABS Underwriter Derived Information

     2.1      

Additional Securities

     1.1      

Bank

     3.5      

Co-Managers

     1.1      

Commission

     2.1      

Contract Securities

     3.1      

Contributing Underwriters

     9.5      

Dealer

     3.5      

DTC

     5.2      

Fees and Commissions

     1.1      

FINRA

     3.1      

Firm Securities

     1.1      

Free Writing Prospectus

     2.1      

Guarantor

     1.1      

In Writing

     1.2      

Indemnified Party

     9.4      

Indenture

     1.1      

International Offering

     1.1      

Intersyndicate Agreement

     2.3      

Invitation Wire

     Foreword      

Issuer

     1.1      

Issuer Free Writing Prospectus

     3.3      

Issuer Information

     3.3, 3.3      

Judgment Credit

     9.7      

Litigation

     9.4      

Losses

     9.4      

Manager

     9.9, 1.1      

Master AAU

     Foreward      

NASD

     3.1      

Offering

     Foreword      

Offering Circular

     2.2, 2.2      

Offering Date

     3.2      

Offering Price

     1.1      

Original Underwriting Obligation

     1.1      

Preliminary Offering Circular

     2.2      

Preliminary Prospectus

     2.1      

Pricing Date

     1.1      

Proceeding

     12.4      

Prospectus

     2.1      

Purchase Price

     1.1      

QIU

     9.4      

 

26


Reallowance

     1.1      

Registered Offering

     2.1      

Registration Statement

     2.1      

Regulation M

     5.1      

Representative

     1.1      

Securities

     1.1      

Securities Offering Reform Release

     2.1      

Seller

     1.1      

Selling Concession

     1.1      

Settlement Date

     1.1      

Supplemental Materials

     3.3      

Syndicate Counsel

     9.6      

Trustee

     1.1      

Unauthorized Material

     3.3      

Underwriter Free Writing Prospectus

     3.3      

Underwriters

     1.1, 1.1      

Underwriters’ Securities

     3.1      

Underwriting Agreement

     1.1      

Underwriting Percentage

     1.1      

Wire

     Foreword      

 

27


EXHIBIT A

UNDERWRITERS’ QUESTIONNAIRE

In connection with each Offering governed by the Morgan Stanley & Co. Incorporated Master Agreement Among Underwriters dated April 1, 2009, except as indicated in a timely acceptance of the Invitation Wire pursuant to Section 1.2 of the Master Agreement Among Underwriters (“ Master AAU ”), each Underwriter participating in such Offering severally advises the Issuer that, other than as disclosed in the Preliminary Prospectus or Preliminary Offering Circular, as the case may be (Capitalized terms used herein and not otherwise defined herein will have the meanings given to them in the Master AAU):

(a) neither such Underwriter nor any of its directors, officers, or partners have a material relationship, as “material” is defined in Regulation C under the 1933 Act, with the Issuer, the Guarantor, or the Seller;

(b) if the Registration Statement is on Form S-1, neither such Underwriter nor any “group” (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) of which such Underwriter is aware is the beneficial (as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) owner of more than 5% of any class of voting securities of the Issuer or Guarantor, nor does such Underwriter have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement, nor does such Underwriter have any knowledge that more than 5% of any class of voting securities of the Issuer or the Guarantor is held or to be held subject to any voting trust or other similar agreement;

(c) other than as may be stated in the Morgan Stanley & Co. Incorporated Master Agreement Among Underwriters dated April 1, 2009, the applicable AAU, the Intersyndicate Agreement or dealer agreement, if any, the Prospectus, the Registration Statement, or the Offering Circular, such Underwriter does not know and has no reason to believe that there is an intention to over-allot or that the price of any security may be stabilized to facilitate the offering of the Securities;

(d) other than as may be stated in the Prospectus or the Offering Circular, as the case may be, or the Invitation Wire, such Underwriter does not know of any other discounts or commissions to be allowed or paid to the Underwriters or of any other items that would be deemed by the Financial Industry Regulatory Authority (“ FINRA ”) to constitute underwriting compensation for purposes of FINRA Rule 5110, and such Underwriter does not know of any discounts or commissions to be allowed or paid to dealers, including all cash, securities, contracts, or other consideration to be received by any dealer in connection with the sale of the Securities;

(e) such Underwriter has not prepared any report or memorandum for external use in connection with the Offering;

(f) if the offer and sale of the Securities are to be registered under the 1933 Act pursuant to a Registration Statement on Form S-1 or Form F-1, such Underwriter has


not within the past 12 months prepared or had prepared for such Underwriter any engineering, management, or similar report or memorandum relating to broad aspects of the business, operations, or products of the Issuer or the Guarantor. The immediately preceding sentence does not apply to reports solely comprised of recommendations to buy, sell, or hold the Issuer’s or the Guarantor’s securities, unless such recommendations have changed within the past six months, or to information already contained in documents filed with the Commission;

(g) such Underwriter is not an “affiliate” of the Issuer or the Guarantor for purposes of the NASD Conduct Rule 2720 (or any FINRA successor rule thereto). Such Underwriter understands that under Rule 2720 (except as provided in Rule 2720(b)(1)(C) thereof) two entities are “affiliates” of each other if one entity controls, is controlled by, or is under common control with, the second entity and that “control” is presumed to exist if one entity (or, in the case of a FINRA member, the entity and all “persons associated with” it (as defined by FINRA)) beneficially owns 10% or more of the second entity’s outstanding voting securities or, if the second entity is a partnership, if the first entity has a partnership interest in 10% or more of the second entity’s distributable profits or losses;

(h) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, and if the Securities are not investment grade debt securities or preferred stock, or equity securities for which there exists a “bona fide independent market” (as defined in NASD Conduct Rule 2720(b)(3) or any FINRA successor rule thereto) or otherwise exempted under NASD Conduct Rule 2720(b)(7)(D) (or any FINRA successor rule thereto), such Underwriter does not have a “conflict of interest” with the Issuer or the Guarantor under NASD Conduct Rule 2720 (or any FINRA successor rule thereto). In that regard, such Underwriter specifically confirms that such Underwriter, the “parent” of (as defined in Rule 2720), affiliates, and “persons associated with” such Underwriter (as defined by FINRA), in the aggregate do not: (a) beneficially own 10% or more of the Issuer’s or the Guarantor’s “common equity,” “preferred equity,” or “subordinated debt” (as each such term is defined in Rule 2720), or (b) in the case of an Issuer or Guarantor which is a partnership, beneficially own a general, limited, or special partnership interest in 10% or more of the Issuer’s or Guarantor’s distributable profits or losses;

(i) other than as may be stated in the Prospectus or the Offering Circular, as the case may be, in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, neither such Underwriter nor any of its directors, officers, partners, or “persons associated with” such Underwriter (as defined by FINRA) nor, to such Underwriter’s knowledge, any “related person” (defined by FINRA to include counsel, financial consultants and advisors, finders, members of the selling or distribution group, any FINRA member participating in the offering, and any other persons associated with or related to and members of the immediate family of any of the foregoing) or any other broker-dealer: (A) within the last six months have purchased in private transactions, or intend before, at, or within six months after the commencement of the public offering of the Securities to purchase in private transactions, any securities of the Issuer, the Guarantor, or any Issuer Related Party (as hereinafter defined), (B) within

 

2


the last 6 months have had any dealings with the Issuer, the Guarantor, any Seller, or any subsidiary or controlling person thereof (other than relating to the proposed Underwriting Agreement) as to which documents or information are required to be filed with FINRA, or (C) during the 6 months immediately preceding the filing of the Registration Statement (or, if there is none, the Offering Circular), have entered into any arrangement which provided or provides for the receipt of any item of value (including, but not limited to, cash payments and expense reimbursements) and/or the transfer of any warrants, options, or other securities from the Issuer, the Guarantor, or any Issuer Related Party to you or any related person;

(j) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, there is no association or affiliation between such Underwriter and; (A) any officer or director of the Issuer, the Guarantor or, any Issuer Related Party, or (B) any securityholder of 5% or more (or, in the case of an initial public offering of equity securities, any securityholder) of any class of securities of the Issuer, the Guarantor, or an Issuer Related Party; it being understood that for purposes of paragraph (i) above and this paragraph (j), the term “Issuer Related Party” includes any Seller, any affiliate of the Issuer, the Guarantor, or a Seller, and the officers or general partners, directors, employees, and securityholders thereof;

(k) in the case of Registered Offerings and Offerings of Securities exempt under Section 3 of the 1933 Act, and if the Securities are not issued by a real estate investment trust, no portion of the net offering proceeds from the sale of the Securities will be paid to such Underwriter or any of its affiliates or “persons associated with” such Underwriter (as defined by FINRA) or members of the immediate family of any such person; and

(l) in the case of Securities which are debt securities whose offer and sale is to be registered under the 1933 Act, such Underwriter is not an affiliate (as defined in Rule 0-2 under the Trust Indenture Act of 1939) of the Trustee for the Securities or of its parent, if any. Neither the Trustee nor its parent, if any, nor any of their directors or executive officers is a “director, officer, partner, employee, appointee, or representative” of such Underwriter (as those terms are defined in the Trust Indenture Act of 1939 or in the relevant instructions to Form T-1). Such Underwriter and its directors, partners, and executive officers, taken as a group, did not on the date specified in the Invitation, and do not, own beneficially 1% or more of the shares of any class of voting securities of the Trustee or of its parent, if any. If such Underwriter is a corporation, it does not have outstanding and has not assumed or guaranteed any securities issued otherwise than in its present corporate name.

If an Underwriter notes an exception with respect to material of the type referred to in clauses (e) and (f), such underwriter will send three copies of each item of such material, together with a statement as to distribution, identifying classes of recipients and the number of copies distributed to each such class, and, if relevant, the number of equity securities or the face value of debt securities owned by such person, the date such securities were acquired, and the price paid for such securities to Morgan Stanley & Co. Incorporated, Attention: Syndicate Department, 1585 Broadway, New York, New York 10036.

 

3

Exhibit 2(h)(3)

Morgan Stanley & Co. Incorporated

FORM OF MASTER SELECTED DEALERS AGREEMENT

REGISTERED SEC OFFERINGS

AND

EXEMPT OFFERINGS

(OTHER THAN OFFERINGS OF MUNICIPAL SECURITIES)

December 1, 2009


This Master Selected Dealers Agreement (this “ Master SDA ”), dated as of December 1, 2009, is by and between Morgan Stanley & Co. Incorporated (including its successors and assigns) (“ we ,” “ our ,” “ us ” or the “ Manager ”) and the party named on the signature page hereof (a “ Dealer ,” “ you ” or “ your ”). From time to time, in connection with an offering and sale (an “ Offering ”) of securities (the “ Securities ”), managed solely by us or with one or more other managers or co-managers, we or one or more of our affiliates may offer you (and others) the opportunity to purchase as principal a portion of such securities on the terms set forth herein as a Selected Dealer (as defined below).

References herein to laws, statutory and regulatory sections, rules, regulations, forms and interpretive materials are deemed to include successor provisions. The following provisions of this Master SDA shall apply separately to each individual Offering of Securities. You and we further agree as follows:

1.  Applicability of this Master SDA .  The terms and conditions of this Master SDA will be applicable to any Offering in which you accept an offer to participate as a Selected Dealer (including through the receipt by you of Securities), whether pursuant to a registration statement filed under the Securities Act of 1933, as amended (the “ 1933 Act ”), or exempt from registration thereunder, in respect of which we (acting for our own account or for the account of any underwriting or similar group or syndicate) are responsible for managing or otherwise implementing the sale of Securities to Selected Dealers. A Dealer is a person who meets the requirements of Section 10 hereof. The parties who agree to participate (including by the receipt by such parties of Securities) or are designated a selling concession to Dealers (the “ Selling Concession ”), and reallowance, if any (the “ Reallowance ”), in such Offering as selected Dealers are hereinafter referred to as “ Selected Dealers ”. In the case of any Offering where we are acting for the account of the several underwriters, initial purchasers or others acting in a similar capacity (the “ Underwriters ”), the terms and conditions of this Master SDA will be for the benefit of such Underwriters, including, in the case of any Offering where we are acting with others as representatives of Underwriters, such other representatives.

2.  Terms of the Offering .  We may advise you orally or by one or more wires, telexes, telecopy or electronic data transmissions, or other written communications (each, a “ Wire ”) of the particular method and supplementary terms and conditions of any Offering (including the price or prices at which the Securities initially will be offered by the several Underwriters, or if the price is to be determined by a formula based on market price, the terms of the formula, (the “ Offering Price ”) and any Selling Concession or, if applicable, Reallowance) in which you are invited to participate. Any such Wire may also amend or modify such provisions of this Master SDA in respect of the Offering to which such Wire relates, and may contain such supplementary provisions as may be specified in any Wire relating to an Offering. To the extent such supplementary terms and conditions are inconsistent with any provision herein, such supplementary terms and conditions shall supersede any provision of this Master SDA. Unless otherwise indicated in any such Wire, acceptances and other communications by you with respect to an Offering should be sent pursuant to the terms of Section 19 hereof. Notwithstanding that we may not have sent you a Wire or other form of invitation to participate in such Offering or that you may not otherwise have responded by wire or other written


communication (any such communication being deemed “ In Writing ”) to any such Wire or other form of invitation, you will be deemed to have accepted the terms of our offer to participate as a Selected Dealer and of this Master SDA (as amended, modified or supplemented by any Wire) by your purchase of Securities or otherwise receiving and retaining an economic benefit for participating in the Offering as a Selected Dealer. We reserve the right to reject any acceptance in whole or in part.

Any Offering will be subject to delivery of the Securities and their acceptance by us and any other Underwriters may be subject to the approval of all legal matters by counsel and may be subject to the satisfaction of other conditions. Any application for additional Securities will be subject to rejection in whole or in part.

3.  Offering Documents Upon your request, we will furnish, make available to you or make arrangements for you to obtain copies (which may, to the extent permitted by law, be in electronic form) of each prospectus, prospectus supplement, offering memorandum, offering circular or similar offering document, and any preliminary version thereof, as soon as reasonably practicable after sufficient quantities thereof have been made available by the issuer of the Securities (each, an “ Issuer ”) and any guarantor (each, a “ Guarantor ”) thereof, and, if different from the Issuer, the seller or sellers (each, a “ Seller ”) of the Securities. You agree that you will comply with the applicable United States federal and state laws, and the applicable rules and regulations of any regulatory body promulgated thereunder, and the applicable laws, rules and regulations of any non-United States jurisdiction, governing the use and distribution of offering materials by brokers and dealers. You represent and warrant that you are familiar with Rule l5c2-8 under the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), relating to the distribution of preliminary and final prospectuses and agree that your purchase of Securities shall constitute your confirmation that you have delivered and will deliver all preliminary prospectuses and final prospectuses required for compliance therewith. You agree to make a record of your distribution of each preliminary prospectus and, when furnished with copies of any revised preliminary prospectus or final prospectus, you will, upon our request, promptly forward copies thereof to each person to whom you have theretofore distributed a preliminary prospectus. You agree that, in purchasing Securities, you will rely upon no statement whatsoever, written or oral, other than the statements in the final prospectus, offering memorandum, offering circular or similar offering document delivered to you by us. You are not authorized by the Issuer or other Seller of Securities offered pursuant to a final prospectus, offering memorandum, offering circular or similar offering document or by any Underwriters to give any information or to make any representation not contained therein in connection with the sale of such Securities.

4.  Offering of Securities .

(a)  In respect of any Offering, we will inform you of any Selling Concession and Reallowance, if any. The Offering of Securities is made subject to the conditions referred to in the prospectus, offering memorandum, or offering circular or similar offering document related to the Offering and to the terms and conditions set forth in any Wire. After the initial Offering has commenced, we may change the Offering Price, the Selling Concession and the Reallowance (if any) to Selected Dealers. If a Reallowance is in effect, a reallowance from the Offering Price

 

2


not in excess of such Reallowance may be allowed (i) in the case of Offerings of Securities that are not exempted securities (as defined in Section 3(a)(12) of the 1934 Act), as consideration for services rendered in distribution to Dealers who are actually engaged in the investment banking or securities business and who are either members in good standing of the Financial Industry Regulatory Authority (“ FINRA ”) who agree to abide by the applicable rules of FINRA or non-U.S. banks, brokers, dealers or institutions not eligible for membership in FINRA who represent to you that they will promptly reoffer such Securities at the Offering Price and will abide by the conditions with respect to non-U.S. banks, dealers and institutions set forth in Section 10 hereof, or (ii) in the case of Offerings of Securities that are exempted securities (as defined in Section 3(a)(12) of the 1934 Act), as consideration for services rendered in distribution not only to Dealers identified in the immediately preceding clause but also to Dealers who are domestic banks which are not members of FINRA who represent to you that they will promptly reoffer such Securities at the Offering Price and will abide by the conditions with respect to domestic banks set forth in Section 10 hereof.

(b)  No expenses will be charged to Selected Dealers. A single transfer tax upon the sale of the Securities by the respective Underwriters to you will be paid by such Underwriters when such Securities are delivered to you. However, you shall pay any transfer tax on sales of Securities by you and you shall pay your proportionate share of any transfer tax or other tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise.

5.  Payment and Delivery You will deliver to us, on the date and at the place and time specified by us orally or In Writing, payment in the manner and type of currency specified by us orally or In Writing, payable to the order of Morgan Stanley & Co. Incorporated (or as we may subsequently inform you), for an amount equal to the Offering Price plus (if not included in the Offering Price) accrued interest, amortization of original issue discount or dividends, if any, specified in the prospectus or offering circular or other similar offering document furnished in connection with the Offering of the Securities. We may, in our sole discretion, retain the applicable Selling Concession in respect of the Securities to be purchased by you for release at a date specified by us. We will make payment to the Issuer or Seller against delivery to us for your account of the Securities to be purchased by you, and we will deliver to you the Securities paid for by you which will have been retained by or released to you for direct sale. If we determine that transactions in the Securities are to be settled through The Depository Trust Company (“ DTC ”) or another clearinghouse facility and payment in the settlement currency is supported by such facility, payment for and delivery of Securities purchased by you will be made through such facility, if you are a participant, or, if you are not a participant, settlement will be made through your ordinary correspondent who is a participant.

6.  Over-allotment; Stabilization; Unsold Allotments; Penalty Bids We may, with respect to any Offering, be authorized to over-allot in arranging sales to Selected Dealers, to purchase and sell Securities for long or short account and to stabilize or maintain the market price of the Securities. You agree that upon our request at any time and from time to time prior to the termination of the provisions of Section 4 hereof with respect to any Offering, you will report to us the amount of Securities purchased by you pursuant to such Offering which then remain unsold by you and will, upon our request at any such time, sell to us for our account or

 

3


the account of one or more Underwriters such amount of such unsold Securities as we may designate at the Offering Price less an amount to be determined by us not in excess of the Selling Concession. Prior to the termination of the Manager’s authority to cover any short position in connection with the Offering or such other date as the Manager may specify by Wire, if the Manager determines pursuant to the “Initial Public Offering Tracking System” of DTC that the Manager has purchased, or any of your customers have sold, a number or amount of Securities retained by, or released to, you for direct sale or any Securities sold pursuant to Section 4 hereof for which you received a portion of the Selling Concession, or any Securities which may have been issued on transfer or in exchange for such Securities, which Securities were therefore not effectively placed for investment, then you authorize the Manager to charge your account with an amount equal to such portion of the Selling Concession received by you with respect to such Securities at a price equal to the total cost of such purchase, including transfer taxes, accrued interest, dividends, and commissions, if any.

7.  Termination .

(a)  The terms and conditions set forth in (i) Section 4, (ii) the second sentence of Section 6, (iii) Section 15 and (iv) Section 16 of this Master SDA (collectively, the “ offering provisions ”) will terminate with respect to each Offering pursuant to this Master SDA at the close of business on the later of (a) the date on which the Underwriters pay the Issuer or Seller for the Securities, and (b) 45 calendar days after the applicable Offering date, unless in either such case the effectiveness of such offering provisions is extended or sooner terminated as hereinafter provided. We may terminate such offering provisions other than Section 6 at any time by notice to you to the effect that the offering provisions are terminated and we may terminate the provisions of Section 6 at any time at or subsequent to the termination of the other offering provisions by notice to you to the effect that the penalty bid provisions are terminated. All other provisions of the Master SDA shall remain operative and in full force and effect with respect to such Offering.

(b)  This Master SDA may be terminated by either party hereto upon five business days’ written notice to the other party; provided, however, that with respect to any particular Offering, if we receive any such notice from you after we have advised you of the amount of Securities allotted to you, this Master SDA shall remain in full force and effect as to such Offering and shall terminate with respect to such Offering and all previous Offerings only in accordance with and to the extent provided in subsection (a) of this Section 7.

8.  Amendments .  This Master SDA may be amended from time to time by consent of the parties hereto. Your consent will be deemed to have been given to an amendment to this Master SDA, and such amendment will be effective, five business days following written notice to you of such amendment if you do not notify us In Writing prior to the close of business on such fifth business day that you do not consent to such amendment. Notwithstanding the foregoing, you agree that any amendment, supplement or modification of the terms of this Master SDA by Wire or otherwise In Writing will be effective immediately and your consent will be deemed to have been given to any such amendment, supplement or modification by your purchase of Securities or otherwise receiving and retaining an economic benefit for participating

 

4


in the Offering as a Selected Dealer; provided that such amendment, supplement or modification of the terms of this Master SDA shall only be effective with respect to the related Offering.

9.  Relationship Among Underwriters and Selected Dealers .  We shall have full authority to take such actions as we deem advisable in all matters pertaining to any Offering under this Master SDA. You are not authorized to act as an agent for us, any Underwriter or the Issuer or other Seller of any Securities in offering Securities to the public or otherwise. Neither we nor any Underwriter will be under any obligation to you except for obligations assumed hereby or in any Wire from us in connection with any Offering, and no obligations on our part as the Manager will be implied hereby or inferred herefrom. Nothing contained in this Master SDA or any Wire shall constitute the Selected Dealers an association or partners with us or any Underwriter or with one another, and the obligations of you and each of the other Selected Dealers or any of the Underwriters are several and not joint. If the Selected Dealers, among themselves, with us or with the Underwriters, should be deemed to constitute a partnership for federal income tax purposes, then you elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986 and agree not to take any position inconsistent with such election. You authorize the Manager, in its discretion, to execute on your behalf such evidence of such election as may be required by the U.S. Internal Revenue Service. In connection with any Offering, you will be liable for your proportionate share of the amount of any tax, claim, demand or liability that may be asserted against you alone or against one or more Selected Dealers participating in such Offering, or against us or the Underwriters, based upon the claim that the Selected Dealers, or any of them, constitute an association, an unincorporated business or other entity, including, in each case, your proportionate share of the amount of any expense (including attorneys’ fees and expenses) incurred in defending against any such tax, claim, demand or liability.

10.  FINRA Compliance .  You represent and warrant (a) that you are a broker or dealer (as defined by FINRA actually engaged in the investment banking or securities business and that you are either (i) a member in good standing of FINRA or (ii) a non-U.S. bank, broker, dealer or other institution not eligible for membership in FINRA and not registered under the 1934 Act (a “ non-member non-U.S. dealer ”), or (b) only in the case of Offerings of Securities that are exempted securities (as defined in Section 3(a)(12) of the 1934 Act), and such other Securities as from time to time may be sold by a “bank” (as defined in Section 3(a)(6) of the 1934 Act (a “ Bank ”)), that you are a domestic Bank which is not a member of FINRA that makes the representations and agreements applicable to such institutions contained in this Section 10 hereof as if you were a member of FINRA. You agree that, in connection with any purchase or sale of the Securities wherein a selling concession, discount or other allowance is received or granted, you (aa) will comply, if you are a member of FINRA, with all applicable rules of FINRA, including, without limitation, (i) the requirements of FINRA Rule 5130, and (ii) the requirements of NASD Conduct Rule 2740 (relating to Selling Concessions, Discounts and Other Allowances) or any FINRA successor rules thereto or (bb) if you are a non-member non-U.S. dealer, (i) will comply, as though you were a member of FINRA, with the requirements of the following rules (including any FINRA successor rules thereto): NASD Conduct Rules 2730 (relating to Securities Taken in Trade), 2740 (relating to Selling Concessions), 2750 (relating to Transactions with Related Persons) and FINRA Rule 5130 (relating to Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and NASD Conduct Rule 2420 (relating to Dealing with

 

5


Non-Members) as that Rule applies to a non-member broker/dealer in a non-U.S. country, and (ii) are, and will remain at all relevant times, an appropriately registered or licensed broker-dealer (to the extent required) in a non-U.S. jurisdiction and will not engage in any activities in the United States or with United States persons as would require you to register as a broker-dealer under Section 15 of the 1934 Act or obtain FINRA membership as set forth in NASD Conduct Rule 2420(c). In addition, if you are a domestic bank or a non-member non-U.S. dealer, you agree to comply, as though you were a member of FINRA, and make the representations and agreements applicable to such institutions contained in this Section 10. You represent and warrant that you are fully familiar with the above provisions.

You further represent, by your participation in an Offering, that you have provided to us all documents and other information required to be filed with respect to you, any related person or any person associated with you or any such related person pursuant to the supplementary requirements of FINRA’s interpretation with respect to review of corporate financing as such requirements relate to such Offering.

11.  Blue Sky Matters .  Upon application to us, we shall inform you as to any advice we have received from counsel concerning the jurisdictions in which Securities have been qualified for sale or are exempt under the securities or “Blue Sky” laws of such jurisdictions, but we do not assume any obligation or responsibility as to your right to sell Securities in any such jurisdiction, notwithstanding any information we may furnish to you in that connection.

12.  Governing Law; Submission to Jurisdiction .  This Master SDA (as it may be modified or supplemented by any Wire) will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed in the State. You hereby irrevocably: (a) submit to the jurisdiction of any court of the State of New York located in the City of New York or the U.S. District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Master SDA, or any of the agreements or transactions contemplated hereby (each, a “ Proceeding ”), (b) agree that all claims in respect of any Proceeding may be heard and determined in any such court, (c) waive, to the fullest extent permitted by law, any immunity from jurisdiction of any such court or from any legal process therein, (d) agree not to commence any Proceeding other than in such courts, and (e) waive, to the fullest extent permitted by law, any claim that such Proceeding is brought in an inconvenient forum.

13.  Successors and Assigns .  This Master SDA will be binding on, and inure to the benefit of, the parties hereto and other persons specified in Section 1 hereof, and the respective successors and assigns of each of them; provided, however, that you may not assign your rights or delegate any of your duties under this Master SDA without our prior written consent.

14.  Compliance with Law .  You agree that in selling Securities pursuant to any Offering (which agreement shall also be for the benefit of the Issuer or other Seller of such Securities) you will comply with all applicable rules and regulations, including the applicable provisions of the 1933 Act and the 1934 Act, the applicable rules and regulations of the Securities and Exchange Commission thereunder, the applicable rules and regulations of FINRA, the applicable rules and

 

6


regulations of any securities exchange having jurisdiction over the Offering and the applicable laws, rules and regulations specified in Section 3(a) and 3(b) hereof.

15.  Discretionary Accounts .  In the case of an Offering of Securities registered under the 1933 Act by an Issuer that was not, immediately prior to the filing of the related registration statement, subject to the requirements of Section 13(d) or 15(d) of the 1934 Act, you will not make sales to any account over which you exercise discretionary authority in connection with such sale, except as otherwise permitted by us for such Offering In Writing.

16.  Offering Restrictions .  You will not make any offers or sales of Securities or any other securities in jurisdictions outside the United States except under circumstances that will result in compliance with (a) applicable laws, including private placement requirements, in each such jurisdiction and (b) the restrictions on offers or sales set forth in this Master SDA, any Wire or the prospectus, preliminary prospectus, offering memorandum, offering circular, or preliminary offering memorandum or preliminary offering circular or other similar offering document, as the case may be. It is understood that, except as specified in this Master SDA, the prospectus, offering memorandum or offering circular or other similar offering document, or applicable Wire, no action has been taken by us, the Issuer, the Guarantor, the Seller or any other party to permit you to offer Securities in any jurisdiction other than the United States, in the case of a Registered Offering, where action would be required for such purpose.

17.  Prohibition on Money Laundering .  The operations of your business and your subsidiaries are and, to your knowledge, have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “ Money Laundering Laws ”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving you or any of your subsidiaries with respect to the Money Laundering Laws is pending or, to your knowledge, threatened.

18.  Liability of Manager .  The Manager will not be liable to you for any act or omission, except for obligations expressly assumed by the Manager In Writing.

19.  Notices .  Any notice to you will be deemed to have been duly given if mailed, sent by Wire, or delivered in person to you at the address set forth on the signature page hereto (or to such other address, telephone, telecopy or telex as you will be notified by us), or if such address is no longer valid, then at the address set forth in reports filed by you with FINRA. Any such notice will take effect upon receipt thereof. Communications by Wire will be deemed to be “written” communications and made In Writing.

20.  Severability .  In case any provision in this Master SDA or any Wire is deemed invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions will not in any way be affected or impaired thereby.

 

7


21.  Counterparts .  This Master SDA may be executed in any number of counterparts, each of which will be deemed to be an original, and all of which taken together constitute one and the same instrument. Transmission by telecopy of an executed counterpart of this Master SDA will constitute due and sufficient delivery of such counterpart.

Please confirm by signing and returning to us the enclosed copy of this Master SDA that your subscription to, or your acceptance of any reservation of, any Securities pursuant to an Offering shall constitute (a) acceptance of and agreement to the terms and conditions of this Master SDA (as supplemented and amended pursuant to Section 8 hereof) together with and subject to any supplementary terms and conditions contained in any Wire from us in connection with such Offering, all of which shall constitute a binding agreement between you and us individually or as representative of any Underwriters, (b) confirmation that your representations and warranties set forth herein are true and correct at that time, (c) confirmation that your agreements herein have been and will be fully performed by you to the extent and at the times required thereby and (d) in the case of any Offering described in Section 3 hereof, acknowledgment that you have requested and received from us sufficient copies of the final prospectus, offering memorandum or offering circular, as the case may be, with respect to such Offering in order to comply with your undertakings in Section 3(a) or 3(b) hereof.

(Remainder of page intentionally left blank)

(Signature page follows)

 

8


This Master SDA is dated as of December 1, 2009, and executed by and between Morgan Stanley & Co. Incorporated and other party named below.

 

Very truly yours,

MORGAN STANLEY & CO. INCORPORATED
By:  

 

  Name:
  Title:

 

Confirmed as of (date):

CONFIRMED:                   , 2009

 

(Legal Name of Selected Dealer)

By:

 

 

  Name:
  Title:

Address:

Telephone:

Facsimile:

Email:


Master Selected Dealers Agreement

GUIDE TO DEFINED TERMS

 

Term

  

Section Reference

1933 Act

   1

1934 Act

   3

Bank

   10

Dealer

   Foreward

DTC

   5

FINRA

   4(a)

Guarantor

   3

In Writing

   2

Issuer

   3

Manager

   Foreword

Master SDA

   Foreword

Money Laundering Laws

   17

non-member non-U.S. dealer

   10

Offering

   Foreword

Offering Price

   2

offering provisions

   7(a)

Proceeding

   12

Reallowance

   1

Securities

   1

Selected Dealers

   1

Seller

   3

Selling Concession

   1

Underwriters

   1

Wire

   2

 

10

Exhibit 2(j)(1)

FORM OF

CUSTODY AGREEMENT

AGREEMENT, dated as of                      , 2011 between Apollo Senior Floating Rate Fund Inc. a corporation organized and existing under the laws of the State of Maryland having its principal office and place of business at 9 West 57 th Street, New York, NY 10019 (the “Fund”) and The Bank of New York Mellon Corporation, a New York corporation authorized to do a banking business, having its principal office and place of business at One Wall Street, New York, New York 10286 (“Custodian”).

W I T N E S S E T H:

that for and in consideration of the mutual promises hereinafter set forth the Fund and Custodian agree as follows:

ARTICLE I

DEFINITIONS

Whenever used in this Agreement, the following words shall have the meanings set forth below:

1. “Authorized Person” shall be any person, whether or not an officer or employee of the Fund, duly authorized by the Fund’s board to execute any Certificate or to give any Oral Instruction with respect to one or more Accounts, such persons to be designated in a Certificate annexed hereto as Schedule I hereto or such other Certificate as may be received by Custodian from time to time.

2. “BNY Affiliate” shall mean any office, branch or direct or indirect subsidiary of Custodian and any person controlled by, or under common control with, the Custodian.

3. “Book-Entry System” shall mean the Federal Reserve/Treasury book-entry system for receiving and delivering securities, its successors and nominees.

4. “Business Day” shall mean any day on which Custodian and relevant Depositories are open for business.

5. “Certificate” shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to Custodian, which is actually received by Custodian by letter or facsimile transmission and signed on behalf of the Fund by an Authorized Person or a person reasonably believed by Custodian to be an Authorized Person.

6. “Composite Currency Unit” shall mean the Euro or any other composite currency unit consisting of the aggregate of specified amounts of specified currencies, as such unit may be constituted from time to time.

7. “Depository” shall include any “securities depository” as defined in Rule 17f-4 under the 1940 Act registered with the Securities and Exchange Commission and identified to the Fund from time to time.


8. “Foreign Depository” shall mean each Eligible Securities Depository as defined in Rule 17f-7 under 1940 Act identified to the Fund from time to time,.

9. “Instructions” shall mean communications actually received by Custodian by S.W.I.F.T., tested telex, letter, facsimile transmission, or other method or system specified by Custodian as available for use in connection with the services hereunder.

10. “Oral Instructions” shall mean verbal instructions received by Custodian from an Authorized Person or from a person reasonably believed by Custodian to be an Authorized Person.

11. “Series” shall mean the various portfolios, if any, of the Fund listed on Schedule II hereto, and if none are listed references to Series shall be references to the Fund.

12. “Securities” shall include, without limitation, any common stock and other equity securities, bonds, debentures and other debt securities, notes, mortgages, loans or other obligations, and any instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein (whether represented by a certificate or held in a Depository or by a Subcustodian), or over-the-counter options, futures and swaps when agreed upon by Custodian.

13. “Subcustodian” shall mean a bank (including any branch thereof) or other financial institution (other than a Foreign Depository) located outside the U.S. which is utilized by Custodian in connection with the purchase, sale or custody of Securities hereunder and identified to the Fund from time to time, that in each case meets the definition of an “Eligible Foreign Custodian” as defined in Rule 17f-5 under the 1940 Act.

14. “1940 Act” shall mean the Investment Company Act of 1940, as amended, and the rules and regulations thereunder.

ARTICLE II

APPOINTMENT OF CUSTODIAN; ACCOUNTS;

REPRESENTATIONS, WARRANTIES, AND COVENANTS

1. (a) The Fund hereby appoints Custodian as custodian of all Securities and cash at any time delivered to Custodian during the term of this Agreement, and authorizes Custodian to hold Securities in registered form in its name or the name of its nominees. Custodian hereby accepts such appointment and agrees to establish and maintain one or more securities accounts and cash accounts for each Series in which Custodian will hold Securities and cash as provided herein and in accordance with Section 17 of the 1940 Act. Custodian shall maintain books and records segregating the assets of each Series from the other assets held by Custodian of any other Series. Such accounts (each, an “Account”; collectively, the “Accounts”) shall be in the name of the Fund.

(b) Custodian may from time to time establish on its books and records such sub-accounts within each Account as the Fund and Custodian may agree upon in writing (each a

 

- 2 -


“Special Account”), and Custodian shall reflect therein such assets as the Fund may specify in a Certificate or Instructions.

(c) Custodian may from time to time establish pursuant to a written agreement with and for the benefit of a broker, dealer, future commission merchant or other third party identified in a Certificate or Instructions such accounts on such terms and conditions as the Fund and Custodian shall agree in writing, and Custodian shall transfer to such account such Securities and money as the Fund may specify in a Certificate or Instructions.

2. The Fund hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon each delivery of a Certificate or each giving of Oral Instructions or Instructions by the Fund, that:

(a) it is duly incorporated or organized and is validly existing in good standing in its jurisdiction of incorporation or organization;

(b) it has the requisite power and authority under applicable law and its governing documents to enter into and perform this Agreement; it is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents, if any, necessary to carry on its business as now conducted;

(c) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement;

(d) this Agreement constitutes its legal, valid, binding and enforceable agreement;

(e) its performance of its obligations hereunder will not result in a material conflict with any other agreement or obligation of the Fund or any law or regulation applicable to it;

(f) The Fund or its investment adviser has determined that the custody arrangements of each Foreign Depository identified in writing to the Fund provides reasonable safeguards against the custody risks associated with maintaining assets with such Foreign Depository within the meaning of Rule 17f-7 under the 1940 Act and that the use of each Subcustodian utilized satisfies the applicable requirements of Rule 17f-5 under the 1940 Act, provided, however, that to the extent that Custodian serves as Foreign Custody Manager to the Fund, the determination will be made by Custodian subject to the terms and conditions of the separate Foreign Custody Manager agreement entered into between the parties;

(g) The Fund acknowledges the protections and risks associated with various methods of communications between the parties and it shall safeguard and treat with commercially reasonable care any user and authorization codes, passwords and/or authentication keys, and shall implement security procedures to be followed in connection therewith which provide a commercially reasonable degree of protection in light of its particular needs and circumstances; and

 

- 3 -


(h) Subject to Article V, it shall manage its borrowings, including, without limitation, any advance or overdraft (including any day-light overdraft) in the Accounts, so that the aggregate of its total borrowings for each Series does not exceed the amount such Series is permitted to borrow under the 1940 Act at the time such borrowings are incurred.

3. The Custodian hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon each delivery of a Certificate or each giving of Oral Instructions or Instructions by the Fund, that:

(a) it is a bank duly organized and validly existing and in good standing under the laws of the State of New York;

(b) it is qualified to serve as a custodian pursuant to Section 17 of the 1940 Act and is a U.S. Bank as defined in Rule 17f-5 under the 1940 Act;

(c) it has the requisite power and authority under applicable law and its governing documents to enter into and perform this Agreement;

(d) all requisite proceedings have been taken to authorize it to enter into and perform this Agreement;

(e) this Agreement constitutes its legal, valid, binding and enforceable agreement; and

(f) its performance of its obligations hereunder will not result in a material conflict with any other agreement or obligation of Custodian or any law or regulation applicable to it.

4. The Fund hereby covenants that it shall from time to time complete and execute and deliver to Custodian upon Custodian’s request a Form FR U-1 (or successor form) whenever the Fund borrows from Custodian any money to be used for the purchase or carrying of margin stock as defined in Federal Reserve Regulation U.

5. The parties hereby agree that no liability shall arise hereunder due to a breach of Article II, Section 2 or Section 3, where such breach would not reasonably be expected to have a material adverse effect on such breaching party.

ARTICLE III

CUSTODY AND RELATED SERVICES

1. (a) Subject to the terms hereof, the Fund hereby authorizes Custodian to hold any Securities received by Custodian from time to time for the Fund’s account. Provided Custodian exercises commercially reasonable care (in light of prevailing rules, practices and procedures in the relevant market) in its selection, retention and supervision, Custodian shall be entitled to utilize, subject to subsection (c) of this Section 1, Depositories, Subcustodians, and, subject to subsection (d) of this Section 1, Foreign Depositories, to the extent possible in connection with its performance hereunder. Securities and cash held in a Depository or Foreign Depository will be held subject to the rules, terms and conditions of such entity. Securities and cash held through

 

- 4 -


Subcustodians shall be held subject to the terms and conditions of Custodian’s agreement with such Subcustodians. Subcustodians may be authorized to hold Securities in Foreign Depositories in which such Subcustodians participate. Unless otherwise required by local law or practice or a particular subcustodian agreement, Securities deposited with a Subcustodian, a Depositary or a Foreign Depository will be held in a commingled account, in the name of Custodian, holding only Securities held by Custodian as custodian for its customers. Custodian shall identify on its books and records the Securities and cash belonging to the Fund, whether held directly or indirectly through Depositories, Foreign Depositories, or Subcustodians. Custodian shall, directly or indirectly through Subcustodians, Depositories, or Foreign Depositories, endeavor, to the extent feasible, to hold Securities in the country or other jurisdiction in which the principal trading market for such Securities is located, where such Securities are to be presented for cancellation and/or payment and/or registration, or where such Securities are acquired. Custodian at any time may cease utilizing any Subcustodian and/or may replace a Subcustodian with a different Subcustodian (the “Replacement Subcustodian”). In the event Custodian selects a Replacement Subcustodian, Custodian shall not utilize such Replacement Subcustodian until after the Fund’s board or foreign custody manager has determined that utilization of such Replacement Subcustodian satisfies the requirements of the 1940 Act and Rule 17f-5 thereunder. Notwithstanding any other provisions hereof, with respect to any losses incurred by the Fund as a result of the acts or the failure to act by any Subcustodian (other than a BNY Mellon Affiliate), the Custodian shall take appropriate action to recover such losses from such Subcustodian. For the avoidance of doubt, it is acknowledged and agreed that Custodian shall be liable for the acts or omissions of any Subcustodian that is a BNY Affiliate or such other Subcustodians selected or appointed by Custodian in breach of its standard of care hereunder.

(b) Unless Custodian has received a Certificate or Instructions to the contrary, Custodian shall hold Securities indirectly through a Subcustodian only if (i) the Securities are not subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors or operators, including a receiver or trustee in bankruptcy or similar authority, except for a claim of payment for the safe custody or administration of Securities on behalf of the Fund by such Subcustodian, and (ii) beneficial ownership of the Securities is freely transferable without the payment of money or value other than for safe custody or administration.

(c) With respect to each Depository, Custodian (i) shall act in good faith without negligence and shall exercise due care in accordance with reasonable commercial standards in discharging its duties as a securities intermediary to obtain and thereafter maintain Securities or financial assets deposited or held in such Depository, and (ii) will provide, promptly upon request by the Fund, such reports as are available concerning the internal accounting controls and financial strength of Custodian.

(d) With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence (i) to provide the Fund with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Fund of any material change in such risks. The Fund acknowledges and agrees that such analysis and monitoring shall be made on the basis of, and limited by, information gathered from Subcustodians or through publicly available information otherwise obtained by Custodian, and shall not include any evaluation of

 

- 5 -


Country Risks. As used herein the term “Country Risks” shall mean with respect to any Foreign Depository: (a) the financial infrastructure of the country in which it is organized, (b) such country’s prevailing custody and settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country’s regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the order execution of securities transactions or affect the value of securities.

2. Custodian shall furnish the Fund with an advice of daily transactions (including a confirmation of each transfer of Securities) and a monthly summary, or summary for such other period as the Fund may reasonably request, of all transfers to or from the Accounts.

3. With respect to all Securities held hereunder, Custodian shall, unless otherwise instructed to the contrary:

(a) Receive all income and other payments and advise the Fund as promptly as practicable of any such amounts due but not paid;

(b) Present for payment and receive the amount paid upon all Securities which may mature and advise the Fund as promptly as practicable of any such amounts due but not paid;

(c) Forward to the Fund copies of all information or documents that it may actually receive from an issuer of Securities which, in the commercially reasonable judgment of Custodian, are intended for the beneficial owner of Securities;

(d) Execute, as custodian, any certificates of ownership, affidavits, declarations or other certificates under any tax laws now or hereafter in effect in connection with the collection of bond and note coupons;

(e) Hold directly or through a Depository, a Foreign Depository, or a Subcustodian all rights and similar Securities issued with respect to any Securities credited to an Account hereunder; and

(f) Endorse for collection checks, drafts or other negotiable instruments.

4. (a) Custodian shall as promptly as practicable under the circumstances, notify the Fund of rights or discretionary actions with respect to Securities held hereunder, and of the date or dates by when such rights must be exercised or such action must be taken, provided that Custodian has actually received, from the issuer or the relevant Depository (with respect to Securities issued in the United States) or from the relevant Subcustodian, Foreign Depository, or a nationally or internationally recognized bond or corporate action service to which Custodian subscribes, notice of such rights or discretionary corporate action or of the date or dates such rights must be exercised or such action must be taken. Absent actual receipt of such notice (which failure to so receive is not caused by Custodian’s own negligence, willful misfeasance or willful misconduct), Custodian shall have no liability for failing to so notify the Fund.

(b) Whenever Securities (including, but not limited to, warrants, options, tenders, options to tender or non-mandatory puts or calls) confer discretionary rights on the

 

- 6 -


Fund or provide for discretionary action or alternative courses of action by the Fund, the Fund shall be responsible for making any decisions relating thereto and for directing Custodian to act. In order for Custodian to act, it must receive the Fund’s Certificate or Instructions at Custodian’s offices, addressed as Custodian may from time to time request, not later than noon (New York time) at least two (2) Business Days prior to the last scheduled date to act with respect to such Securities (or such earlier date or time as Custodian may specify to the Fund). Absent Custodian’s timely receipt of such Certificate or Instructions, Custodian shall not be liable for failure to take any action relating to or to exercise any rights conferred by such Securities.

5. All voting rights with respect to Securities, however registered, shall be exercised by the Fund or its designee. Custodian will make available to the Fund proxy voting services upon the request of, and for the jurisdictions selected by, the Fund in accordance with terms and conditions to be mutually agreed upon by Custodian and the Fund.

6. Custodian shall promptly advise the Fund upon Custodian’s actual receipt of notification of the partial redemption, partial payment or other action affecting less than all Securities of the relevant class. If Custodian, any Subcustodian, any Depository, or any Foreign Depository holds any Securities in which the Fund has an interest as part of a fungible mass, Custodian, such Subcustodian, Depository, or Foreign Depository may select the Securities to participate in such partial redemption, partial payment or other action in any non-discriminatory manner that it customarily uses to make such selection.

7. Custodian shall not under any circumstances accept bearer interest coupons which have been stripped from United States federal, state or local government or agency securities unless explicitly agreed to by Custodian in writing.

8. The Fund shall be liable for all taxes, assessments, duties and other governmental charges, including any interest or penalty with respect thereto (“Taxes”), with respect to any cash or Securities held on behalf of the Fund or any transaction related thereto. The Fund shall indemnify Custodian and each Subcustodian for the amount of any Tax that Custodian, any such Subcustodian or any other withholding agent is required under applicable laws (whether by assessment or otherwise) to pay on behalf of, or in respect of income earned by or payments or distributions made to or for the account of the Fund (including any payment of Tax required by reason of an earlier failure to withhold). The Fund will not be required to indemnify Custodian or any Subcustodian for the amount of any Tax that Custodian, any Subcustodian or any other withholding agent is required under applicable law to pay on behalf of, or in respect of, the untimely payment of any Tax required to be paid as set out in the preceding sentence. Custodian shall, or shall instruct the applicable Subcustodian or other withholding agent to, withhold the amount of any Tax which is required to be withheld under applicable law upon collection of any dividend, interest or other distribution made with respect to any Security and any proceeds or income from the sale, loan or other transfer of any Security. In the event that Custodian or any Subcustodian is required under applicable law to pay any Tax on behalf of the Fund, Custodian is hereby authorized to withdraw cash from any cash account in the amount required to pay such Tax and to use such cash, or to remit such cash to the appropriate Subcustodian or other withholding agent, for the timely payment of such Tax in the manner required by applicable law. If the aggregate amount of cash in all cash accounts is not sufficient to pay such Tax, Custodian

 

- 7 -


shall promptly notify the Fund of the additional amount of cash (in the appropriate currency) required, and the Fund shall directly deposit such additional amount in the appropriate cash account promptly after receipt of such notice, for use by Custodian as specified herein. In the event that Custodian reasonably believes that Fund is eligible, pursuant to applicable law or to the provisions of any tax treaty, for a reduced rate of, or exemption from, any Tax which is otherwise required to be withheld or paid on behalf of the Fund under any applicable law, Custodian shall, or shall instruct the applicable Subcustodian or withholding agent to, either withhold or pay such Tax at such reduced rate or refrain from withholding or paying such Tax, as appropriate; provided that Custodian shall have received from the Fund all documentary evidence of residence or other qualification for such reduced rate or exemption required to be received under such applicable law or treaty. In the event that Custodian reasonably believes that a reduced rate of, or exemption from, any Tax is obtainable only by means of an application for refund, Custodian and the applicable Subcustodian shall have no responsibility for the accuracy or validity of any forms or documentation provided by the Fund to Custodian hereunder. In the absence of Custodian’s own negligence, willful misfeasance and willful misconduct in discharging its duties as contemplated in this Agreement, the Fund hereby agrees to indemnify and hold harmless Custodian and each Subcustodian in respect of any liability arising from any underwithholding or underpayment of any Tax which results from the inaccuracy or invalidity of any such forms or other documentation, and such obligation to indemnify shall be a continuing obligation of the Fund, its successors and assigns for a period of two years following the termination of this Agreement.

9. (a) For the purpose of settling Securities and foreign exchange transactions, the Fund shall provide Custodian with sufficient immediately available funds for all transactions by such time and date as conditions in the relevant market dictate. As used herein, “sufficient immediately available funds” shall mean either (i) sufficient cash denominated in U.S. dollars to purchase the necessary foreign currency, or (ii) sufficient applicable foreign currency, to settle the transaction. Custodian shall provide the Fund with immediately available funds each day which result from the actual settlement of all sale transactions, based upon advices received by Custodian from Subcustodians, Depositories, and Foreign Depositories. Such funds shall be in U.S. dollars or such other currency as the Fund may specify to Custodian.

(b) Any foreign exchange transaction effected by Custodian in connection with this Agreement may be entered with Custodian or a BNY Affiliate acting as principal or otherwise through customary banking channels. The Fund may, but is not required to, issue a standing Certificate or Instructions with respect to foreign exchange transactions, but Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Fund. The Fund shall bear all risks of investing in Securities or holding cash denominated in a foreign currency.

10. Until such time as Custodian receives a Certificate to the contrary with respect to a particular Security, Custodian may not release the identity of the Fund to an issuer which requests such information pursuant to the Shareholder Communications Act of 1985 for the specific purpose of direct communications between such issuer and shareholder.

 

- 8 -


ARTICLE IV

PURCHASE AND SALE OF SECURITIES;

CREDITS TO ACCOUNT

1. Promptly after each purchase or sale of Securities by the Fund, the Fund shall deliver to Custodian a Certificate or Instructions, or with respect to a purchase or sale of a Security generally required to be settled on the same day the purchase or sale is made, Oral Instructions specifying all information Custodian may reasonably request to settle such purchase or sale. Custodian shall account for all purchases and sales of Securities on the actual settlement date unless otherwise agreed by Fund and Custodian.

2. The Fund understands that when Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously. Notwithstanding any provision in this Agreement to the contrary, settlements, payments and deliveries of Securities may be effected by Custodian or any Subcustodian in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction in which the transaction occurs, including, without limitation, delivery to a purchaser or dealer therefor (or agent) against receipt with the expectation of receiving later payment for such Securities. In the absence of Custodian’s negligence, willful misfeasance and willful misconduct in discharging its duties as contemplated in this Agreement, or its material breach of this Agreement with respect to the delivery of Securities, the Fund assumes responsibility for the risks, including, without limitation, credit risks, involved in connection with such deliveries of Securities.

3. Subject to Article V hereof, Custodian may, as a matter of bookkeeping convenience or by separate agreement with the Fund, credit the Account with the proceeds from the sale, redemption or other disposition of Securities or interest, dividends or other distributions payable on Securities prior to its actual receipt of final payment therefor. All such credits shall be conditional until Custodian’s actual receipt of final payment and may be reversed by Custodian to the extent that final payment is not received. Payment with respect to a transaction will not be “final” until Custodian shall have received immediately available funds which under applicable local law, rule and/or practice are irreversible and not subject to any security interest, levy or other encumbrance, and which are specifically applicable to such transaction.

ARTICLE V

OVERDRAFTS OR INDEBTEDNESS

1. If Custodian should in its sole discretion advance funds on behalf of any Series which results in an overdraft (including, without limitation, any day-light overdraft) because (i) the money held by Custodian in an Account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate, Instructions or Oral Instructions, or (ii) if an overdraft arises in the separate account of a Series for some other reason, including, without limitation, because of a reversal of a conditional credit or the purchase of any currency ((i) and (ii) together an “Overdraft”), or if upon the direction of the Fund, the Fund becomes indebted to Custodian with respect to a Series, including any indebtedness to The Bank of New York Mellon under the Fund’s Cash Management and Related Services Agreement (except a borrowing for investment or for

 

- 9 -


temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of Section 2 of this Article) (the “Indebtedness”), such Overdraft or Indebtedness shall be deemed to be a loan made by Custodian to the Fund for such Series payable on demand and shall bear interest from the date incurred at a rate per annum ordinarily charged by Custodian to its institutional customers, as such rate may be adjusted from time to time. In addition, the Fund hereby agrees that Custodian shall to the maximum extent permitted by law have a continuing lien, security interest, and security entitlement in and to any property, including, without limitation, any investment property or any financial asset, of such Series at any time held by Custodian for the benefit of such Series or in which such Series may have an interest which is then in Custodian’s possession or control or in possession or control of any third party acting in Custodian’s behalf. The Custodian hereby subordinates any such continuing lien, security interest, security entitlement or other encumbrance in and to any investment property, Securities, financial asset or other property of the Series or Fund held by the Custodian (whether obtained by operation of law or contract), to the lien of any bank or other lending or financing institution of whatever nature (“Lender”) from which the Fund or Series borrows money for investment (including through a derivative contract) or for temporary or emergency purposes using Securities held by the Custodian hereunder as collateral for such borrowings, provided however that when assets in excess of the amount of collateral required to be pledged by the Funds to any Lender (“Excess Assets”) are held in the Account(s), the Custodian shall have a priority security interest and right of setoff in such Excess Assets to secure any Overdraft or Indebtedness, provided that Custodian notifies the Lender and the Funds in writing prior to exercising any of its rights against such Excess Assets. Provided further that the Fund authorizes Custodian, in its sole discretion, at any time to charge any such Overdraft against any balance of account standing to such Series’ credit on Custodian’s books, and acknowledges and agrees that with respect to advance of funds made by Custodian to purchase, or to make payment on or against delivery of Securities hereunder, Custodian shall have a continuing security interest in and right of setoff against such Securities and the proceeds thereof, until such time as Custodian is repaid the amount of such advance (the “Purchase Money Security Interest”).

2. If the Fund borrows money from any Lender (including Custodian if the borrowing is pursuant to a separate agreement) for investment or for temporary or emergency purposes using Securities held by Custodian hereunder as collateral for such borrowings, the Fund shall deliver to Custodian a Certificate specifying with respect to each such borrowing: (a) the Series to which such borrowing relates; (b) the name of the Lender, (c) the amount of the borrowing, (d) the time and date, if known, on which the loan is to be entered into, (e) the total amount payable to the Fund on the borrowing date, (f) the Securities to be delivered as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (g) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan and its collateralization is in conformance with the ‘40 Act and the Fund’s prospectus. Custodian shall deliver on the borrowing date specified in a Certificate (i) the specified collateral against payment by the Lender of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate, and (ii) a subordination agreement, if requested by the Lender, subject to acknowledgement of any Purchase Money Security Interest. Custodian may, at the option of the Lender, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the Lender by virtue of any promissory note or loan agreement and notwithstanding Custodian’s possession of the collateral, such rights of the

 

- 10 -


Lender in the collateral shall have priority over the rights of the Custodians therein, subject to Section 1 of this Article. Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this Section. The Fund shall cause all Securities released from collateral status to be returned directly to Custodian, and Custodian shall receive from time to time such return of collateral as may be tendered to it. In the event that the Fund fails to specify in a Certificate the Series, the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by Custodian, Custodian shall not be under any obligation to deliver any Securities.

ARTICLE VI

SALE AND REDEMPTION OF SHARES

1. Whenever the Fund shall sell any shares issued by the Fund (“Shares”) it shall deliver to Custodian a Certificate or Instructions specifying the amount of money and/or Securities to be received by Custodian for the sale of such Shares and specifically allocated to an Account for such Series.

2. Upon receipt of such money, Custodian shall credit such money to an Account in the name of the Series for which such money was received.

3. Except as provided hereinafter, whenever the Fund desires Custodian to make payment out of the money held by Custodian hereunder in connection with a redemption of any Shares, it shall furnish to Custodian (a) a resolution of the Fund’s board directing the Fund’s transfer agent to redeem the Shares, and (b) a Certificate or Instructions specifying the total amount to be paid for such Shares. Custodian shall make payment of such total amount to the transfer agent specified in such Certificate or Instructions out of the money held in an Account of the appropriate Series.

ARTICLE VII

PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

1. Whenever the Fund shall determine to pay a dividend or distribution on Shares it shall furnish to Custodian Instructions or a Certificate setting forth with respect to the Series specified therein the date of the declaration of such dividend or distribution, the total amount payable, and the payment date.

2. Upon the payment date specified in such Instructions or Certificate, Custodian shall pay out of the money held for the account of such Series the total amount payable to the dividend agent of the Fund specified therein.

ARTICLE VIII

CONCERNING CUSTODIAN

1. (a) Except as otherwise expressly provided herein, Custodian shall not be liable for any costs, expenses, damages, liabilities or claims, including reasonable attorneys’ and accountants’ fees (collectively, “Losses”), incurred by or asserted against the Fund, except those Losses arising out of Custodian’s or a BNY Affiliate’s failure to act in good faith in a

 

- 11 -


commercially reasonable manner and without negligence, willful misfeasance or willful misconduct. Custodian shall have no liability whatsoever for the action or inaction of any Depositories or of any Foreign Depositories, except in each case to the extent such action or inaction is a direct result of the Custodian’s failure to exercise commercially reasonable care and fulfill its duties hereunder without negligence, willful misfeasance or willful misconduct. With respect to any Losses incurred by the Fund as a result of the acts or any failures to act by any Subcustodian (other than a BNY Affiliate), Custodian shall take appropriate action to recover such Losses from such Subcustodian; and Custodian’s sole responsibility and liability to the Fund shall be limited to amounts so received from such Subcustodian (exclusive of costs and expenses incurred by Custodian). In no event shall Custodian or the Fund be liable to each other or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising in connection with this Agreement. In the absence of their own negligence, willful misfeasance and willful misconduct in discharging its duties as contemplated in this Agreement, and absent its material breach of this Agreement in respect of the matters enumerated in this paragraph, neither Custodian nor any BNY Affiliate shall be liable: ( i ) for acting in accordance with any Certificate or Oral Instructions actually received by Custodian and reasonably believed by Custodian to be given by an Authorized Person; ( ii ) for holding property in any particular country, including, but not limited to, Losses resulting from nationalization, expropriation or other governmental actions; regulation of the banking or securities industry; exchange or currency controls or restrictions, devaluations or fluctuations; availability of cash or Securities or market conditions which prevent the transfer of property or execution of Securities transactions or affect the value of property; ( iii ) for any Losses due to forces reasonably beyond the control of Custodian, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, or interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; provided that Custodian has taken steps that are commercially reasonable under the circumstances to mitigate such Losses; (iv) for the insolvency of any Subcustodian (other than a BNY Affiliate), any Depository, or any Foreign Depositions, except to the extent such action or inaction is a direct result of the Custodian’s failure to exercise commercially reasonable care and to fulfill its duties hereunder without negligence, willful misfeasance or willful misconduct; or ( v ) for any Losses arising from the applicability of any law or regulation now or hereafter in effect, or from the occurrence of any event, including, without limitation, implementation or adoption of any rules or procedures of a Foreign Depository, which may affect, limit, prevent or impose costs or burdens on, the transferability, convertibility, or availability of any currency or Composite Currency Unit in any country or on the transfer of any Securities, and in no event shall Custodian be obligated to substitute another currency for a currency (including a currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected, limited, or prevented by such law, regulation or event, and to the extent that any such law, regulation or event imposes a cost or charge upon Custodian in relation to the transferability, convertibility, or availability of any cash currency or Composite Currency Unit, such cost or charge shall be for the account of the Fund, and Custodian may treat any account denominated in an affected currency as a group of separate accounts denominated in the relevant component currencies.

(b) Custodian may enter into subcontracts, agreements and understandings with any BNY Affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder. No such subcontract, agreement or understanding

 

- 12 -


shall discharge Custodian from its obligations hereunder and Custodian shall be solely liable for all acts and omissions of such BNY Affiliate.

(c) Absent Custodian’s material breach of this Agreement or failure to meet its standard of care (defined in this Article VIII above), the Fund agrees to indemnify, defend and hold harmless Custodian and its affiliates and their respective directors, trustees, officers, agents and employees from all Losses arising directly from: (a) any action or omission to act by any prior custodian of the Fund; and (b) any action taken or omitted to be taken by Custodian in connection with the provision of services to the Fund pursuant this Agreement. This Section 1(c) shall survive termination of this Agreement for a period of two years.

(d) The Custodian agrees to indemnify the Fund and hold the Fund harmless from and against any and all Losses asserted against the Fund directly by reason of or as a result of Custodian’s material breach of this Agreement or failure to exercise the standard of care (defined in this Article VIII above); provided however, that Custodian shall not indemnify the Fund for those Losses to the extent primarily arising out of the Fund’s own intentional misconduct, bad faith, negligence or material breach of this Agreement. This indemnity shall be a continuing obligation of the Custodian, its successors and assigns for a period of two years following the termination of this Agreement.

(e) Custodian shall maintain in effect arrangements making reasonable provision for (i) periodic back-up of the computer files and data with respect to the Fund; and (ii) emergency use of electronic data processing equipment to provide services under this Agreement.

2. Without limiting the generality of the foregoing, Custodian shall be under no obligation to inquire into, and shall not be liable for:

(a) Any Losses incurred by the Fund or any other person as a result of the receipt or acceptance of fraudulent, forged or invalid Securities, or Securities which are otherwise not freely transferable or deliverable without encumbrance in any relevant market, unless Custodian knew or reasonably should have know such Securities were fraudulent, forged or invalid or not transferable or deliverable on their face;

(b) The validity of the issue of any Securities purchased, sold, or written by or for the Fund, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor;

(c) The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor;

(d) The legality of the declaration or payment of any dividend or distribution by the Fund;

(e) The legality of any borrowing by the Fund;

(f) The legality of any loan of portfolio Securities, nor shall Custodian be under any duty or obligation to see to it that any cash or collateral delivered to it by a broker, dealer or

 

- 13 -


financial institution or held by it at any time as a result of such loan of portfolio Securities is adequate security for the Fund against any loss it might sustain as a result of such loan, which duty or obligation shall be the sole responsibility of the Fund. In addition, Custodian shall be under no duty or obligation to see that any broker, dealer or financial institution to which portfolio Securities of the Fund are lent makes payment to it of any dividends or interest which are payable to or for the account of the Fund during the period of such loan or at the termination of such loan, provided, however that Custodian shall promptly notify the Fund in the event that such dividends or interest are not paid and received when due. For the avoidance of doubt, it is acknowledged and agreed that Custodian shall not lend any portfolio Security of the Fund except pursuant to a Certificate;

(g) Custodian may, with respect solely to questions of law specifically regarding an Account, obtain the advice of reasonably selected, nationally recognized outside counsel (not objectionable to the Fund) and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with the written opinion of such counsel; provided that Custodian may not rely on such advice to act, or omit to act, in a manner inconsistent with the terms of this Agreement.

(h) The sufficiency or value of any amounts of money and/or Securities held in any Special Account in connection with transactions by the Fund; whether any broker, dealer, futures commission merchant or clearing member makes payment to the Fund of any variation margin payment or similar payment which the Fund may be entitled to receive from such broker, dealer, futures commission merchant or clearing member, or whether any payment received by Custodian from any broker, dealer, futures commission merchant or clearing member is the amount the Fund is entitled to receive, or to notify the Fund of Custodian’s receipt or non-receipt of any such payment; or

(i) Whether any Securities at any time delivered to, or held by it or by any Subcustodian, for the account of the Fund and specifically allocated to a Series are such as properly may be held by the Fund or such Series under the provisions of its then current prospectus and statement of additional information, or to ascertain whether any transactions by the Fund, whether or not involving Custodian, are such transactions as may properly be engaged in by the Fund.

3. Custodian shall be under no obligation to take action to collect any amount payable on Securities in default, or if payment is refused after due demand and presentment; provided that Custodian shall notify Fund of such default.

4. Custodian shall have no duty or responsibility to inquire into, make recommendations, supervise, or determine the suitability of any transactions affecting any Account.

5. The Fund shall pay to Custodian the fees, charges and expenses as may be specifically agreed upon from time to time.

6. Subject to Article V hereof, Custodian has the right to debit any cash account for any undisputed amount payable by the Fund in connection with any and all obligations of the Fund to Custodian. In addition, and subject to Article V hereof, to the rights of Custodian under

 

- 14 -


applicable law and other agreements, at any time when the Fund shall not have honored any of its obligations to Custodian, Custodian shall have the right without notice to the Fund to retain or set-off, against such obligations of the Fund, any Securities or cash Custodian or a BNY Affiliate may directly or indirectly hold for the account of the Fund, and any obligations (whether matured or unmatured) that Custodian or a BNY Affiliate may have to the Fund in any currency or Composite Currency Unit. Any such asset of, or obligation to, the Fund may be transferred to Custodian and any BNY Affiliate in order to effect the above rights.

7. The Fund agrees to forward to Custodian a Certificate confirming Oral Instructions by the close of business of the same day (or at such later time as is reasonably practicable under the circumstances) that such Oral Instructions are given to Custodian. The Fund agrees that the fact that such confirming Certificate or Instructions are not received or that a contrary Certificate or contrary Instructions are received by Custodian shall in no way affect the validity or enforceability of transactions authorized by such Oral Instructions and effected by Custodian. If the Fund elects to transmit Instructions through an on-line communications system offered by Custodian, the Fund’s use thereof shall be subject to the Terms and Conditions attached as Appendix I hereto. If Custodian receives Instructions which appear on their face to have been transmitted by an Authorized Person via (i) computer facsimile, email, the Internet or other insecure electronic method, or (ii) secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys, the Fund understands and agrees that Custodian cannot determine the identity of the actual sender of such Instructions and that Custodian shall conclusively presume that such Instructions have been sent by an Authorized Person, and the Fund shall be responsible for ensuring that only Authorized Persons transmit such Instructions to Custodian. If the Fund elects (with Custodian’s prior consent) to transmit Instructions through an on-line communications service owned or operated by a third party, the Fund agrees that Custodian shall not be responsible or liable for the reliability or availability of any such service.

8. The books and records pertaining to the Fund which are in possession of Custodian shall be the property of the Fund. Such books and records shall be prepared and maintained as required by the 1940 Act and the rules thereunder. The Fund, or its authorized representatives, shall have access to such books and records during Custodian’s normal business hours and at such other times as the Fund may reasonably request. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by Custodian to the Fund or its authorized representative. Upon the reasonable request of the Fund, Custodian shall provide in hard copy or on computer disc any records included in any such delivery which are maintained by Custodian on a computer disc, or are similarly maintained.

9. It is understood that Custodian is authorized to supply any information regarding the Accounts which is required by any law, regulation or rule now or hereafter in effect. The Custodian shall provide the Fund with any report obtained by the Custodian on the system of internal accounting control of a Depository, and with such reports on its own system of internal accounting control as the Fund may reasonably request from time to time.

 

- 15 -


ARTICLE IX

TERMINATION

1. The Fund may terminate this Agreement (a) by giving notice to Custodian in writing specifying the date of such termination, which notice shall be not less than ninety (90) days after the date of the giving of such notice or (b) immediately in the event of the appointment of a conservator or receiver for the other party or upon the happening of a like event to the Custodian at the direction of an appropriate agency or court of competent jurisdiction. Custodian may terminate this Agreement by giving notice to the Fund in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice. In the event such notice is given by the Fund, it shall be accompanied by a copy of a resolution of the board of the Fund, certified by the Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company eligible to serve as a custodian of a unit investment trust under the 1940 Act. In the event such notice is given by Custodian, the Fund shall, on or before the termination date, deliver to Custodian a copy of a resolution of the board of the Fund, certified by the Secretary or any Assistant Secretary, designating a successor custodian or custodians. In the absence of such designation by the Fund, Custodian may designate a successor custodian which shall be a bank or trust company eligible to serve as custodian for a unit investment trust under the 1940 Act. Upon the date set forth in such notice this Agreement shall terminate, and Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and money then owned by the Fund and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled and Custodian’s security interest in any and all property of the Series or the Fund shall automatically be released.

2. If a successor custodian is not designated by the Fund or Custodian in accordance with the preceding Section, the Fund shall upon the date specified in the notice of termination of this Agreement and upon the delivery by Custodian of all Securities (other than Securities which cannot be delivered to the Fund) and money then owned by the Fund be deemed to be its own custodian and Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities which cannot be delivered to the Fund to hold such Securities hereunder in accordance with this Agreement, and Custodian’s security interest in any and all property of the Series or the Fund shall automatically be released.

ARTICLE X

MISCELLANEOUS

1. The Fund agrees to furnish to Custodian a new Certificate of Authorized Persons in the event of any change in the then present Authorized Persons. Until such new Certificate is received, Custodian shall be fully protected in acting upon Certificates or Oral Instructions of such present Authorized Persons.

2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to Custodian, shall be sufficiently given if addressed to Custodian and received by it at its offices at One Wall Street, New York, New York 10286, or at such other place as Custodian may from time to time designate in writing.

 

- 16 -


3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if addressed to the Fund and received by it at its offices at 9 West 57 th Street, New York, NY 10019, Attn: ______________, or at such other place as the Fund may from time to time designate in writing.

4. Each and every right granted to either party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of either party to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by either party of any right preclude any other or future exercise thereof or the exercise of any other right.

5. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any exclusive jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties, except that any amendment to the Schedule I hereto need be signed only by the Fund and any amendment to Appendix I hereto need be signed only by Custodian. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other.

6. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Fund and Custodian hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. Each of the Fund and Custodian hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. The Fund and Custodian each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.

7. The Fund hereby acknowledges that Custodian is subject to federal laws, including its Customer Identification Program (CIP) requirements under the USA PATRIOT Act and its implementing regulations, pursuant to which Custodian must obtain, verify and record information that allows Custodian to identify the Fund. Accordingly, prior to opening an Account hereunder Custodian will ask the Fund to provide certain information including, but not limited to, the Fund’s name, physical address, tax identification number and other information that will help Custodian to identify and verify the Fund’s identity such as organizational documents, certificate of good standing, license to do business, or other pertinent identifying information. The Fund agrees that Custodian cannot open an Account hereunder unless and until Custodian verifies the Fund’s identity in accordance with its CIP.

8. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.

 

- 17 -


9. Notwithstanding anything in this Agreement to the contrary, the obligations of the Fund (and Series) entered into in the name or on behalf thereof by any director, trustee, representative, employee or agent thereof are made not individually, but in such capacities, and are not binding upon any of the directors, trustees, shareholders, representatives, employees or agents of the Fund (or Series) personally, but bind only the property of the Fund (or Series), and all persons dealing with the Fund (or Series) must look solely to the property of the Fund (or Series) for the enforcement of any claims against the Fund (or Series). For the avoidance of doubt, it is acknowledged and agreed that the liabilities and obligations of each Series shall be separate and apart from each other Series and under no circumstance shall any Series be liable for the liabilities and obligations of any other Series. For the avoidance of doubt, it is acknowledged and agreed that the agreements made herein by the Fund (or Series) bind and obligate only the Fund (or Series) and its assets and no related, affiliated or controlling person of the Fund (or Series) shall have any liability for the debts or obligations of the Fund (or Series) hereunder.

 

- 18 -


IN WITNESS WHEREOF , the Fund and Custodian have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written.

 

APOLLO SENIOR FLOATING RATE FUND INC.
By:  

 

Title:  

Fund Tax Identification No:

THE BANK OF NEW YORK MELLON
By:  

 

Title:  

 

- 19 -


SCHEDULE I

CERTIFICATE OF AUTHORIZED PERSONS

(The Fund - Oral and Written Instructions)

The undersigned hereby certifies that he/she is the duly elected and acting                                          of Apollo Senior Floating Rate Fund Inc. (the “Fund”), and further certifies that the following officers or employees of the Fund have been duly authorized in conformity with the Fund’s Charter and By-Laws to deliver Certificates and Oral Instructions to The Bank of New York Mellon (“Custodian”) pursuant to the Custody Agreement between the Fund and Custodian dated                      , and that the signatures appearing opposite their names are true and correct:

 

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

 

     

 

     

 

Name       Title       Signature

This Certificate supersedes any certificate of Authorized Persons you may currently have on file.

 

[seal]   By:  

 

    Title:
Date:  


SCHEDULE II

SERIES

None.

Exhibit 2(j)(2)

FORM OF

FOREIGN CUSTODY MANAGER AGREEMENT

AGREEMENT made as of                          , 201_ by and between each entity listed on Annex I attached hereto (the “Fund”) and The Bank of New York Mellon (“BNY”).

W I T N E S S E T H:

WHEREAS , the Fund desires to appoint BNY as a Foreign Custody Manager on the terms and conditions contained herein;

WHEREAS , BNY desires to serve as a Foreign Custody Manager and perform the duties set forth herein on the terms and conditions contained herein;

NOW THEREFORE , in consideration of the mutual promises hereinafter contained in this Agreement, the Fund and BNY hereby agree as follows:

ARTICLE I.

DEFINITIONS

Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings:

1. “Board” shall mean the board of directors or board of trustees, as the case may be, of the Fund.

2. “Eligible Foreign Custodian” shall have the meaning provided in the Rule.

3. “Foreign Assets” shall mean any investments (including foreign currencies) for which the primary market is outside the United States, and any cash or cash equivalents that are reasonably necessary to effect the Fund’s transactions in those investments.

4. “Monitoring System” shall mean a system established by BNY to fulfill the Responsibilities specified in clauses (d) and (e) of Section 1 of Article III of this Agreement.

5. “Responsibilities” shall mean the responsibilities delegated to BNY under the Rule as a Foreign Custody Manager with respect to each Specified Country and each Eligible Foreign Custodian selected by BNY, as such responsibilities are more fully described in Article III of this Agreement.

6. “Rule” shall mean Rule 17f-5 under the Investment Company Act of 1940, as amended.

7. “Specified Country” shall mean each country listed on Schedule I attached hereto and each country, other than the United States, constituting the primary market for a security with respect to which the Fund has given settlement instructions to The Bank of New York Mellon as custodian (the “Custodian”) under its Custody Agreement with the Fund.


ARTICLE II.

BNY AS A FOREIGN CUSTODY MANAGER

1. The Fund on behalf of its Board hereby delegates to BNY with respect to each Specified Country the Responsibilities.

2. BNY accepts the Board’s delegation of Responsibilities with respect to each Specified Country and agrees in performing the Responsibilities as a Foreign Custody Manager to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Fund’s Foreign Assets would exercise.

3. BNY shall provide to the Board at such times as the Board deems reasonable and appropriate based on the circumstances of the Fund’s foreign custody arrangements written reports notifying the Board of the placement of the Fund’s Foreign Assets with a particular Eligible Foreign Custodian within a Specified Country and of any material change in the arrangements (including the contract governing such arrangements) with respect to the Fund’s Foreign Assets with any such Eligible Foreign Custodian.

ARTICLE III.

RESPONSIBILITIES

1. Subject to the provisions of this Agreement, BNY shall with respect to each Specified Country select an Eligible Foreign Custodian. In connection therewith, BNY shall: (a) determine that the Fund’s Foreign Assets held by such Eligible Foreign Custodian will be subject to reasonable care, based on the standards applicable to custodians in the relevant market in which such Eligible Foreign Custodian operates, after considering all factors relevant to the safekeeping of such assets, including, without limitation, those contained in paragraph (c)(1) of the Rule; (b) determine that the Fund’s foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract that BNY has determined will provide reasonable care for the Fund’s Foreign Assets based on the standards specified in paragraph (c)(1) of the Rule; (c) determine that each contract with an Eligible Foreign Custodian shall include the provisions specified in paragraph (c)(2)(i)(A) through (F) of the Rule or, alternatively, in lieu of any or all of such (c)(2)(i)(A) through (F) provisions, such other provisions as BNY determines will provide, in their entirety, the same or a greater level of care and protection for the Fund’s Foreign Assets as such specified provisions, in their entirety; (d) monitor pursuant to the Monitoring System the appropriateness of maintaining the Fund’s Foreign Assets with a particular Eligible Foreign Custodian pursuant to paragraph (c)(1) of the Rule and the performance of the contract governing such arrangement; and (e) advise the Fund whenever BNY determines under the Monitoring System that an arrangement (including, any material change in the contract governing such arrangement) described in preceding clause (d) no longer meets the requirements of the Rule.

2. For purposes of preceding Section 1 of this Article, BNY’s determination of appropriateness shall not include, nor be deemed to include, any evaluation of Country Risks associated with investment in a particular country. For purposes hereof, “Country Risks” shall mean systemic risks of holding assets in a particular country including but not limited to (a) an Eligible Foreign Custodian’s use of any depositories that act as or operate a system or a transnational system for the central handling of securities or any equivalent book-entries; (b)

 

-2-


such country’s financial infrastructure; (c) such country’s prevailing custody and settlement practices; (d) nationalization, expropriation or other governmental actions; (e) regulation of the banking or securities industry; (f) currency controls, restrictions, devaluations or fluctuations; and (g) market conditions which affect the orderly execution of securities transactions or affect the value of securities.

ARTICLE IV.

REPRESENTATIONS

1. The Fund hereby represents that: (a) this Agreement has been duly authorized, executed and delivered by the Fund, constitutes a valid and legally binding obligation of the Fund enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on the Fund prohibits the Fund’s execution or performance of this Agreement; (b) this Agreement has been approved and ratified by the Board at a meeting duly called and at which a quorum was at all times present, and (c) the Board or the Fund’s investment adviser has considered the Country Risks associated with investment in each Specified Country and will have considered such risks prior to any settlement instructions being given to the Custodian with respect to any other country.

2. BNY hereby represents that: (a) BNY is duly organized and existing under the laws of the State of New York, with full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; (b) this Agreement has been duly authorized, executed and delivered by BNY, constitutes a valid and legally binding obligation of BNY enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on BNY prohibits BNY’s execution or performance of this Agreement; and (c) BNY has established the Monitoring System.

ARTICLE V.

LIMITATION OF LIABILITY; FEES

1. BNY shall not be liable for any costs, expenses, damages, liabilities or claims, including reasonable attorneys’ and accountants’ fees, sustained or incurred by, or asserted against, the Fund except to the extent the same arises out of the failure of BNY to exercise the care, prudence and diligence required by Section 2 of Article II hereof. In no event shall either party be liable to the other or any third party for special, indirect or consequential damages, or for lost profits or loss of business, arising in connection with this Agreement.

2. The Fund shall indemnify BNY and hold it harmless from and against any and all costs, expenses, damages, liabilities or claims, including reasonable attorneys’ fees (collectively, “Losses”), sustained or incurred by, or asserted against, BNY by reason or as a result of any action or inaction, or arising out of BNY’s performance of its duties hereunder, provided that the Fund shall not indemnify BNY to the extent any such Losses arise out of BNY’s material breach of this Agreement or failure to exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof. This Section 2 shall survive termination of this Agreement for a period of two years.

3. BNY shall indemnify the Fund and hold it harmless from and against any and all Losses sustained or incurred by, or asserted against, the Fund arising out of BNY’s failure to

 

-3-


exercise the reasonable care, prudence and diligence required by Section 2 of Article II hereof or BNY’s material breach of this Agreement. This indemnity shall be a continuing obligation of BNY, its successors and assigns for a period of two years following the termination of this Agreement.

4. For its services hereunder, the Fund agrees to pay to BNY such compensation and out-of-pocket expenses as shall be mutually agreed.

5. BNY shall have only such duties as are expressly set forth herein. In no event shall BNY be liable for any Country Risks associated with investments in a particular country.

ARTICLE VI.

MISCELLANEOUS

1. This Agreement constitutes the entire agreement between the Fund and BNY as a foreign custody manager, and no provision in the Custody Agreement between the Fund and the Custodian shall affect the duties and obligations of BNY hereunder, nor shall any provision in this Agreement affect the duties or obligations of the Custodian under the Custody Agreement.

2. Any notice or other instrument in writing, authorized or required by this Agreement to be given to BNY, shall be sufficiently given if received by it at its offices at 100 Church Street, 10th Floor, New York, New York 10286, or at such other place as BNY may from time to time designate in writing.

3. Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Fund shall be sufficiently given if received by it at its offices at 9 West 57th Street, 43rd Floor, New York, New York 10019, Attn: Secretary, or at such other place as the Fund may from time to time designate in writing.

4. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided however, that this Agreement shall not be assignable by either party without the written consent of the other.

5. This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof. The Fund and BNY hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder. Each party hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum. The Fund and BNY each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.

 

-4-


6. The parties hereto agree that in performing hereunder, BNY is acting solely on behalf of the Fund and no contractual or service relationship shall be deemed to be established hereby between BNY and any other person by reason of this Agreement.

7. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.

8. This Agreement shall terminate simultaneously with the termination of the Custody Agreement between the Fund and the Custodian, and may otherwise be terminated by either party giving to the other party a notice in writing specifying the date of such termination, which shall be not less than sixty (60) days after the date of such notice if give by the Fund or ninety (90) days after the date of such notice if given by the Custodian.

IN WITNESS WHEREOF , the Fund and BNY have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written.

 

EACH OF THE FUNDS OR SERIES

IDENTIFIED IN ANNEX I

By:

 

 

Title:

 
 

THE BANK OF NEW YORK MELLON

By:

 

 

Title:

 

 

-5-


ANNEX I

 

Fund Name

  

Tax Identification

 

Apollo Senior Floating Rate Fund Inc.

  

 

-6-


SCHEDULE I

Specified Countries

 

-7-

Exhibit 2(k)(1)

FORM OF

SERVICE AGREEMENT

FOR

TRANSFER AGENT SERVICES

TO

APOLLO SENIOR FLOATING RATE FUND INC.


THIS SERVICE AGREEMENT FOR TRANSFER AGENT SERVICES (this “Agreement”) between Apollo Senior Floating Rate Fund Inc., a Maryland corporation (“Client” or the “Fund”), and BNY Mellon Investment Servicing (US) Inc., a Massachusetts corporation (“Agent”), is dated as of                      .

1. Appointment . Client appoints Agent as its transfer agent, registrar and dividend disbursing agent and Agent accepts such appointment in accordance with and subject to the following terms and conditions for all authorized shares of each class of stock listed in Exhibit A hereto (the “Shares”).

2. Term of Agreement . Agent’s appointment hereunder shall commence on the next business day after the later of (i) the date hereof, or (ii) the date Agent has confirmed that Client’s records have been converted to Agent’s system (the “Effective Date”), and shall continue for one year thereafter (the “Initial Term”). Unless either party gives written notice of termination of this Agreement at least 90 days, prior to the end of the Initial Term, this Agreement shall automatically renew for successive additional one-year terms.

3. Duties of Agent . Commencing on the Effective Date, Agent shall provide the services listed in Exhibit B hereto, in the performance of its duties hereunder. Agent shall act in good faith in a commercially reasonable manner and without negligence, willful misfeasance or willful misconduct in performing its duties hereunder.

4. Representations, Warranties and Covenants of Client . Client represents, warrants and covenants to Agent that:

(a) it is a corporation duly organized and validly existing under the laws of its state of incorporation;

(b) the Shares issued and outstanding on the date hereof have been duly authorized, validly issued and are fully paid and are non-assessable; and any Shares to be issued hereafter, when issued, shall have been duly authorized, validly issued and fully paid and will be non-assessable;

(c) the Shares issued and outstanding on the date hereof have been duly registered under the Securities Act of 1933, as amended (the “Securities Act”), and such registration has become effective, or are exempt from such registration; and have been duly registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or are exempt from such registration;

(d) any Shares to be issued hereafter, when issued, shall have been duly registered under the Securities Act, and such registration shall have become effective, or shall be exempt from such registration; and shall have been duly registered under the Exchange Act, or shall be exempt from such registration;

(e) Client has paid or caused to be paid all taxes, if any, that were payable upon or in respect of the original issuance of the Shares issued and outstanding on the date hereof;

 

1


(f) assuming the accuracy of Agent’s representations and warranties and compliance by Agent with its covenants hereunder, the execution and delivery of this Agreement, and the issuance and any subsequent transfer of the Shares in accordance with this Agreement, do not and will not conflict with, violate, or result in a breach of, the terms, conditions or provisions of, or constitute a default under, the charter or the by-laws of Client, any law or regulation, any order or decree of any court or public authority having jurisdiction, or any mortgage, indenture, contract, agreement or undertaking to which Client is a party or by which it is bound. This Agreement has been duly authorized, executed and delivered by Client and, assuming the due execution and delivery by Agent, is enforceable against Client in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting the enforcement of creditors’ rights generally; and

(g) Client agrees to provide to Agent the documentation and notifications listed in Exhibit C hereto according to the requirements set forth therein.

5. Representations, Warranties and Covenants of Agent . Agent represents, warrants and covenants to Client that:

(a) Agent is a limited liability company duly organized and validly existing under the laws of its state of organization;

(b) Agent is, and for the term of this Agreement shall remain, duly registered as a transfer agent under the Exchange Act;

(c) subject to Section 7 hereof, during the term of this Agreement, Agent shall comply with its obligations as a transfer agent under the Exchange Act and the rules and regulations thereunder; and

(d) assuming the accuracy of Client’s representations and warranties and compliance by Client with its covenants hereunder, the execution and delivery of this Agreement, and the performance by Agent of its obligations in accordance with this Agreement, do not and will not conflict with, violate, or result in a breach of, the terms, conditions or provisions of, or constitute a default under, the organizational documents of Agent, any law or regulation, any order or decree of any court or public authority having jurisdiction, or any mortgage, indenture, contract, agreement or undertaking to which Agent is a party or by which it is bound. This Agreement has been duly authorized, executed and delivered by Agent and, assuming the due execution and delivery by Client, is enforceable against Agent in accordance with its terms, except as may be limited by bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting the enforcement of creditors’ rights generally.

6. Scope of Agency .

(a) Agent shall act solely as agent for Client under this Agreement and owes no duties hereunder to any other person. Agent undertakes to perform the duties and only the duties that are specifically set forth in this Agreement (but including any activities

 

2


incidental thereto), and no implied covenants or obligations shall be read into this Agreement against Agent.

(b) In the absence of its own negligence, willful misfeasance and willful misconduct in discharging its duties as contemplated hereunder, and absent its material breach of this Agreement, Agent may rely upon, and shall be protected in acting or refraining from acting in reliance upon, (i) any oral instruction, writing or document from Client reasonably believed by it to be genuine and to have been given, signed or made by the proper person or persons; (ii) any guaranty of signature by an “eligible guarantor institution” that is a member or participant in the Securities Transfer Agents Medallion Program or other comparable “signature guarantee program” or insurance program in addition to, or in substitution for, the foregoing; (iii) any instructions received through Direct Registration System/Profile; or (iv) any law, act, regulation or any interpretation of the same even though such law, act, or regulation may thereafter have been altered, changed, amended or repealed. In addition, Agent is authorized to refuse to make any transfer that it determines in a good faith commercially reasonable manner not to be in good order.

(c) In connection with any question of law arising in the course of Agent performing its duties hereunder, Agent may, with respect solely to questions of law specifically regarding the provision of services to Client, obtain the advice of a reasonably selected, nationally recognized outside counsel (not objectionable to Client) and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with the written opinion of such counsel; provided that Agent may not rely on such advice to act, or omit to act, in a manner inconsistent with the terms of this Agreement. Any instructions given by Client to Agent orally shall be confirmed in writing by Client as soon as reasonably practicable. Absent its own negligence, willful misfeasance or willful misconduct, and absent its material breach of this Agreement, Agent shall not be liable or responsible and shall be fully authorized and protected for acting, or failing to act, in reliance upon any oral instructions that do not conform with the written confirmation received in accordance with this Section 6(d).

7. Indemnification .

(a) Absent Agent’s material breach of this Agreement or failure to meet its Standard of Care (defined in Section 8 below), Client agrees to indemnify, defend and hold harmless Agent and its affiliates and their respective directors, trustees, officers, agents and employees from all costs, expenses, damages, liabilities or claims, including reasonable attorneys’ and accountants’ fees (collectively, “Losses”) arising directly from: (a) any action or omission to act by any prior transfer agent of Client; and (b) any action taken or omitted to be taken by Agent in connection with the provision of services to Client pursuant to this Agreement. This Section 7(a) shall survive termination of this Agreement for a period of two years.

(b) Administrator agrees to indemnify Client and hold Client harmless from and against any and all Losses asserted against Client directly by reason of or as a result of Agent’s material breach of this Agreement or failure to exercise the Standard of Care set forth in this Agreement; provided however, that Agent shall not indemnify Client for those Losses to the extent arising

 

3


primarily out of Client’s own willful misfeasance, willful misconduct or negligence or material breach of this Agreement. This Section 7(b) shall survive termination of this Agreement for a period of two years.

8. Limitation of Liability .

(a) Subject to the terms of this Section 8, Agent shall not be liable for Losses incurred by or asserted against Client, except those Losses arising out of Agent’s or an Agent affiliate’s failure to act in good faith in a commercially reasonable manner and without negligence, willful misfeasance or willful misconduct (“ Standard of Care ”). In no event will Agent or Client be liable to each other for special, indirect, incidental, consequential or punitive losses or damages of any kind whatsoever (including but not limited to lost profits), even if such party has been advised of the possibility of such losses or damages and regardless of the form of action. Agent’s cumulative maximum liability for any and all Losses arising out of or related to this Agreement and regardless of the form of action or legal theory, other than Losses incurred as a result of Agent’s own intentional misconduct, bad faith or fraud, shall not exceed the fees received by Agent for services provided hereunder during the eighteen (18) months immediately prior to the date of the first such Loss; provided that if this Agreement has not been effective for eighteen (18) months, such amount shall be calculated based on the average amount of monthly fees for such period as the Agreement shall have been in effect applied to a eighteen (18) month period.

(b) If any question or dispute arises with respect to the proper interpretation of this Agreement or Agent’s duties hereunder, Agent shall act or refrain from acting in good faith in a commercially reasonable manner and shall not be held liable or responsible for its failure or refusal to act under such circumstances until the question or dispute has been (i) judicially settled (and Agent may, if it deems it advisable, but shall not be obligated to, file a suit in interpleader or for a declaratory judgment for such purpose) by a final judgment of a court of competent jurisdiction that is binding on all parties interested in the matter and is no longer subject to review or appeal, or (ii) settled by a written document in form and substance satisfactory to Agent and executed by Client. For such purpose, Agent may, but shall not be obligated to, require the execution of such a document.

9. Force Majeure . Agent shall not be liable for any failures, delays or losses, arising directly or indirectly out of conditions beyond its reasonable control, including, but not limited to, acts of government, exchange or market ruling, suspension of trading, work stoppages or labor disputes, civil disobedience, riots, rebellions, electrical or mechanical failure, computer hardware or software failure, communications facilities failures including telephone failure, war, terrorism, insurrection, fires, earthquakes, storms, floods, acts of God or similar occurrences; provided that Agent has taken steps that are commercially reasonable under the circumstances to mitigate such failures, delays or losses resulting from such activities.

10. Market Data . Client acknowledges that Agent may provide real-time or delayed quotations and other market information and messages (“Market Data”), which Market Data is provided to Agent by certain national securities exchanges and associations who assert a

 

4


proprietary interest in Market Data disseminated by them but do not guarantee the timeliness, sequence, accuracy or completeness thereof. Client agrees and acknowledges that, absent Agent’s negligence, willful misfeasance or willful misconduct, Agent shall not be liable in any way for any loss or damage arising from or occasioned by any inaccuracy, error, delay in, omission of, or interruption in any Market Data or the transmission thereof.

11. Termination .

(a) Client may terminate this Agreement if (i) Agent defaults on any of its material obligations hereunder and such default remains uncured thirty (30) days after Agent’s receipt of notice of such default from Client; or (ii) any proceeding in bankruptcy, reorganization, receivership or insolvency is commenced by or against Agent, Agent shall become insolvent or shall cease paying its obligations as they become due or makes any assignment for the benefit of its creditors.

(b) Agent may suspend providing services hereunder or terminate this Agreement if (i) Client fails to pay amounts due hereunder or defaults on any of its material obligations hereunder and such failure or default remains uncured thirty (30) days after Client’s receipt of notice of such failure or default from Agent; or (ii) any proceeding in bankruptcy, reorganization, receivership or insolvency is commenced by or against Client, Client shall become insolvent, or shall cease paying its obligations as they become due or makes any assignment for the benefit of its creditors.

(c) Upon termination of this Agreement, all fees earned and expenses incurred by Agent up to and including the date of such termination shall be immediately due and payable to Agent within 30 days following the effective date of such termination.

(d) In addition to the payments required in Section 11(c) above, if this Agreement is terminated by Client for any reason other than pursuant to Section 11(a) above or by Agent pursuant to Section 11(b) above, then Client shall pay a termination fee, due and payable to Agent within 30 days following the effective date of such termination in an amount equal to six (6) times the average monthly invoice charged to Client by Agent hereunder. For purposes of this paragraph, fees for non-recurring events shall be excluded when calculating the average monthly invoice charged to Client by Agent.

(e) Prior to termination of this Agreement, Client shall provide Agent with written instructions as to the disposition of records, as well as any additional documentation reasonably requested by Agent. Except as otherwise expressly provided in this Agreement, the respective rights and duties of Client and Agent under this Agreement shall cease upon termination of this Agreement.

12. Confidentiality .

(a) In connection with Agent’s appointment hereunder, each party shall obtain confidential information related to the other party or its stockholders that is not available to the general public (“Confidential Information”), which Confidential Information shall include the terms and conditions of this Agreement and the exhibits attached hereto. Each party agrees that the Confidential Information shall be held and treated by it, its

 

5


directors, officers, employees, affiliates, agents and subcontractors (collectively, “Representatives”) in confidence and, except as hereinafter provided, shall not be disclosed in any manner whatsoever except as otherwise required by law, regulation, subpoena or governmental authority. Confidential Information shall be used by each party and its Representatives only for the purposes for which provided and shall be disclosed by such party only to those Representatives who have a need to know in order to accomplish the business purpose in connection with which the Confidential Information has been provided. Confidential Information does not include information that (i) is now or subsequently becomes generally available to the public through no fault or breach on the part of the receiving party; (ii) the receiving party had rightfully in its possession (without any action by such party in breach of the duty to keep such information confidential) prior to disclosure to it by the disclosing party; (iii) is independently developed by the receiving party without the use of or reference to any Confidential Information; or (iv) the receiving party rightfully obtains on a non-confidential basis from a source other than the disclosing party who has the right to transfer or disclose it.

(b) In connection with the provision of services under this Agreement, Client may direct Agent to release information, including non-public personal information (“NPPI”), as defined in Title V of the Gramm Leach Bliley Act and the regulations issued thereunder (including but not limited to Regulation P of the Board of Governors of the Federal Reserve) to Client’s agents or other third party service providers, including, without limitation, broker/dealers, custodians and depositories. In addition, Client consents to the release of information, including NPPI, (i) to any of Agent’s Representatives in connection with the services provided hereunder, provided that such NPPI is treated by Agent’s representatives as Confidential Information, and (ii) as required by law, regulation, subpoena or governmental authority. Agent shall not be liable for the release of information in accordance with the foregoing provisions.

13. Lost Stockholders; In-Depth Stockholder Search .

(a) Agent shall conduct such database searches to locate lost stockholders as are required by Rule 17Ad-17 under the Exchange Act, without charge to the stockholder. If a new address is so obtained in a database search for a lost stockholder, Agent shall conduct a verification mailing and update its records for such stockholder accordingly.

(b) Agent may conduct a more in-depth search for the purpose of (i) locating lost stockholders for whom a new address is not obtained in accordance with clause (a) above, (ii) identifying stockholders who are deceased (or locating their next of kin) and (iii) locating stockholders whose accounts contain two or more consecutive uncashed checks, in each case using the services of a locating service provider selected by Agent. Such provider may compensate Agent for processing and other services that Agent provides in connection with such in-depth search.

(c) Upon locating any stockholder (or next of kin) pursuant to clause (b) above, the locating service provider shall clearly identify to such stockholder (or next of kin) all assets held in such stockholder’s account. Such provider shall inform any such located

 

6


stockholders (or next of kin) that they may choose either (i) to contact Agent directly to obtain the assets in such account, at no charge other than any applicable fees to replace lost certificates, if any or (ii) to use the services of such provider for a fee, which may not exceed (A) 10% of the asset value of such stockholder’s property where the registered stockholder is a living person or (B) 20% of the asset value of such stockholder’s property where the registered stockholder is deceased or is not a natural person; provided that in no case shall such fee exceed the maximum statutory fee permitted by the applicable state jurisdiction. If Client selects a locating service provider other than one selected by Agent, then Agent shall not be responsible for the terms of any agreement with such provider and additional fees may apply.

14. Compensation and Expenses .

(a) Commencing on the Effective Date, Client shall compensate Agent for its services hereunder in accordance with the fee schedules listed in Exhibit B hereto.

(b) All amounts owed to Agent hereunder are due within thirty (30) days of the invoice date. Delinquent payments are subject to a late payment charge of 50 basis points (0.50%) per month commencing forty-five (45) days from the invoice date. Client agrees to reimburse Agent for any attorney’s fees and any other costs associated with collecting delinquent payments.

(c) Client shall be charged for certain expenses advanced or incurred by Agent in connection with Agent’s performance of its duties hereunder. Such charges include, but are not limited to, stationery and supplies, such as transfer sheets, dividend checks, envelopes, and paper stock, as well as any disbursements for telephone, mail insurance, electronic document creation and delivery, travel expenses for annual meetings, link-up charges from Automatic Data Processing Inc. and tape charges from The Depository Trust Company. While Agent endeavors to maintain such charges (both internal and external) at competitive rates, these charges will not, in all instances, reflect actual out-of-pocket costs, and in some instances may include reasonable handling charges to cover internal processing and use of Agent’s billing systems.

(d) With respect to any shareholder mailings processed by Agent, Client shall be charged postage as an out-of-pocket expense at postage rates that may not reflect all available or utilized postal discounts, such as presort or NCOA discounts. Client shall, at least one business day prior to mail date, provide immediately available funds sufficient to cover all postage due on such mailing. Any material shareholder mailing schedule changes, including, but not limited to, delays in delivering materials to Agent or changes in a mailing commencement date, may result in additional fees and/or expenses.

(e) Upon expiration or termination of this Agreement, Client shall pay Agent a fee for deconversion services (e.g., providing shareholder lists and files, producing and shipping records, answering successor agent inquiries). This fee shall be based on Agent’s then-current deconversion fee schedule, as previously provided to Client.

 

7


15. Notices . All notices, demands and other communications given pursuant to this Agreement shall be in writing, shall be deemed effective on the date of receipt, and may be sent by overnight delivery service, or by certified or registered mail, return receipt requested to:

 

If to Client:    with an additional copy to:
Apollo Senior Floating Rate Fund Inc.    [additional notice name and address]

9 West 57th Street,

New York, NY 10019

  
Attn:   
If to Agent:    with an additional copy to:

BNY Mellon Investment Servicing (US) Inc.

301 Bellevue Parkway

Wilmington, DE 19809

Attn: President

  

Mellon Investor Services LLC

Newport Office Center VII

480 Washington Blvd.

Jersey City, NJ 07310

Attn: Legal Department

16. Submission to Jurisdiction; Foreign Law .

(a) The parties irrevocably (i) submit to the non-exclusive jurisdiction of any New York State court sitting in New York City or the United States District Court for the Southern District of New York in any action or proceeding arising out of or relating to this Agreement, (ii) waive, to the fullest extent they may effectively do so, any defense based on inconvenient forum, improper venue or lack of jurisdiction to the maintenance of any such action or proceeding, and (iii) waive all right to trial by jury in any action, proceeding or counterclaim arising out of this Agreement or the transactions contemplated hereby.

(b) Agent shall not be required hereunder to comply with the laws or regulations of any country other than the United States of America or any political subdivision thereof. Agent may consult with foreign counsel, at Client’s expense, to resolve any foreign law issues that may arise as a result of Client or any other party being subject to the laws or regulations of any foreign jurisdiction.

17. Miscellaneous .

(a) Amendments . This Agreement may not be amended or modified in any manner except by a written agreement signed by both Client and Agent.

(b) Governing Law . This Agreement shall be governed by, construed and interpreted in accordance with the laws of the State of New York, without regard to principles of conflicts of law.

 

8


(c) Survival of Terms . Sections 7, 8, 13 and 16 hereof shall survive termination of this Agreement and Agent’s appointment hereunder for a period of two years.

(d) Assignment; Delegation . This Agreement shall be binding upon the parties hereto and their respective successors and assigns; provided that this Agreement may not be assigned, or otherwise transferred, in whole or in part, by either party without the prior written consent of the other party, which the other party will not unreasonably withhold, condition or delay. With the written consent of the Fund (such consent not to be unreasonably withheld, conditioned or delayed), the Administrator may assign this Agreement and/or its rights hereunder to any affiliate of the Administrator. Such consent shall not be necessary for the delegation of certain obligations or duties to an affiliate of Administrator provided that Administrator remains fully and unconditionally liable, in accordance with the terms of this Agreement, for all delegated obligations or duties.

(e) Headings . The headings contained in this Agreement are for the purposes of convenience only and are not intended to define or limit the contents of this Agreement.

(f) Severability . Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is found to violate a law, it will be severed from the rest of the Agreement and ignored.

(g) Counterparts . This Agreement may be executed manually in any number of counterparts, each of which such counterparts, when so executed and delivered, shall be deemed an original, and all such counterparts when taken together shall constitute one and the same original instrument.

(h) Entire Agreement . This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supercedes all prior written or oral communications, understandings, and agreements with respect to the subject matter of this Agreement. The parties acknowledge that the Exhibits hereto are an integral part of this Agreement.

(i) Benefits of this Agreement . Nothing in this Agreement shall be construed to give any person or entity other than Agent and Client any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of Agent and Client.

(j) Customer Identification Program . Client acknowledges that Agent is subject to the customer identification program (“Customer Identification Program”) requirements under the USA PATRIOT Act and its implementing regulations, and that Agent must obtain, verify and record information that allows Agent to identify Client. Accordingly, prior to accepting an appointment hereunder, Agent may request information from Client that will help Agent to identify Client, including without limitation Client’s physical address, tax identification number, organizational documents, certificate of good standing, license to do business, or any other information that Agent deems necessary. Client agrees that Agent cannot accept an appointment hereunder unless and until Agent

 

9


verifies Client’s identity in accordance with the Customer Identification Program requirements.

(k) Incentive Compensation Program . The Bank of New York Mellon Corporation (“BNYM”) has adopted an incentive compensation program designed (i) to facilitate clients gaining access to and being provided with explanations about the full range of products and services offered by BNYM and its subsidiaries and (ii) to expand and develop client relationships. This program may lead to the payment of referral fees and/or bonuses to employees of BNYM or its subsidiaries who may have been involved in a referral that resulted in the execution of obtaining of products or services by Client covered by this Agreement or which may be ancillary or supplemental to such products or services. Any such referral fees or bonuses are funded solely out of fees and commissions paid by Client under this Agreement or with respect to such ancillary or supplemental products or services.

(l) Notwithstanding anything in this Agreement to the contrary, the obligations of the Fund entered into in the name or on behalf thereof by any director, trustee, representative, employee or agent thereof are made not individually, but in such capacities, and are not binding upon any of the directors, trustees, shareholders, representatives, employees or agents of the Fund personally, but bind only the property of the Fund, and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund. For the avoidance of doubt, if the Fund shall establish any separate series, it is acknowledged and agreed that the liabilities and obligations of each series shall be separate and apart from each other series and under no circumstance shall any series be liable for the liabilities and obligations of any other series. For the avoidance of doubt, it is acknowledged and agreed that the agreements made herein by the Fund bind and obligate only the Fund and its assets and no related, affiliated or controlling person of the Fund shall have any liability for the debts or obligations of the Fund hereunder.

[The remainder of this page has been intentionally left blank. Signature page follows.]

 

10


IN WITNESS WHEREOF , the parties hereto have executed this Agreement by their duly authorized officers as of the day and year above written.

 

APOLLO SENIOR FLOATING RATE FUND INC.
By:  

 

Name:  
Title:  
BNY MELLON INVESTMENT SERVICING (US) INC.
By:  

 

Name:  
Title:  

 

11

Exhibit 2(k)(2)

FORM OF

ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT

THIS AGREEMENT is made as of                      ,          by and between BNY MELLON INVESTMENT SERVICING (US) INC., a Massachusetts corporation (the “Administrator”), and APOLLO SENIOR FLOATING RATE FUND INC., a Maryland corporation (the “Fund”). Capitalized terms not otherwise defined shall have the meanings set forth in Appendix A.

BACKGROUND

A. The Fund is registered as a closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”).

B. The Fund wishes to retain the Administrator to provide administration and accounting services to the Fund, and the Administrator wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and intending to be legally bound hereby the parties hereto agree as follows:

1. Appointment . The Fund hereby appoints the Administrator as administrator to provide administration and accounting services to the Fund, in accordance with the terms set forth in this Agreement. The Administrator accepts such appointment and agrees to furnish such services. The Administrator shall be under no duty to take any action hereunder on behalf of the Fund except as specifically set forth herein (or incidental thereto) or as may be specifically agreed to by the Administrator and the Fund in a written amendment hereto. The Administrator shall not bear, or otherwise be responsible for, any fees, costs or expenses charged by any third party service providers engaged by the Fund or by any other third party service provider to the Fund.

2. Instructions .

(a) Unless otherwise provided in this Agreement, the Administrator shall act only upon Oral Instructions or Written Instructions.

(b) The Administrator shall be entitled to rely upon any Oral Instruction or Written Instruction it receives from an Authorized Person (or from a person reasonably believed by the Administrator to be an Authorized Person) pursuant to this Agreement. The Administrator may assume that any Oral Instruction or Written Instruction received hereunder is not in any way inconsistent with the provisions of the Fund’s charter and Bylaws or this Agreement or of any vote, resolution or proceeding of the Fund’s Board of Directors, unless and until the Administrator receives Written Instructions to the contrary.

(c) The Fund agrees to forward to the Administrator Written Instructions confirming Oral Instructions so that the Administrator receives the Written Instructions as soon as reasonably practicable. The fact that such confirming Written Instructions are not received by the Administrator or differ from the Oral Instructions shall in no way invalidate the transactions or enforceability of the transactions authorized by the Oral Instructions or the Administrator’s


ability to rely upon such Oral Instructions.

3. Right to Receive Advice .

(a) Advice of the Fund . If the Administrator is in doubt as to any action it should or should not take, the Administrator may request directions or advice, including Oral Instructions or Written Instructions, from the Fund.

(b) Advice of Counsel . If the Administrator shall be in doubt as to any question of law pertaining to any action it should or should not take, the Administrator may request advice from one counsel of its own choosing (who may be counsel for the Fund, the Fund’s investment adviser or the Administrator, at the option of the Administrator).

(c) Conflicting Advice . In the event of a conflict between directions or advice or Oral Instructions or Written Instructions the Administrator receives from the Fund and the advice the Administrator receives from counsel, the Administrator may rely upon and follow the advice of counsel.

(d) No Obligation to Seek Advice . Nothing in this section shall be construed so as to impose an obligation upon the Administrator (i) to seek such directions or advice or Oral Instructions or Written Instructions, or (ii) to act in accordance with such directions or advice.

4. Records; Visits .

(a) The books and records pertaining to the Fund which are in the possession or under the control of the Administrator shall be the property of the Fund. The Fund and Authorized Persons shall have access to such books and records at all times during the Administrator’s normal business hours and otherwise upon the reasonable request of the Fund. Upon the reasonable request of the Fund, copies of any such books and records shall be provided by the Administrator to the Fund or to an Authorized Person, at the Fund’s expense.

(b) The Administrator shall keep the following records:

 

  (i) all books and records with respect to the Fund’s books of account;

 

  (ii) records of the Fund’s securities transactions; and

 

  (iii) all other books and records as the Administrator is required to maintain pursuant to Rule 31a-1 of the 1940 Act in connection with the services provided hereunder.

5. Confidentiality . Each party shall keep confidential any information relating to the other party’s business (“Confidential Information”). Confidential Information shall include (a) any data or information that is competitively sensitive material, and not generally known to the public, including, but not limited to, information about product plans, marketing strategies, finances, operations, customer relationships, customer profiles, customer lists, sales estimates,

 

2


business plans, and internal performance results relating to the past, present or future business activities of the Fund or the Administrator, their respective subsidiaries and affiliated companies; (b) any scientific or technical information, design, process, procedure, formula, or improvement that is commercially valuable and secret in the sense that its confidentiality affords the Fund or the Administrator a competitive advantage over its competitors; (c) all confidential or proprietary concepts, documentation, reports, data, specifications, computer software, source code, object code, flow charts, databases, inventions, know-how, and trade secrets, whether or not patentable or copyrightable; and (d) anything designated as confidential. Notwithstanding the foregoing, information shall not be Confidential Information and shall not be subject to such confidentiality obligations if it: (a) is already known to the receiving party (without any action by such party in breach of the duty to keep such information confidential) at the time it is obtained; (b) is or becomes publicly known or available through no wrongful act of the receiving party; (c) is rightfully received from a third party who, to the best of the receiving party’s knowledge, is not under a duty of confidentiality; (d) is released by the protected party to a third party without restriction; (e) is required to be disclosed by the receiving party pursuant to a court order, subpoena, governmental or regulatory agency request or law; (f) is Fund information provided by the Administrator in connection with an independent third party compliance or other review (i.e. a SAS 70 review), provided that such third party is subject to a confidentiality agreement which requires it to protect Fund Confidential Information in a manner that is substantially similar to the requirements herein; (g) is required for the Administrator to release such information in connection with the provision of services under this Agreement; or (h) has been or is independently developed or obtained by the receiving party. The provisions of this Section 5 shall survive termination of this Agreement for a period of three (3) years after such termination.

6. Liaison with Accountants . The Administrator shall act as liaison with the Fund’s independent public accountants and shall provide account analyses, fiscal year summaries, and other audit-related schedules with respect to the Fund. The Administrator shall take all reasonable action in the performance of its duties under this Agreement to assure that the necessary information is made available to such accountants for the expression of their opinion, as required by the Fund.

7. BNY Mellon System . The Administrator shall retain title to and ownership of any and all of its data bases, computer programs, screen formats, report formats, interactive design techniques, derivative works, inventions, discoveries, patentable or copyrightable matters, concepts, expertise, patents, copyrights, trade secrets, and other related legal rights utilized by the Administrator in connection with the services provided by the Administrator to the Fund. For the avoidance of doubt, it is acknowledged and agreed that any document or record of the Fund created by the Administrator for the Fund in connection with performing the services hereunder shall remain the property of the Fund, which shall not include the Administrator’s internal work papers, checklists and similar work product.

8. Disaster Recovery . The Administrator shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provisions for emergency use of electronic data processing equipment to the extent appropriate equipment is available. In the event of equipment failures, the Administrator shall, at no additional expense to the Fund, take reasonable steps to minimize service interruptions. The Administrator shall have no liability

 

3


with respect to the loss of data or service interruptions caused by equipment failure, provided the Administrator has taken reasonable steps to mitigate such loss or interruption and such loss or interruption is not caused by the Administrator’s own willful misfeasance, willful misconduct or negligence with respect to its duties under this Agreement.

9. Compensation .

(a) As compensation for services rendered by the Administrator during the term of this Agreement, the Fund will pay to the Administrator a fee or fees as may be agreed to in writing by the Fund and the Administrator.

(b) The Fund hereby represents and warrants to the Administrator that (i) the terms of this Agreement and (ii) the fees and expenses associated with this Agreement (including, for example, any waivers or reimbursements thereof) have been disclosed to the Board of Directors of the Fund and that, if required by applicable law, such Board of Directors has approved or will approve the terms of this Agreement, any such fees and expenses or waivers and reimbursements.

10. Standard of Care/Limitation of Liability .

(a) Subject to the terms of this Section 10, the Administrator shall not be liable for any costs, expenses, damages, liabilities or claims, including reasonable attorneys’ and accountants’ fees (collectively, “Losses”), incurred by or asserted against the Fund, except those Losses arising out of the Administrator’s or an Administrator affiliate’s failure to act in good faith in a commercially reasonable manner and without negligence, willful misfeasance or willful misconduct (“ Standard of Care ”).

(b) The Administrator’s cumulative maximum liability for any and all Losses arising out of or related to this Agreement and regardless of the form of action or legal theory, other than Losses incurred as a result of Administrator’s own intentional misconduct, bad faith or fraud, shall not exceed the fees received by the Administrator for services provided hereunder during the eighteen (18) months immediately prior to the date of the first such Loss; provided that if this Agreement has not been effective for eighteen (18) months, such amount shall be calculated based on the average amount of monthly fees for such period as the Agreement shall have been in effect applied to a eighteen (18) month period.

(c) Subject to the Administrator’s compliance with the Standard of Care, the Administrator shall not be liable for damages (including without limitation damages caused by delays, failure, errors, interruption or loss of data) occurring directly or indirectly by reason of circumstances beyond its reasonable control, including without limitation acts of God; action or inaction of civil or military authority; national emergencies; public enemy; war; terrorism; riot; fire; flood; catastrophe; sabotage; epidemics; labor disputes; civil commotion; interruption, loss or malfunction of utilities, transportation, computer or communications capabilities; insurrection; elements of nature; non-performance by a third party; failure of the mails; or functions or

 

4


malfunctions of the internet, firewalls, encryption systems or security devices caused by any of the above.

(d) Provided that the Administrator acts within the Standard of Care, the Administrator shall not be under any duty or obligation to inquire into and shall not be liable for the validity or invalidity, authority or lack thereof, or truthfulness or accuracy or lack thereof, of any instruction, direction, notice, instrument or other information which the Administrator reasonably believes to be genuine. Provided that the Administrator acts within the Standard of Care, the Administrator shall not be liable for any damages that are caused by actions or omissions taken by the Administrator in accordance with Written Instructions. Provided that the Administrator acts within the Standard of Care, the Administrator shall not be liable for any damages arising out of any action or omission to act by any prior service provider of the Fund or for any failure to discover any such error or omission.

(e) Neither the Fund nor the Administrator or their respective affiliates shall be liable to each other for any consequential, incidental, exemplary, punitive, special or indirect damages, whether or not the likelihood of such damages was known by the Fund, the Administrator or their respective affiliates.

(f) Each party shall have a duty to mitigate damages for which the other party may become responsible.

(g) This Section 10 shall survive termination of this Agreement.

11. Indemnification . (a) Absent the Administrator’s material breach of this Agreement or failure to meet its Standard of Care (defined in Section 10 above), the Fund agrees to indemnify, defend and hold harmless the Administrator and its affiliates and their respective directors, trustees, officers, agents and employees from all Losses arising directly from: (a) any action or omission to act by any prior administrator of the Fund; and (b) any action taken or omitted to be taken by the Administrator in connection with the provision of services to the Fund pursuant to this Agreement. This Section 11(a) shall survive termination of this Agreement for a period of two years.

(b) Administrator agrees to indemnify the Fund and hold the Fund harmless from and against any and all Losses asserted against the Fund directly by reason of or as a result of Administrator’s material breach of this Agreement or failure to exercise the Standard of Care set forth in this Agreement; provided however, that Administrator shall not indemnify the Fund for Losses to the extent primarily arising out of the Fund’s own willful misfeasance, willful misconduct or negligence or material breach of this Agreement. This Section 11(b) shall survive termination of this Agreement for a period of two years.

12. Description of Accounting Services on a Continuous Basis . The Administrator will perform the following accounting services with respect to the Fund:

 

  (i) Journalize investment, capital and income and expense activities;

 

5


  (ii) Verify investment buy/sell trade tickets when received from the investment adviser for the Fund (the “Adviser”) and transmit trades to the Fund’s custodian (the “Custodian”) for proper settlement;

 

  (iii) Maintain individual ledgers for investment securities;

 

  (iv) Maintain historical tax lots for each security;

 

  (v) Reconcile cash and investment balances of the Fund with the Custodian, and provide the Adviser with the beginning cash balance available for investment purposes;

 

  (vi) Update the cash availability throughout the day as required by the Adviser;

 

  (vii) Post to and prepare the Statement of Assets and Liabilities and the Statement of Operations;

 

  (viii) Calculate the contractual fees and expenses of the Fund payable to Fund service providers;

 

  (ix) Monitor the expense accruals and notify the Fund’s chief financial officer or his or her delegate of any proposed adjustments;

 

  (x) Control all disbursements and authorize such disbursements upon Written Instructions;

 

  (xi) Calculate capital gains and losses;

 

  (xii) Determine net income;

 

  (xiii) Compute the amount of monthly dividends and available distributions to be paid by the Fund and consult with the Fund’s treasurer, financial officers and accountants regarding the same and perform periodic analysis of available net investment income to assist the Fund’s adviser in managing the Fund’s dividend policy;

 

  (xiv) As mutually agreed upon by the parties hereto, provide reports to lenders of the Fund as are required by loan agreements and provide testing to assist the Fund in complying with such agreements;

 

  (xv) As mutually agreed upon by the parties hereto, provide reports to agencies providing a credit rating to the Fund and provide testing to assist the Fund in complying with ratings criteria and guidelines;

 

  (xvi)

Obtain security market quotes from independent pricing services approved by the Adviser, or if such quotes are unavailable, then obtain such prices from the Adviser, and in either case calculate the market value of the Fund’s investments

 

6


 

pursuant to the Fund’s valuation procedures (attached hereto as Appendix B, as Appendix B may be updated, revised, restated or supplemented by the Fund and delivered to Administrator from time to time); provided, however, that the Administrator shall not under any circumstances be under a duty to independently price or value any of the Fund’s investments itself or to confirm or validate any information or valuation provided by the Adviser or any other pricing source, nor shall the Administrator have any liability relating to inaccuracies or otherwise with respect to such information or valuations;

 

  (xvii) Transmit a copy of the daily portfolio valuation to the Adviser;

 

  (xviii) Compute net asset value and, as mutually agreed upon by the parties hereto, provide net asset value on a daily basis to the Fund’s website (via a technology as mutually agreed) and other locations as directed by client; and

 

  (xix) As appropriate, compute yields, total return, expense ratios, portfolio turnover rate, and, if requested, portfolio average dollar-weighted maturity.

13. Description of Administration Services on a Continuous Basis . The Administrator will perform the following administration services with respect to the Fund:

 

  (i) Prepare quarterly broker security transactions summaries;

 

  (ii) Prepare monthly security transaction listings;

 

  (iii) Supply various normal and customary Fund statistical data as requested on an ongoing basis;

 

  (iv) Prepare for execution and filing the Fund’s Federal and state tax returns;

 

  (v) Compute tax basis provisions for both excise and income tax purposes and calculate tax disclosure information for the Fund’s audited financial statements;

 

  (v) Monitor the Fund’s status as a regulated investment company under Sub-chapter M of the Internal Revenue Code of 1986, as amended and provide periodic testing of the Fund with respect to compliance with the requirements of the 1940 Act and limitations for the Fund contained in the Registration Statement for the Fund as may be mutually agreed upon by the parties hereto and to the extent such information is maintained by the Administrator, including quarterly compliance reporting to the designated officer(s) of the Fund as well as preparation of Board compliance materials;

 

  (vi) Prepare the Fund’s annual and semi-annual shareholder reports and coordinate the printing of such reports and the filing of the same with the SEC on Form N-CSR. Prepare the Fund’s quarterly reports on Form N-Q and coordinate the filing of the same with the SEC. Prepare such other regulatory reports and filings as the parties hereto agree;

 

7


  (vii) Coordinate the audit of each Fund’s financial statements by the Fund’s independent accountants, including the preparation of supporting audit workpapers and other schedules;

 

  (viii) At the direction of the Fund’s chief legal officer, prepare and coordinate with the Fund’s counsel post-effective amendments to the Fund’s registration statement on Form N-2, as needed (but no more than two per calendar year, unless otherwise agreed by the parties), and coordinate with the Fund’s financial printer to file such amendments; and prepare and file semi-annual reports on Form N-SAR, subject to the review of Fund management;

 

  (ix) At the direction of the Fund’s chief legal officer, assist in the preparation of notices of annual meetings (and if requested and agreed to by Administrator, special meetings) of shareholders and proxy materials relating to such meetings;

 

  (x) At the direction of the Fund’s chief legal officer, prepare Form N-PX (provided that such documentation is delivered in the format requested by the Administrator) and coordinate the filing of the same with the SEC;

 

  (xi) Assist in obtaining the fidelity bond and directors’ and officers’/errors and omissions insurance policies for the Fund in accordance with the requirements of Rule 17g-1 and 17d-1(d)(7) under the 1940 Act as such bond and policies are approved by the Fund’s board of directors;

 

  (xii) Monitor the Fund’s assets to assure adequate fidelity bond coverage is maintained;

 

  (xiii) At the direction of the Fund’s chief legal officer, draft agendas (with the final selection of items to be made by the Fund’s counsel), resolutions and materials for quarterly board meetings, and for special meetings of the board as may be requested by the Fund and agreed to by Administrator;

 

  (xiv) Coordinate the preparation, assembly and mailing of quarterly board meeting materials, and materials for special board meetings as may be requested by the Fund and agreed to by Administrator;

 

  (xv) At the direction of the Fund’s chief legal officer, attend quarterly board meetings and draft minutes thereof, and attend and prepare the same for such special board meetings as may be requested by the Fund and agreed to by Administrator;

 

  (xvi) Maintain a calendar that identifies the required SEC filing and board approval deadlines;

 

  (xvii) Maintain copies of the Fund’s agreements and governing documents;

 

  (xviii) Assist the Fund in the handling of SEC examinations, including the production of documents and responses thereto;

 

8


  (xix) If the chief executive officer or chief financial officer of the Fund is required to provide a certification as part of the Fund’s Form N-Q or Form N-CSR filing pursuant to regulations promulgated by the SEC under Section 302 of the Sarbanes-Oxley Act of 2002, the Administrator will provide (to such person or entity as agreed between the Fund and the Administrator) a sub-certification in support of certain matters set forth in the aforementioned certification, such sub-certification to be in such form and relating to such matters as agreed between the Fund and the Administrator from time to time. The Administrator shall be required to provide the sub-certification only during the term of the Agreement and only if it receives such cooperation as it may request to perform its investigations with respect to the sub-certification. For clarity, the sub-certification is not itself a certification under the Sarbanes-Oxley Act of 2002 or under any other regulatory requirement;

 

  (xx) Coordinate services and communications between the Fund and the other service providers of the Fund who are affiliates of Administrator;

 

  (xxi) Provide compliance policies and procedures related to services provided by the Administrator to the extent such services are covered by Rule 38a-1 promulgated under the 1940 Act, and summary procedures thereof and an annual certification letter in respect of such procedures; and

 

  (xxii) Such other regulatory and administrative services as the parties hereto may from time to time agree upon in writing.

All regulatory services are subject to the review and approval of Fund counsel.

14. Duration and Termination .

(a) This Agreement shall be effective on the date first written above and unless terminated pursuant to its terms shall continue for a period of one (1) year (the “Initial Term”).

(b) Upon the expiration of the Initial Term, this Agreement shall automatically renew for successive terms of one (1) year (“Renewal Terms”) each, unless the Fund or the Administrator provides written notice to the other of its intent not to renew. Such notice must be received not less than ninety (90) days prior to the expiration of the Initial Term or the then current Renewal Term.

(c) In the event of termination, all expenses associated with movement of records and materials and conversion thereof to a successor service provider will be borne by the Fund and paid to the Administrator prior to any such conversion.

(d) If a party hereto is guilty of a material failure to perform its duties and obligations hereunder (a “Defaulting Party”) the other party (the “Non-Defaulting Party”) may give written notice thereof to the Defaulting Party, and if such material failure shall not have been remedied within thirty (30) days after such written notice is given of such material failure, then the

 

9


Non-Defaulting Party may terminate this Agreement by giving thirty (30) days written notice of such termination to the Defaulting Party. In all cases, termination by the Non-Defaulting Party shall not constitute a waiver by the Non-Defaulting Party of any other rights it might have under this Agreement or otherwise against the Defaulting Party.

15. Notices . Notices shall be addressed (a) if to the Administrator, at 301 Bellevue Parkway, Wilmington, Delaware 19809, Attention: President (or such other address as the Administrator may inform the Fund in writing); (b) if to the Fund, at 9 West 57th Street, New York, NY 10019, Attention:                      (or such other address as the Fund may inform the Administrator in writing) or (c) if to neither of the foregoing, at such other address as shall have been given by like notice to the sender of any such notice or other communication by the other party. If notice is sent by confirming telegram, cable, telex or facsimile sending device, it shall be deemed to have been given immediately. If notice is sent by first-class mail, it shall be deemed to have been given three days after it has been mailed. If notice is sent by messenger, it shall be deemed to have been given on the day it is delivered.

16. Amendments . This Agreement, or any term thereof, may be changed or waived only by written amendment, signed by the party against whom enforcement of such change or waiver is sought.

17. Assignment . With the written consent of the Fund (such consent not to be unreasonably withheld, conditioned or delayed), the Administrator may assign this Agreement and/or its rights hereunder to any affiliate of the Administrator. Such consent shall not be necessary for the delegation of certain obligations or duties to an affiliate of Administrator provided that Administrator remains fully and unconditionally liable, in accordance with the terms of this Agreement, for all delegated obligations or duties.

18. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19. Miscellaneous .

(a) Notwithstanding anything in this Agreement to the contrary, should the Fund make any modifications to its registration statement or adopt any policies which would materially affect the obligations or responsibilities of the Administrator hereunder without the prior written consent of the Administrator (such consent to not be unreasonably withheld, conditioned or delayed), the Administrator shall not be bound to such changes in its obligations or responsibilities or be required to provide services related thereto. The scope of services to be provided by the Administrator under this Agreement shall not be increased as a result of new or revised regulatory or other requirements that may become applicable with respect to the Fund, unless the parties hereto expressly agree in writing to any such increase.

(b) The Administrator shall at all times maintain insurance coverage adequate for the nature of its administration and accounting services, and shall provide the Funds a memorandum of insurance summarizing its insurance coverage, upon reasonable request.

 

10


(c) During the term of this Agreement and for one year thereafter, neither party shall (with the exceptions noted in the immediately succeeding sentence) knowingly solicit or recruit for employment or hire any of the other party’s employees, and shall cause their affiliates to not (with the exceptions noted in the immediately succeeding sentence) knowingly solicit or recruit for employment or hire any of the other party’s employees. To “knowingly” solicit, recruit or hire within the meaning of this provision does not include, and therefore does not prohibit, solicitation, recruitment or hiring of an other party’s employee if the other party’s employee was identified by such entity solely as a result of the employee’s response to a general advertisement by such entity in a publication of trade or industry interest or other similar general solicitation by such entity.

(d) Except as expressly provided in this Agreement, the Administrator hereby disclaims all representations and warranties, express or implied, made to the Fund or any other person, including, without limitation, any warranties regarding quality, suitability, merchantability, fitness for a particular purpose or otherwise (irrespective of any course of dealing, custom or usage of trade), of any services or any goods provided incidental to services provided under this Agreement. The Administrator disclaims any warranty of title or non-infringement except as otherwise set forth in this Agreement.

(e) This Agreement embodies the entire agreement and understanding between the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, provided that the parties may embody in one or more separate documents their agreement, if any, with respect to delegated duties. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. Notwithstanding any provision hereof, the services of the Administrator are not, nor shall they be construed as constituting, legal advice or the provision of legal services for or on behalf of the Fund or any other person. Neither this Agreement nor the provision of services under this Agreement establishes or is intended to establish an attorney-client relationship between the Fund and the Administrator.

(f) The Fund will provide such information and documentation as the Administrator may reasonably request in connection with services provided by the Administrator to the Fund.

(g) This Agreement shall be deemed to be a contract made in New York and governed by New York law, without regard to principles of conflicts of law.

(h) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as may be explicitly stated in this Agreement, (i) this Agreement is not for the benefit of any other person or entity and (ii) there shall be no third party beneficiaries hereof.

(i) The facsimile signature of any party to this Agreement shall constitute the valid and binding execution hereof by such party.

 

11


(j) To help the U.S. government fight the funding of terrorism and money laundering activities, U.S. Federal law requires each financial institution to obtain, verify, and record certain information that identifies each person who initially opens an account with that financial institution on or after October 1, 2003. Certain of the Administrator’s affiliates are financial institutions, and the Administrator may, as a matter of policy, request (or may have already requested) the Adviser’s and the Fund’s name, address and taxpayer identification number or other government-issued identification number, and, if such party is a natural person, that party’s date of birth. The Administrator may also ask (and may have already asked) for additional identifying information, and the Administrator may take steps (and may have already taken steps) to verify the authenticity and accuracy of these data elements.

(k) Administrator acknowledges and agrees that, subject to the reuse and re-disclosure provisions of Regulation S-P, 17 CFR Part 248.11, it shall not disclose the non-public personal information of shareholders in the Fund obtained under this Agreement, except disclosures in connection with carrying out the services set forth in this Agreement or as otherwise permitted by law or regulation. The Administrator agrees to implement and maintain appropriate security measures to protect “personal information”, as that term is defined in 201 CMR 17.00: Standards For The Protection Of Personal Information Of Residents Of The Commonwealth (“Massachusetts Privacy Regulation”), consistent with the Massachusetts Privacy Regulation and any applicable federal regulations.

(l) Notwithstanding anything in this Agreement to the contrary, the obligations of the Fund entered into in the name or on behalf thereof by any director, trustee, representative, employee or agent thereof are made not individually, but in such capacities, and are not binding upon any of the directors, trustees, shareholders, representatives, employees or agents of the Fund personally, but bind only the property of the Fund, and all persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund. For the avoidance of doubt, if the Fund shall establish any separate series, it is acknowledged and agreed that the liabilities and obligations of each series shall be separate and apart from each other series and under no circumstance shall any series be liable for the liabilities and obligations of any other series. For the avoidance of doubt, it is acknowledged and agreed that the agreements made herein by the Fund bind and obligate only the Fund and its assets and no related, affiliated or controlling person of the Fund shall have any liability for the debts or obligations of the Fund hereunder.

[SIGNATURE PAGE FOLLOWS]

 

12


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

 

BNY MELLON INVESTMENT SERVICING (US) INC.
By:  

 

Name:  
Title:  
APOLLO SENIOR FLOATING RATE FUND INC.
By:  

 

Name:  
Title:  

 

13


APPENDIX A

Definitions

As used in this Agreement:

 

  (a) “1933 Act” means the Securities Act of 1933, as amended.

 

  (b) “1934 Act” means the Securities Exchange Act of 1934, as amended.

 

  (c) “Authorized Person” means any officer of the Fund and any other person duly authorized by the Fund’s Board of Directors to give Oral Instructions or Written Instructions on behalf of the Fund. An Authorized Person’s scope of authority may be limited by setting forth such limitation in a written document signed by both parties hereto.

 

  (d) “Oral Instructions” mean oral instructions received by the Administrator from an Authorized Person or from a person reasonably believed by the Administrator to be an Authorized Person. The Administrator may, in its sole discretion in each separate instance, consider and rely upon instructions it receives from an Authorized Person via electronic mail as Oral Instructions.

 

  (e) “SEC” means the Securities and Exchange Commission.

 

  (f) “Securities Laws” means the 1933 Act, the 1934 Act and the 1940 Act.

 

  (g) “Shares” means the shares Common Stock of the Fund.

 

  (h) “Written Instructions” mean (i) written instructions signed by an Authorized Person (or a person reasonably believed by the Administrator to be an Authorized Person) and received by the Administrator or (ii) Fund trade instructions transmitted (and received by the Administrator) by means of an electronic transaction reporting system access to which requires use of a password or other authorized identifier. The instructions may be delivered electronically (with respect to sub-item (ii) above) or by hand, mail, tested telegram, cable, telex or facsimile sending device.

 

14

Exhibit 2(k)(3)

FORM OF ADMINISTRATIVE SERVICES AND REIMBURSEMENT AGREEMENT

This administrative services and reimbursement agreement (this “Agreement”) is entered into as of                      , 2011 by APOLLO SENIOR FLOATING RATE FUND INC. (the “Fund”), a corporation duly organized and existing under the laws of the State of Maryland, and APOLLO CREDIT MANAGEMENT, LLC, a limited liability company duly organized and existing under the laws of the State of Delaware (the “Administrator”).

WITNESSETH:

WHEREAS, the Fund is a closed-end management investment company registered under the Investment Company Act of 1940;

WHEREAS, the Fund desires to retain the Administrator to provide certain administrative and other services to the Fund and the Fund desires to compensate the Administrator for the use of certain personnel in the manner and on the terms set out in this Agreement; and

WHEREAS, the Administrator also provides investment advisory services to the Fund pursuant to an Investment Advisory and Management Agreement between the Fund and the Administrator, as adviser thereunder (the “Management Agreement”).

NOW, THEREFORE, in consideration of the premises and the covenants contained in this Agreement and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Fund and the Administrator agree as follows.

 

  1. Duties of the Administrator

(a) Employment of the Administrator . The Fund employs the Administrator to act as administrator of the Fund, and to furnish, or arrange for others to furnish, the administrative services, personnel and facilities described below, subject to review by and the overall control of the Board of Directors of the Fund, for the period and on the terms and conditions set out in this Agreement. The Administrator accepts such employment and agrees during such period to render, or arrange for the rendering of, such services and to assume the obligations set out in this Agreement subject to the reimbursement of costs and expenses as set out below. The Administrator and such others shall for all purposes of this Agreement be deemed to be independent contractors and shall, unless otherwise expressly provided or authorized in this Agreement, have no authority to act for or represent the Fund in any way or otherwise be deemed agents of the Fund.

(b) Services . The Administrator shall perform (or delegate, oversee, or arrange for, the performance of) certain administrative and operational services necessary for the operation of the Fund not otherwise provided by other Fund service providers. Without limiting the generality of the foregoing, the Administrator shall provide the Fund with office facilities, equipment, clerical, bookkeeping and record keeping services, compliance and legal services, investor relations assistance, accounting, auditing and financial support and services,


operational services and such other services as the Administrator, subject to review by the Board of Directors of the Fund, shall from time to time determine to be necessary or useful to perform its obligations under this Agreement. The Administrator shall make reports to the Directors of its performance of obligations under this Agreement and furnish advice and recommendations with respect to such other aspects of the business and affairs of the Fund as it shall determine to be desirable; provided that nothing in this Agreement shall be construed to require the Administrator to, and the Administrator shall not, provide any advice or recommendation relating to the securities and other assets that the Fund should purchase, retain or sell or any other investment advisory services to the Fund.

 

  2. Compensation; Allocation of Costs and Expenses

Certain costs and expenses are required by the Management Agreement to be borne by the Fund. In addition, in full consideration of the provision of the services of the Administrator under this Agreement, the Fund shall reimburse the Administrator for the costs and expenses (other than compensation of the employees of the Fund’s investment adviser (in such capacity, the “Investment Manager”) except for the compensation of such personnel hereinafter expressly provided for) incurred by the Administrator, if any, in performing its obligations and providing services and facilities under this Agreement. Such costs and expenses include, but are not limited to direct costs and expenses of administrative and operational services, including, without limitation, the cost of systems needed to meet its obligations under this Agreement (including, but not limited to application licensing, development and maintenance, data licensing and reporting); the cost incurred to implement and monitor ISDA, Prime Brokerage and other agreements governing the Fund’s financing or borrowing facilities; secretarial and other staff; printing, mailing, long distance telephone, copying; the Fund’s allocable portion of the Administrator’s overhead in performing its obligations under this Agreement, including, without limitation, rent and the allocable portion of the cost, if any, of the Fund’s chief compliance officer, chief financial officer, operations officers, chief legal officer, investor relations officers and their respective staffs; and all other expenses incurred by the Fund or the Administrator in connection with administering the Fund’s business.

 

  3. Limitation of Liability of the Administrator; Indemnification

The Administrator will exercise its reasonable judgment and will act in good faith and use reasonable care and in a manner consistent with applicable federal and state laws and regulations in rendering the services it agrees to provide under this Agreement. The Administrator shall not be liable for any error of judgment or mistake of law or for any loss arising out of any act or omission in the administration of the Fund, except for willful misfeasance, bad faith or gross negligence in the performance of its duties, or by reason of reckless disregard of its obligations and duties hereunder. The Fund shall indemnify, defend and protect the Administrator (and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Administrator (collectively, the “Indemnified Parties”) and hold them harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) incurred by the Indemnified Parties in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Fund or its security holders) arising out of or otherwise based upon the performance

 

- 2 -


of any of the Administrator’s duties or obligations under this Agreement or otherwise as an administrator of the Fund. Notwithstanding anything contained herein to the contrary, nothing in this Agreement shall protect or be deemed to protect the Indemnified Parties against or entitle or be deemed to entitle the Indemnified Parties to indemnification in respect of, any liability to the Fund or its security holders to which the Indemnified Parties would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of the Administrator’s duties or by reason of the reckless disregard of the Administrator’s duties and obligations under this Agreement (as the same shall be determined in accordance with the Investment Company Act and any interpretations or guidance by the SEC or its staff thereunder).

 

  4. Activities of the Administrator

The services of the Administrator to the Fund are not deemed to be exclusive, and the Administrator and each affiliate is free to render services to others. For the avoidance of doubt, it is acknowledged and agreed that the Fund may engage such other administrators on such terms and conditions, and for such compensation, as it may determine from time to time notwithstanding anything in this Agreement to the contrary. It is understood that directors, officers, employees and shareholders of the Fund are or may become interested in the Administrator and its affiliates, as directors, officers, members, managers, employees, partners, shareholders or otherwise, and that the Administrator and directors, officers, members, managers, employees, partners and shareholders of the Administrator and its affiliates are or may become similarly interested in the Fund as shareholders or otherwise.

 

  5. Duration and Termination of this Agreement

This Agreement shall remain in force with respect to the Fund for two years from the date of effectiveness, and thereafter continue from year to year, but only so long as such continuance is specifically approved at least annually by (i) the Board of Directors of the Fund and (ii) a majority of those Directors who are not parties to this Agreement or “interested persons” (as defined in the Investment Company Act) of any such party.

This Agreement may be terminated at any time, without the payment of any penalty, by vote of the Directors of the Fund, or by the Administrator, upon 60 days’ written notice to the other party. This Agreement may not be assigned by a party without the consent of the other party.

 

  6. Amendments of this Agreement

This Agreement may be amended pursuant to a written instrument by mutual consent of the parties.

 

  7. Governing Law

This Agreement shall be construed in accordance with the laws of the State of New York, without reference to the conflict of law principles thereof, and the applicable provisions of the Investment Company Act, if any. To the extent that the applicable laws of the State of New York, or any of the provisions in this Agreement, conflict with the applicable provisions of the Investment Company Act, if any, the latter shall control.

 

- 3 -


  8. Entire Agreement

This Agreement contains the entire agreement of the parties and supersedes all prior agreements, understandings and arrangements with respect to the subject matter of this Agreement.

[Signature Page Follows]

 

- 4 -


IN WITNESS WHEREOF , the parties to this Agreement have executed and delivered this Agreement as of the date first above written.

 

     

APOLLO SENIOR FLOATING RATE FUND INC.

  By:  

 

  Name:  
  Title:  
  APOLLO CREDIT MANAGEMENT, LLC
  By:  

 

  Name:  
  Title:  

Exhibit 2(k)(4)

FORM OF TRADEMARK LICENSE AGREEMENT

This TRADEMARK LICENSE AGREEMENT (this “ Agreement ”) is made and effective as of [              , 2011] (the “ Effective Date ”) by and between Apollo Global Management, LLC, a Delaware limited liability company (the “ Licensor ”), and Apollo Senior Floating Rate Fund Inc., a corporation organized under the laws of the State of Maryland (“ Corporation ”) (each a “ party ,” and collectively, the “ parties ”).

RECITALS

WHEREAS, Licensor is the owner of the trade name “APOLLO” (the “ Licensed Mark ”) throughout the world (the “Territory”) for services including investment advisory services.

WHEREAS, Corporation is a newly organized closed-end management company registered as an investment company under the Investment Company Act of 1940 (the “1940 Act”);

WHEREAS, pursuant to that certain investment advisory and management agreement dated as of [DATE] between Apollo Credit Management, LLC, an affiliate of Licensor, and Corporation (the “ Advisory Agreement ”), Corporation has engaged Apollo Credit Management, LLC to act as the investment adviser to the Corporation; and

WHEREAS, Corporation desires to use the Licensed Mark in connection with the operation of its business (the “Corporation Services”), and Licensor is willing to permit Corporation to use the Licensed Mark solely in conjunction with the Corporation Services, subject to the terms and conditions of this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

ARTICLE 1

LICENSE GRANT

1.1 License . Subject to the terms and conditions of this Agreement, Licensor hereby grants to Corporation, and Corporation hereby accepts from Licensor, a personal, worldwide, non-exclusive, royalty-free right and license to use the Licensed Mark solely and exclusively (a) as an element of Corporation’s own company name, (b) in connection with the Corporation, and (c) in conjunction with the Corporation Services. Except as provided above, neither Corporation nor any affiliate, owner, director, officer, employee, or agent thereof shall otherwise use the Licensed Mark or any derivative thereof without the prior express written consent of Licensor in its sole and absolute discretion.

(a) The Licensed Mark shall remain the exclusive property of Licensor and nothing in this Agreement shall give Corporation any right or interest in the Licensed Mark except the license expressly granted in this Agreement.

(b) Corporation shall not use the Licensed Mark or any similar trademarks, service marks or trade names for any services other than the Corporation Services, and Corporation shall not use the Licensed Mark or any similar trademarks, service marks or trade names except pursuant to this Agreement.

1.2 Licensor’s Use . Nothing in this Agreement shall preclude Licensor, its affiliates, or any of their respective successors or assigns from using or permitting other entities to use the Licensed Mark whether or not such entity directly or indirectly competes or conflicts with Corporation’s business in any manner.

ARTICLE 2

OWNERSHIP

2.1 Ownership . Corporation acknowledges and agrees that Licensor is the owner of all right, title, and interest in and to the Licensed Mark, and all such right, title, and interest shall remain with the Licensor. Corporation shall not otherwise contest, dispute, or challenge Licensor’s right, title, and interest in and to the Licensed Mark.

2.2 Goodwill . All goodwill and reputation generated by Corporation’s use of the Licensed Mark shall inure to the benefit of Licensor. Corporation shall not by any act or omission use the Licensed Mark in any manner that


disparages or reflects adversely on Licensor or its business or reputation. Except as expressly provided herein, neither party may use any trademark or service mark of the other party without that party’s prior written consent, which consent shall be given in that party’s sole discretion.

ARTICLE 3

COMPLIANCE

3.1 Quality Control . In order to preserve the inherent value of the Licensed Mark, Corporation agrees to use reasonable efforts to ensure that it maintains the quality of the Corporation’s business and the operation thereof equal to the standards prevailing in the operation of Licensor’s and Corporation’s business as of the date of this Agreement. Corporation further agrees to use the Licensed Mark in accordance with such quality standards as may be reasonably established by Licensor and communicated to Corporation from time to time in writing, or as may be agreed to by Licensor and Corporation from time to time in writing.

(a) From time to time as requested by Licensor, Corporation shall make available to Licensor, at Corporation’s expense, a sample of all materials produced by Corporation showing Corporation’s use of the Licensed Mark in conjunction with the Corporation Services, for the purpose of inspecting the quality of such material.

(b) If Licensor reasonably determines that any material aspect of the Corporation Services or Corporation’s use of the Licensed Mark in conjunction with the Corporation Services does not comply with Licensor’s quality standards or is otherwise in violation of this Agreement, then Licensor shall notify Corporation in writing specifying such deficiencies in reasonable detail, and Corporation must use all reasonable endeavors to correct such deficiencies within a reasonable time and at Corporation’s cost.

3.2 Registration . Corporation shall, at Licensor’s expense, execute any and all documents necessary and sufficient to permit Licensor to register the Licensed Mark in conjunction with the Corporation Services throughout the world.

3.3 Compliance With Laws . Corporation agrees that the business operated by it in connection with the Licensed Mark shall comply with all laws, rules, regulations and requirements of any governmental body in the Territory or elsewhere as may be applicable to the operation, advertising and promotion of the business, and shall notify Licensor of any action that must be taken by Corporation to comply with such law, rules, regulations or requirements.

3.4 Notification of Infringement . Each party shall immediately notify the other party and provide to the other party all relevant background facts upon becoming aware of (i) any registrations of, or applications for registration of, marks in the Territory that do or may conflict with any Licensed Mark, and (ii) any infringements, imitations, or illegal use or misuse of the Licensed Mark in the Territory.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

4.1 Mutual Representations . Each party hereby represents and warrants to the other party as follows:

(a) Due Authorization . Such party is a corporation duly incorporated and in good standing as of the Effective Date, and the execution, delivery and performance of this Agreement by such party have been duly authorized by all necessary action on the part of such party.

(b) Due Execution . This Agreement has been duly executed and delivered by such party and, with due authorization, execution and delivery by the other party, constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms.

(c) No Conflict . Such party’s execution, delivery and performance of this Agreement do not: (i) violate, conflict with or result in the breach of any provision of the charter or by-laws (or similar organizational documents) of such party; (ii) conflict with or violate any law or governmental order applicable to such party or any of its assets, properties or businesses; or (iii) conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to

 

- 2 -


others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of any contract, agreement, lease, sublease, license, permit, franchise or other instrument or arrangement to which it is a party.

ARTICLE 5

TERM AND TERMINATION

5.1 Term . This Agreement shall expire (i) upon expiration or termination of the Advisory Agreement; (ii) immediately if Apollo Credit Management, LLC ceases to serve as investment adviser to Corporation; or (iii) by Licensor or Corporation upon sixty (60) days’ written notice to the other party.

5.2 Upon Termination . Upon expiration or termination of this Agreement, all rights granted to Corporation under this Agreement with respect to the Licensed Mark shall cease, and Corporation shall immediately discontinue use of the Licensed Mark. For [    ] months following termination of this Agreement, Corporation shall specify on all public-facing materials in a prominent place and in prominent typeface that Corporation is no longer operating under the Licensed Mark and is no longer associated with Licensor.

ARTICLE 6

MISCELLANEOUS

6.1 Assignment . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither party may assign, delegate or otherwise transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party. No assignment by either party permitted hereunder shall relieve the applicable party of its obligations under this Agreement. Any assignment by either party in accordance with the terms of this Agreement shall be pursuant to a written assignment agreement in which the assignee expressly assumes the assigning party’s rights and obligations hereunder.

6.2 Independent Contractor . Other than as specifically provided in this Agreement, neither party shall have, or shall represent that it has, any power, right or authority to bind the other party to any obligation or liability, or to assume or create any obligation or liability on behalf of the other party.

6.3 Notices . All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by overnight courier service (with signature required), by facsimile, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses:

 

If to Licensor:    If to Corporation:
Apollo Global Management, LLC    Apollo Senior Floating Rate Fund Inc.
9 West 57 th Street    9 West 57 th Street
New York, NY 10019    New York, NY 10019
Tel. No.: (212) 515-3200    Tel. No.: (212) 515-3200
Attn: Jessica Lomm    Attn: Joseph D. Glatt

6.4 Governing Law . This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the principles of conflicts of law rules. The parties unconditionally and irrevocably consent to the exclusive jurisdiction of the courts located in the State of New York and waive any objection with respect thereto, for the purpose of any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.

6.5 Amendment . This Agreement may not be amended or modified except by an instrument in writing signed by all parties hereto.

6.6 No Waiver . The failure of either party to enforce at any time for any period the provisions of or any rights deriving from this Agreement shall not be construed to be a waiver of such provisions or rights or the right of such party thereafter to enforce such provisions, and no waiver shall be binding unless executed in writing by all parties hereto.

 

- 3 -


6.7 Severability . If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any law or public policy, all other terms and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible.

6.8 Headings . The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

6.9 Counterparts . This Agreement may be executed in one or more counterparts, each of which when executed shall be deemed to be an original instrument and all of which taken together shall constitute one and the same agreement.

6.10 Entire Agreement . This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, between the parties with respect to such subject matter.

6.11 Third party Beneficiaries . Nothing in this Agreement, either express or implied, is intended to or shall confer upon any third party any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.

[Remainder of Page Intentionally Blank]

IN WITNESS WHEREOF, each party has caused this Agreement to be executed as of the Effective Date by its duly authorized officer.

 

LICENSOR:
Apollo Global Management, LLC
By:  

AGM Management, LLC

its Manager

By:  

BRH Holdings GP, Ltd.

its Sole Member

By:  
 

 

Name  
Title:  
CORPORATION:
Apollo Senior Floating Rate Fund Inc.
By:  
 

 

Name:  
Title:  

 

- 4 -

Exhibit 2(l)

[LETTERHEAD OF VENABLE LLP]

February 22, 2011

Apollo Senior Floating Rate Fund Inc.

9 West 57 th Street

43 rd Floor

New York, New York 10019

 

Re:    Registration Statement on Form N-2:
   1933 Act File No.: 333-169726
   1940 Act File No.: 811-22481

Ladies and Gentlemen:

We have served as Maryland counsel to Apollo Senior Floating Rate Fund Inc., a Maryland corporation registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a closed-end management investment company (the “Company”), in connection with certain matters of Maryland law arising out of the registration of shares (the “Shares”) of the Company’s common stock, $0.001 par value per share (the “Common Stock”), to be issued in the initial public offering of the Common Stock, covered by the above-referenced Registration Statement, and all amendments thereto (the “Registration Statement”), filed by the Company with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “1933 Act”), and the 1940 Act.

In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the “Documents”):

1. The Registration Statement and the related form of prospectus included therein, substantially in the form in which it was transmitted to the Commission under the 1933 Act and the 1940 Act;

2. The charter of the Company (the “Charter”), certified by the State Department of Assessments and Taxation of Maryland (the “SDAT”);

3. The Bylaws of the Company, certified as of the date hereof by an officer of the Company;


Apollo Senior Floating Rate Fund Inc.

February 22, 2011

Page 2

 

4. A certificate of the SDAT as to the good standing of the Company, dated as of a recent date;

5. Resolutions (the “Resolutions”) adopted by the Board of Directors of the Company (the “Board of Directors”) relating to the authorization of the filing of the Registration Statement and the sale and issuance of the Shares, certified as of the date hereof by an officer of the Company;

6. A certificate executed by an officer of the Company, dated as of the date hereof; and

7. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein.

In expressing the opinion set forth below, we have assumed the following:

1. Each individual executing any of the Documents, whether on behalf of such individual or any other person, is legally competent to do so.

2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so.

3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms.

4. All Documents submitted to us as originals are authentic. The form and content of all Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise.

 

- 2 -


Apollo Senior Floating Rate Fund Inc.

February 22, 2011

Page 3

 

5. Prior to the issuance of the Shares, the Board of Directors, or a duly authorized committee thereof, will determine the number, and certain terms of issuance, of the Shares in accordance with the Resolutions (the “Corporate Proceedings”). Upon any issuance of the Shares, the total number of shares of Common Stock issued and outstanding will not exceed the total number of shares of Common Stock that the Company is then authorized to issue under the Charter.

Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:

1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT.

2. The issuance of the Shares has been duly authorized and, when and if issued and delivered against payment therefor in accordance with the Resolutions, the Corporate Proceedings and the Registration Statement, the Shares will be validly issued, fully paid and nonassessable.

The foregoing opinion is limited to the substantive laws of the State of Maryland and we do not express any opinion herein concerning any other law. We express no opinion as to compliance with federal or state securities laws, including the securities laws of the State of Maryland, or the 1940 Act. To the extent that any matter as to which our opinion is expressed herein would be governed by the laws of any jurisdiction other than the State of Maryland, we do not express any opinion on such matter.

The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof.

This opinion is being furnished to you for submission to the Commission as an exhibit to the Registration Statement. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act.

 

Very truly yours,

/s/ Venable LLP

 

- 3 -

Exhibit 2(n)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Pre-Effective Amendment No. 5 to Registration Statement No. 333-169726 on Form N-2 of our report dated January 25, 2011, relating to the financial statement of Apollo Senior Floating Rate Fund, Inc. (the “Fund”) as of January 21, 2011 appearing in the Prospectus, which is part of such Registration Statement, and to the references to us under the headings “Independent Registered Public Accounting Firm” in the Prospectus.

/s/ Deloitte & Touche LLP

New York, New York

February 22, 2011

Exhibit 2(p)

CERTIFICATE OF INITIAL SHAREHOLDER

Apollo Credit Management, LLC, the holder of shares of common stock indicated below of Apollo Senior Floating Rate Fund Inc., a Maryland Corporation (the “Fund”), does hereby confirm to the Fund its representation that it purchased such shares for investment purposes, with no present intention of reselling any portion thereof.

 

APOLLO CREDIT MANAGEMENT, LLC
By:  

/s/ Joseph D. Glatt

Name:   Joseph D. Glatt
Title:   Vice President
Date:   January 20, 2011

AGGREGATE PURCHASE

 

Name of Shareholder

  

Name of Fund

   Number of Shares    Amount  

Apollo Credit

Management, LLC

  

Apollo Senior Floating

Rate Fund Inc.

   5,236    $ 100,008   

Exhibit 2(r)(1)

CODE OF ETHICS

FOR

APOLLO SENIOR FLOATING RATE FUND INC.

Section I. Statement of General Fiduciary Principles

This Code of Ethics (the “Code”) has been adopted by Apollo Senior Floating Rate Fund Inc. (the “Fund”) in compliance with Rule 17j-1 under the Investment Company Act of 1940 (the “Act”). The purpose of the Code is to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Fund may abuse their fiduciary duty to the Fund, and otherwise to deal with the types of conflict of interest situations to which Rule 17j-1 is addressed.

The Code is based on the principle that the directors and officers of the Fund, and the managers, members, officers and employees of Apollo Credit Management LLC (the “Adviser”), who provide services to the Fund, owe a fiduciary duty to the Fund to conduct their personal securities transactions in a manner that does not interfere with the Fund’s transactions or otherwise take unfair advantage of their relationship with the Fund. All Access Persons (as defined below) are expected to adhere to this general principle as well as to comply with all of the specific provisions of this Code that are applicable to them. With the exception of the Independent Directors of the Fund, Access Persons of the Fund are also subject to the Adviser’s Code of Ethics as Covered Persons of the Adviser (as defined in the Adviser’s Code of Ethics), and must comply with all applicable provisions of the Adviser’s Code of Ethics in addition to the provisions of this Code. The Fund also has adopted the Stock Trading Policy for Independent Directors, which governs transactions in stock of the Fund by the Independent Directors.

Technical compliance with the Code will not automatically insulate any Access Person from scrutiny of transactions that show a pattern of compromise or abuse of the individual’s fiduciary duty to the Fund. Accordingly, all Access Persons must seek to avoid any actual or potential conflicts between their personal interests and the interests of the Fund and its shareholders. In sum, all Access Persons shall place the interests of the Fund before their own personal interests.

All Access Persons must read and retain this Code.

Section II. Definitions

(A) “Access Person” means an Advisory Person (as defined below) of the Fund or the Adviser. All of the Adviser’s directors, officers and members are presumed to be Access Persons, and all of the Fund’s directors and officers are presumed to be Access Persons.

(B) An “Advisory Person” of the Fund or the Adviser means: (i) any director, officer, member or employee of the Fund or the Adviser, or any company in a Control (as defined below) relationship to the Fund or the Adviser, who in connection with his or her regular functions or duties makes, participates in, or obtains information regarding the purchase or sale of any Covered Security (as defined below) by the Fund, or whose functions relate to the making of any


recommendation with respect to such purchases or sales; and (ii) any natural person in a Control relationship to the Fund or the Adviser, who obtains information concerning recommendations made to the Fund with regard to the purchase or sale of any Covered Security by the Fund.

(C) “Beneficial Ownership” is interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934 (the “1934 Act”) in determining whether a person is a beneficial owner of a security for purposes of Section 16 of the 1934 Act and the rules and regulations thereunder.

(D) “Chief Compliance Officer” means the Chief Compliance Officer of the Adviser.

(E) “Compliance Officer” means the Compliance Officer of the Adviser who has overall responsibility for ensuring the effectiveness of the Adviser’s Code of Ethics.

(F) “Control” shall have the same meaning as that set forth in Section 2(a)(9) of the Act.

(G) “Fund Chief Compliance Officer” means the Chief Compliance Officer of the Fund who has been appointed pursuant to Rule 38a-1 under the Act.

(H) “Covered Security” means a security as defined in Section 2(a)(36) of the Act, which includes: any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Except that “Covered Security” does not include: (i) direct obligations of the Government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (iii) shares issued by open-end investment companies registered under the Act. References to a Covered Security in this Code (e.g., a prohibition or requirement applicable to the purchase or sale of a Covered Security) shall be deemed to refer to and to include any warrant for, option in, or security immediately convertible into that Covered Security, and shall also include any instrument that has an investment return or value that is based, in whole or in part, on that Covered Security (collectively, “Derivatives”). Therefore, except as otherwise specifically provided by this Code: (i) any prohibition or requirement of this Code applicable to the purchase or sale of a Covered Security shall also be applicable to the purchase or sale of a Derivative relating to that Covered Security; and (ii) any prohibition or requirement of this Code applicable to the purchase or sale of a Derivative shall also be applicable to the purchase or sale of a Covered Security relating to that Derivative.

 

- 2 -


(I) “Independent Director” means a director of the Fund who is not an “interested person” of the Fund within the meaning of Section 2(a)(19) of the Act.

(J) “Initial Public Offering” means an offering of securities registered under the Securities Act of 1933 (the “1933 Act”), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the 1934 Act.

(K) “Investment Personnel” of the Fund or the Adviser means: (i) any employee of the Fund or the Adviser (or of any company in a Control relationship to the Fund or the Adviser) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Fund; and (ii) any natural person who controls the Fund or the Adviser and who obtains information concerning recommendations made to the Fund regarding the purchase or sale of securities by the Fund.

(L) “Limited Offering” means an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) thereof or pursuant to Rule 504, Rule 505, or Rule 506 thereunder.

(M) “Purchase or sale of a Covered Security” includes, among other things, the writing of an option to purchase or sell a Covered Security.

(N) “Security Held or to be Acquired” by the Fund means: (i) any Covered Security which, within the most recent 15 days: (A) is or has been held by the Fund; or (B) is being or has been considered by the Fund or the Adviser for purchase by the Fund; and (ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in Section II (N)(i).

(O) “Automatic Investment Plan” means a program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocation. An Automatic Investment Plan includes a dividend reinvestment plan.

Section III. Objective and General Prohibitions

An Access Person may not engage in any investment transaction under circumstances in which the Access Person benefits from or interferes with the purchase or sale of investments by the Fund. In addition, Access Persons may not use information concerning the investments or investment intentions of the Fund, or their ability to influence such investment intentions, for personal gain or in a manner detrimental to the interests of the Fund.

Access Persons may not engage in conduct that is deceitful, fraudulent or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of investments by the Fund. In this regard, Access Persons should recognize that Rule 17j-1 makes it unlawful for any affiliated person of or principal underwriter for the Fund, or any affiliated person of an

 

- 3 -


investment adviser of or principal underwriter for the Fund, in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Fund to:

(i) employ any device, scheme or artifice to defraud the Fund;

(ii) make any untrue statement of a material fact to the Fund or omit to state a material fact necessary in order to make the statements made to the Fund, in light of the circumstances under which they are made, not misleading;

(iii) engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Fund; or

(iv) engage in any manipulative practice with respect to the Fund.

Access Persons should also recognize that a violation of this Code or of Rule 17j-1 may result in the imposition of: (1) sanctions as provided by Section VIII below; or (2) administrative, civil and, in certain cases, criminal fines, sanctions or penalties.

Section IV. Prohibited Transactions

(A) An Access Person may not purchase or otherwise acquire direct or indirect Beneficial Ownership of any Covered Security, and may not sell or otherwise dispose of any Covered Security in which he or she has direct or indirect Beneficial Ownership, if he or she knows or should know at the time of entering into the transaction that: (1) the Fund has purchased or sold the Covered Security within the last 15 calendar days, or is purchasing or selling or intends to purchase or sell the Covered Security in the next 15 calendar days; or (2) the Adviser has within the last 15 calendar days considered purchasing or selling the Covered Security for the Fund or within the next 15 calendar days intend to consider purchasing or selling the Covered Security for the Fund.

(B) Investment Personnel of the Fund or the Adviser must obtain approval before directly or indirectly acquiring Beneficial Ownership in any securities in any Initial Public Offering or in a Limited Offering, or Beneficial Ownership in any Covered Security, other than U.S. government and municipal securities, exchange-traded funds, mutual funds, variable annuities and transactions in fully managed accounts, where he/she has no investment control, influence or discretion. Such approval must be obtained from the Compliance Officer, unless he or she is the person seeking such approval, in which case it must be obtained from the Chief Compliance Officer.

(C) No Access Person shall recommend any transaction in any Covered Securities by the Fund without having disclosed to the Compliance Officer, his or her interest, if any, in such Covered Securities or the issuer thereof, including: the Access Person’s Beneficial Ownership of any Covered Securities of such issuer; any contemplated transaction by the Access Person in such Covered Securities; any position the Access Person has with such issuer; and any present or proposed business relationship between such issuer and the Access Person (or a party in which the Access Person has a significant interest).

 

- 4 -


Section V. Reports by Access Persons

(A) Personal Securities Holdings Reports

Except as otherwise hereinafter provided, all Access Persons shall within 5 days of the date on which they become Access Persons, and thereafter, within 45 days after the end of each calendar year, disclose the title, number of shares and principal amount of all Covered Securities in which they have any direct or indirect Beneficial Ownership as of the date the person became an Access Person, in the case of such person’s initial report, and as of the last day of the year, as to annual reports. A form of such report, which is hereinafter called a “Personal Securities Holdings Report,” shall be provided by the Compliance Officer to any Access Person required to submit such report hereunder. Each Personal Securities Holdings Report must also disclose the name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person or as of the last day of the year, as the case may be. Each Personal Securities Holdings Report shall state the date it is being submitted and all information contained therein shall be current as of a date no more than 45 days prior to the date the person becomes an Access Person in the case of an initial report and prior to the date of submission in the case of an annual report.

(B) Quarterly Transaction Reports

Except as otherwise hereinafter provided, within 30 days after the end of each calendar quarter, each Access Person shall make a written report to the Compliance Officer of all transactions occurring in the quarter in a Covered Security in which he or she had any Beneficial Ownership. A form of such report, which is hereinafter called a “Quarterly Securities Transaction Report,” shall be provided by the Compliance Officer to any Access Person required to submit such report hereunder.

A Quarterly Securities Transaction Report must contain the following information with respect to each reportable transaction:

(1) Date and nature of the transaction (purchase, sale or any other type of acquisition or disposition);

(2) Title, interest rate and maturity date (if applicable), number of shares and principal amount of each Covered Security involved and the price of the Covered Security at which the transaction was effected;

(3) Name of the broker, dealer or bank with or through whom the transaction was effected; and

(4) The date the report is submitted by the Access Person.

(C) Exceptions to Reporting Requirements

 

- 5 -


Independent Directors

Notwithstanding the reporting requirements set forth in this Section V, an Independent Director who would be required to make a report under this Section V solely by reason of being a director of the Fund is not required to file a Personal Securities Holding Report upon becoming a director of the Fund or an annual Personal Securities Holding Report. Such an Independent Director also need not file a Quarterly Securities Transaction Report unless such director knew or, in the ordinary course of fulfilling his or her official duties as a director of the Fund, should have known that during the 15-day period immediately preceding or after the date of the transaction in a Covered Security by the director such Covered Security is or was purchased or sold by the Fund or the Fund or the Adviser considered purchasing or selling such Covered Security.

Access Persons

An Access Person need not make any report under Section V with respect to transactions effected for and Covered Securities held in, any account over which the Access Person has no direct or indirect influence or control.

Covered Persons of the Adviser

Notwithstanding the reporting requirements set forth in this Section V, an Access Person who is a Covered Person of the Adviser need not make a Personal Securities Holdings Report or a Quarterly Transaction Report if all of the information in the report was provided pursuant to the Adviser’s Code of Ethics and would duplicate information required to be recorded pursuant to Rule 204-2(a)(13) under the Investment Advisers Act of 1940, as amended.

A Covered Person of the Adviser need not make a Quarterly Transaction Report with respect to transactions effected pursuant to an Automatic Investment Plan.

(D) Brokerage Accounts and Statements

Access Persons, except Independent Directors and Covered Persons of the Adviser who are separately reporting under the Adviser’s Code of Ethics, shall:

(1) within 30 days after the end of each calendar quarter, identify the name of the broker, dealer or bank with whom the Access Person established an account in which any securities were held during the quarter for the direct or indirect benefit of the Access Person and identify any new account(s) and the date the account(s) were established. This information shall be included on the appropriate Quarterly Securities Transaction Report.

(2) instruct the brokers, dealers or banks with whom they maintain such an account to provide duplicate account statements to the Compliance Officer.

(3) on an annual basis, certify that they have complied with the requirements of (1) and (2) above.

 

- 6 -


(E) Form of Reports

A Quarterly Securities Transaction Report may consist of broker statements or other statements that provide a list of all personal Covered Securities holdings and transactions in the time period covered by the report and contain the information required in a Quarterly Securities Transaction Report.

(F) Responsibility to Report

It is the responsibility of each Access Person to take the initiative to comply with the requirements of this Section V. Any effort by the Fund, or by the Adviser and its affiliates, to facilitate the reporting process does not change or alter that responsibility. A person need not make a report hereunder with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control.

(G) Where to File Reports

All Quarterly Securities Transaction Reports and Personal Securities Holdings Reports must be filed with the Compliance Officer.

(H) Disclaimers

Any report required by this Section V may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect Beneficial Ownership in the Covered Security to which the report relates.

Section VI. Additional Prohibitions

These prohibitions apply only to Access Persons who are not Covered Persons under the Adviser’s Code of Ethics, which addresses similar issues:

(A) Confidentiality of the Fund’s Transactions.

Until disclosed in a public report to shareholders or to the Securities and Exchange Commission in the normal course, all information concerning the securities “being considered for purchase or sale” by the Fund shall be kept confidential by all Access Persons and disclosed by them only on a “need to know” basis. It shall be the responsibility of the Compliance Officer to report any inadequacy found in this regard to the directors of the Fund.

(B) Outside Business Activities and Directorships

Access Persons may not engage in any outside business activities that may give rise to conflicts of interest or jeopardize the integrity or reputation of the Fund. Similarly, no such outside business activities may be inconsistent with the interests of the Fund. All directorships of public or private companies held by Access Persons shall be reported to the Compliance Officer.

 

- 7 -


(C) Gratuities

Access Persons shall not, directly or indirectly, take, accept or receive gifts or other consideration in merchandise, services or otherwise of more than nominal value from any person, firm, corporation, association or other entity other than such person’s employer that does business, or proposes to do business, with the Fund.

Section VII. Certification

(A) Initial and Annual Certification

Access Persons who are directors, managers, officers or employees of the Fund or the Adviser shall be required to certify initially and annually that they have read this Code and that they understand it and recognize that they are subject to it and have complied with its terms. Furthermore, each time an amendment to this Code is made, Access Persons shall be required to submit a written acknowledgement that they have received, read and understand the amendments to this Code and agree to comply with its terms.

(B) Board Review

No less frequently than annually, the Fund must furnish to the Fund’s board of directors, and the board must consider, a written report that: (A) describes any issues arising under this Code or procedures since the last report to the board, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to material violations; and (B) certifies that the Fund has adopted procedures reasonably necessary to prevent Access Persons from violating the Code.

Section VIII. Sanctions

Any violation of this Code shall be subject to the imposition of such sanctions by the Fund as may be deemed appropriate under the circumstances to achieve the purposes of Rule 17j-1 and this Code. The sanctions to be imposed shall be determined by the board of directors, including a majority of the Independent Directors, provided, however, that with respect to violations by persons who are directors, managers, officers or employees of the Adviser (or of a company that controls the Adviser), the sanctions to be imposed shall be determined by the Adviser (or the controlling person thereof). Sanctions may include, but are not limited to, suspension or termination of employment, a letter of censure and/or restitution of an amount equal to the difference between the price paid or received by the Fund and the more advantageous price paid or received by the offending person.

Section IX. Administration and Construction

(A) The administration of this Code shall be the responsibility of the Compliance Officer, except insofar as it relates to the Independent Directors. Administration of this Code with respect to the Independent Directors shall be the responsibility of the Fund Chief Compliance Officer.

 

- 8 -


(B) The duties of the Compliance Officer (or Fund Chief Compliance Officer to the extent set out in Section IX(A)) are as follows:

(1) Continuous maintenance of a current list of the names of all Access Persons with an appropriate description of their title or employment, including a notation of any directorships held by Access Persons who are officers or employees of the Adviser or of any company that Controls the Adviser, and informing all Access Persons of their reporting obligations hereunder;

(2) On an annual basis, providing all Access Persons a copy of this Code and informing such persons of their duties and obligations hereunder including any supplemental training that may be required from time to time;

(3) Maintaining or supervising the maintenance of all records and reports required by this Code;

(4) Preparing listings of all transactions effected by Access Persons who are subject to the requirement to file Quarterly Securities Transaction Reports and reviewing such transactions against a listing of all transactions effected by the Fund;

(5) Issuance either personally or with the assistance of counsel as may be appropriate, of any interpretation of this Code that may appear consistent with the objectives of Rule 17j-1 and this Code;

(6) Conduct such inspections or investigations as shall reasonably be required to detect and report, with recommendations, any apparent violations of this Code to the board of directors of the Fund;

(7) Submission of a report to the board of directors of the Fund, no less frequently than annually, a written report that describes any issues arising under the Code since the last such report, including but not limited to the information described in Section VII (B); and

(C) The Fund shall maintain and cause to be maintained in an easily accessible place at the principal place of business of the Fund, the following records:

(1) A copy of all codes of ethics adopted by the Fund or the Adviser, as the case may be, pursuant to Rule 17j-1 that have been in effect at any time during the past five (5) years;

(2) A record of each violation of such codes of ethics and of any action taken as a result of such violation for at least five (5) years after the end of the fiscal year in which the violation occurs;

(3) A copy of each report made by an Access Person for at least two (2) years after the end of the fiscal year in which the report is made, and for an additional three (3) years in a place that need not be easily accessible;

(4) A copy of each report made by the Fund to the board of directors for two (2) years from the end of the fiscal year of the Fund in which such report is made or issued and for an additional three (3) years in a place that need not be easily accessible;

 

- 9 -


(5) A list of all persons who are, or within the past five (5) years have been, required to make reports pursuant to the Rule and this Code, or who are or were responsible for reviewing such reports;

(6) A copy of each report required by Section VII (B) for at least two (2) years after the end of the fiscal year in which it is made, and for an additional three (3) years in a place that need not be easily accessible; and

(7) A record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Personnel of securities in an Initial Public Offering or Limited Offering for at least five (5) years after the end of the fiscal year in which the approval is granted.

(D) This Code may not be materially amended or modified except in a written form that is approved by majority vote of the Independent Directors.

This Code was adopted and approved by the board of directors of the Fund, including a majority of the Independent Directors, at a meeting on January 19, 2011.

 

- 10 -

Exhibit 2(r)(2)

APOLLO

CODE OF ETHICS

February 2010


1.

   INTRODUCTION      1   

2.

   ADMINISTRATION OF THE CODE OF ETHICS      2   
   2.1      Persons Subject to the Code      2   
   2.2      Consultants, Agents and Temporary Workers      2   
   2.3      Consequences of Violating the Code      3   
   2.4      Questions About the Code      3   
   2.5      Obligation to Report Violations      3   
   2.6      Current Version of the Code      4   
   2.7      Affirmation      4   
   2.8      Annual Compliance Survey      4   
3.    STANDARD OF BUSINESS AND PERSONAL CONDUCT      5   
   3.1      Standard of Business Conduct      5   
   3.2      Standard of Personal Conduct      5   
4.    PRIVACY POLICY      6   
   4.1      Information about the Firm, Clients, Investors, Related Parties, Employees, and Others      6   
   4.2      Prior Employer’s Confidential Information and Trade Secrets      7   
   4.3      Publications, Speeches, and Other Communications Relating to Apollo’s Business      7   
   4.4      Privacy Statement      8   

5.

   INSIDE INFORMATION AND PERSONAL SECURITIES TRANSACTIONS      9   
   5.1      Inside Information      9   
        5.1.1       Definition of Material, Non-Public Information      9   
        5.1.2       Insider Trading and Tipping      11   
        5.1.3       Firm Restricted List      11   
        5.1.4       Policies and Procedures Concerning Protection of Material, Non-Public and Other Confidential Information      12   
         5.1.4.1 Confidential Information Process      12   
         5.1.4.2 Communication with Insiders      13   
         5.1.4.3 Inadvertent or Unauthorized Receipt of Material Non-Public Information      13   


        5.1.5       Limiting Inadvertent Access to Material, Non-Public and Other Confidential Information      14   
        5.1.6       Arrangements with Consultants      14   
        5.1.7       No “Big Boy Letters”      14   
  

5.2

     Personal Securities Transactions      14   
        5.2.1       New Issues      15   
        5.2.2       Employee Related Accounts      15   
        5.2.3       Pre-clearance for Trades other than in Apollo      15   
         5.2.3.1 Approval Guidelines for Trades other than in AAA and AINV Securities      16   
         5.2.3.2 Limitations on Trading and Minimum Holding Period for other than AAA Securities      17   
         5.2.3.3 Private Placements      17   
         5.2.3.4 Private Funds and Alternative Investments      17   
         5.2.3.5 Personal Investment Accounts      17   
        5.2.4       Reporting Requirements      17   
         5.2.4.1 Holdings Reports      17   
         5.2.4.2 New Employee Related Accounts and Closed Accounts      18   
         5.2.4.3 Duplicate Statements      18   
         5.2.4.4 Transactions Reports      19   
   5.3      AP Alternative Assets, L.P. (“AAA”) Employee Trading Policy      20   
        5.3.1       Statutory Framework      20   
        5.3.2       General Rules for all Staff Members      20   
        5.3.3       Statutory Notification Obligation for Persons Obliged to Notify      21   
        5.3.4       Exceptions to the Notification Obligation set out in Section 5.3.3      21   
        5.3.5       Restrictions on Transactions in Units Issued by AAA      21   
   5.4      Policy For Trading in Apollo Investment Corporation (“AINV”) Stock      22   
        5.4.1       Pre-Clearance      22   
        5.4.2       Trading Window      22   
        5.4.3       Short-Term Trading and Reporting Requirements      23   
   5.5      Policy For Trading in Apollo Commercial Real Estate Finance, Inc. (“ARI”) Stock      23   

 

ii


        5.5.1       Pre-Clearance      23   
        5.5.2       Trading Window      23   
        5.5.3       Short-Term Trading and Reporting Requirements      23   

6.

   DEALINGS WITH FUNDS AND INVESTORS      25   
   6.1      General Prohibitions      25   
   6.2      Marketing Materials      25   
        6.2.1       General Requirements      26   
        6.2.2       Antifraud Provisions      26   
        6.2.3       Testimonials      26   
        6.2.4       Past Specific Recommendations      27   
        6.2.5       Preparation of Marketing Materials      27   
        6.2.6       Performance Gross/Net of Fees      28   
        6.2.7       Performance Data      28   
        6.2.8       Past Performance      29   
        6.2.8       Media and Conferences      30   
   6.3      Prohibited Titles and Terms      30   
   6.4      Principal and Cross Trades      30   
        6.4.1       When Cross Trades are Principal Trades      30   
   6.5      Piggy-Backing and Front-Running      31   

7.

   OTHER BUSINESS CONDUCT      32   
   7.1      Assets of the Firm      32   
   7.2      Telephones, E-Mail, Internet and other Electronic Communications Devices      32   
   7.3      Internal Controls, Record Retention and Reporting      33   
   7.4      Limits of your Authority      33   
   7.5      Post-Employment Responsibilities      34   
   7.6      Improper Expenditures and the Foreign Corrupt Practices Act      34   
   7.7      Soft Dollar Arrangements      35   

8.

   MONEY LAUNDERING      36   
   8.1      AML Compliance Officer      36   
   8.2      Money Laundering      36   

 

iii


        8.2.1       Know Your Customer (“KYC”)      36   
   8.3      OFAC Prohibited Assets      37   
   8.4      Suspicious Activity      37   

9.

   OUTSIDE ACTIVITIES, GIFTS, POLITICAL ACTIVITY AND OTHER POTENTIAL CONFLICTS OF INTEREST      39   
   9.1      Making Impartial Business Decisions      39   
   9.2      Potential Conflicts of Interest under Limited Partnership Agreements and Offering Materials      39   
   9.3      Dealing With Portfolio Companies      39   
   9.4      Personal Relationships      39   
   9.5      Outside Business and Memberships      40   
        9.5.1       Pursuing Firm Business or Investment Opportunities      40   
        9.5.2       Outside Employment      40   
        9.5.3       Memberships      41   
        9.5.4       Government Positions      41   
   9.6      Gifts      41   
   9.7      Political Activity and Political Contributions      42   
   9.8      Political Contributions of Portfolio Companies      42   
   9.9      Policy for Solicitation of Campaign Contributions      42   
        9.9.1       General Solicitation Policy      42   
        9.9.2       Definitions      42   
        9.9.3       Avoiding Coercion and the Appearance of Coercion      43   
        9.9.4       Use of Firm Name and Resources      43   
        9.9.5       Reimbursement of Contributions      43   
        9.9.6       Firm Sponsored Fundraising Events      44   
   9.10      Solicitation of Potential Investors      44   
   9.11      Donations to Charities Suggested by Investors      44   

10.

   NOTICE REQUIREMENTS      45   
   10.1      Ownership Interest in Registered Securities      45   
   10.2      Section 13 Reportable Company      45   
   10.3      Board Membership      45   
   10.4      Complaints      45   

 

iv


   10.5      Proxies      45   

11.

   BUSINESS CONTINUITY PLAN      46   

12.

   ANTI-BRIBERY POLICY AND PROCEDURES      46   
   12.1      Overview of the Foreign Corrupt Practices Act (FCPS)      46   
        12.1.1       Anti-Bribery Provision      46   
         12.1.1.1 Restrictions on Payment to Third Parties      47   
        12.1.2.       Accounting Provisions      47   
         12.1.2.1 Accurate Records      47   
         12.1.2.2 Restrictions on Reimbursement and Use of Cash      48   
         12.1.2.3 Covered Officials      48   
         12.1.2.4 State-Owned Entities      48   
   12.2      Payments, Recordkeeping and Reimbursement      49   
        12.2.1       Payments That May Be Made in the Course of Apollo Business      49   
   12.3      Permissible Payment, Gifts, Travel, Entertainment and Education Expenses Involving Covered Officials      49   
        12.3.1       Types of Prohibited Payments, Gifts, Travel, Entertainment and Educational Expenses for Covered Officials      49   
        12.3.2       Types of Permitted Payments, Gifts, Travel, Entertainment and Educational Expenses for Covered Officials      50   
        12.3.3       Facilitating Payments      50   
   12.4      Contracts with Third Party Agents and Consultants (“Intermediaries”)      51   
        12.4.1       Covered Intermediaries      51   
        12.4.2       Due Diligence Required in Order to Engage an Intermediary      52   
        12.4.3       Provisions Required to be Included in Contracts with Intermediaries      52   
   12.5      Procedures for Gifts, Travel and Entertainment Involving Covered Officials      53   
        12.5.1       Entertainment      53   
   12.6      Mergers, Acquisitions and Joint Ventures      54   

 

v


  1. INTRODUCTION

Our integrity and reputation depend on our ability to do the right thing. Apollo is committed to promoting an organizational culture that encourages ethical conduct and compliance with the law. As used in this Code, “ Apollo ” or the “ Firm ” refers to Apollo Management, L.P., Apollo Capital Management, L.P., Apollo Value Management, L.P., Apollo Investment Management, L.P., Apollo Commodities Management, L.P and all their affiliated entities, but does not refer to any portfolio company.

The Apollo Code of Ethics (the “ Code ”) describes legal and ethical responsibilities that all Apollo partners, employees, members, owners, principals, directors and officers and, where applicable, consultants are expected to uphold (collectively “ Covered Persons ”). It is a guide that is intended to alert Covered Persons to significant issues that may arise. However, it is not a summary of all laws or policies that apply to Apollo’s business, nor can it serve as a substitute for good judgment. The Code is based on our fundamental understanding that no one at Apollo should ever sacrifice integrity — or give the impression that they have — even if they think it would help the Firm’s business.

Each of us is accountable for our actions, and each of us is responsible for knowing and abiding by the policies that apply to us. You can look to this Code to guide your decisions in a variety of circumstances. However, no rulebook can anticipate every situation. Ultimately, the personal integrity, honesty and conduct of every person associated with Apollo defines the character and reputation of our Firm. The good reputation of the Firm and those associated with it is critical to the success of Apollo.

Never underestimate the importance of your own personal and ethical conduct to the business and success of Apollo.


  2. ADMINISTRATION OF THE CODE OF ETHICS

The Code sets forth certain minimum expectations that Apollo has for you. You are expected to conduct the Firm’s business in full compliance with both the letter and the spirit of the law, the Code, and any other policies and procedures that may be applicable to you.

The Code is intended to provide general guidance regarding your conduct as a Covered Person. The Code is not an exhaustive consideration of all policies and procedures that may be applicable to you, and you are responsible for knowing which policies and procedures (whether or not listed here) apply to you, and for understanding and complying with them.

The Firm will take reasonable steps to ensure that the Code is followed, including monitoring and auditing to confirm compliance and to detect any illegal activity. The Firm has designated the Chief Compliance Officer who has overall responsibility for ensuring the effectiveness of the Code. John Suydam has been designated as the Chief Compliance Officer and he has delegated responsibility for the Code to the Compliance Officer, Cindy Michel.

In our capacity as investment managers to various funds, we act as fiduciaries and thus owe a series of duties to these funds and their investors, including a general duty to act at all times in their best interest and avoid actual and apparent conflicts of interest. In addition, we have registered Apollo Management, L.P., Apollo Capital Management, L.P., Apollo Investment Management, L.P., Apollo Commodities Management, L.P., Apollo Value Management, L.P. and Apollo Global Real Estate Management, L.P. as investment advisers with the U.S. Securities and Exchange Commission (“ SEC ”), and as such we must comply with the requirements set forth in the Investment Advisers Act of 1940, as amended (the “ Advisers Act ”), and the rules and regulations promulgated thereunder. This Code has been adopted in compliance with Rule 204A-1 under the Advisers Act. In addition to providing general guidance regarding your conduct as an Apollo Covered Person, this Code, together with Apollo’s Supervisory Procedures Manual, is intended to set forth the relevant requirements that we must follow as fiduciaries and registered investment advisers.

The Firm may provide required training for Covered Persons covering some of the policies in this Code. Additionally, as contemplated by Advisers Act Rule 206(4)-7, Apollo intends to periodically review the adequacy of the policies and procedures described herein and the effectiveness of their implementation.

The Code does not create any rights to continued employment, is not an employment contract and does not result in a partnership between you and Apollo.

 

  2.1 Persons Subject to the Code

The Code applies to all Covered Persons, but does not cover limited partners. The provisions of the Code described in Section 7.5 also apply to former employees of, and other persons formerly associated with, the Firm.

 

  2.2 Consultants, Agents and Temporary Workers

Certain consultants, agents and temporary workers are expected to comply with the Code.


Specific arrangements with such persons will vary depending on their relationship to the Firm. Consult the Compliance Officer if you have questions about your obligations or those of others.

 

  2.3 Consequences of Violating the Code

Compliance with the Code and with other policies and procedures applicable to you is a term and condition of your employment by Apollo. Violating any laws that relate to the operation of our business, engaging in any other criminal conduct or failing to take reasonable steps to prevent or detect criminal conduct, insensitivity to, disregard of, or lack of compliance with the policies and procedures set forth in the Code, lack of adherence to other applicable policies and procedures of the Firm, or failure to cooperate as directed by the Firm with an internal or external investigation, may result in corrective action, up to and including immediate termination of employment. The Firm will take all reasonable actions to enforce the Code. In cases where a violation of the Code could cause the Firm irreparable harm, it may seek injunctive relief in addition to monetary damages.

 

  2.4 Questions About the Code

The Firm expects you to be at all times thoroughly familiar with the policies and procedures of the Firm, including those outlined herein. Whenever there is a question as to the propriety of a particular course of conduct or the interpretation of the Firm’s policies and procedures outlined herein, you should consult the Firm’s Compliance Officer.

 

  2.5 Obligation to Report Violations

Apollo is committed to exercising due diligence to prevent and detect criminal conduct, and to promoting an organizational culture that encourages ethical conduct and commitment to compliance with the law. This Code and the policies of the Firm are intended to be designed, implemented and enforced so that they are effective in preventing and detecting criminal conduct and other violations of the Code and the Firm’s policies and procedures. Each Covered Person is essential in assisting the Firm in complying with these policies and procedures.

You must promptly report to the Compliance Officer any known or suspected violation of the Code or any applicable law or regulation, whether the suspected violation involves you or another person subject to the Code.

For purposes of the Code, Apollo’s “ clients ” refers to the funds that it manages and any other person on whose behalf Apollo provides advisory services (e.g., separate accounts); “ investors ” refers to the persons or entities that invest in the Firm’s clients; and “ related parties ” refers to Apollo and its direct or indirect affiliates (excluding portfolio companies).

You must immediately report to the Compliance Officer any misdemeanor (other than a minor traffic violation), criminal charge, or arrest involving you personally, whether it relates to the business of the Firm or not. For a more detailed discussion of what should be reported, see Appendix 2.5.

 

3


  2.6 Current Version of the Code

A copy of the Code will be distributed to each Covered Person, when he or she becomes a Covered Person. The Code may be amended from time to time. All amendments are considered part of this Code. The Firm expects Covered Persons to be at all times thoroughly familiar with the investment and ethical policies and procedures of the Firm, including, without limitation, the Firm’s policies and procedures set forth herein. It is your responsibility to review the Code from time to time to ensure that you are in compliance.

 

  2.7 Affirmation

You are required to affirm, in writing, that you have read and understand the Code, that you will comply with it and that you have not violated the Code or any applicable laws or rules. This affirmation is required of all Covered Persons when they become Covered Persons. In addition, all Covered Persons will be required at least annually to re-affirm in writing their understanding of and compliance with the then-current Code. Each Covered Person must notify the Compliance Officer immediately if he or she becomes aware of information that would result in a change in any of this information. A sample annual certification is included at Appendix 2.7.

 

  2.8 Annual Compliance Survey

All Covered Persons are required to complete a compliance survey on an annual basis.

 

4


  3. STANDARD OF BUSINESS AND PERSONAL CONDUCT

 

  3.1 Standard of Business Conduct

It is Apollo’s policy to adhere to the highest legal and ethical standards in the conduct of its business. All Covered Persons must adhere to this same standard of conduct which requires, among other things:

 

   

Complying with all applicable laws and regulations, including federal securities laws;

 

   

Being mindful of the Firm’s fiduciary duties at all times;

 

   

Appropriately managing actual and potential conflicts of interests;

 

   

Refraining from entering into transactions, including personal securities transactions, that are inconsistent with client interests; and

 

   

Promptly reporting violations of this Code.

 

  3.2 Standard of Personal Conduct

The personal conduct of every person associated with Apollo reflects on the reputation of the Firm. The good reputation of the Firm and those associated with it is critical to the success of Apollo. It is the Firm’s policy that all Covered Persons adhere to highest standards of legal and ethical behavior in their personal conduct and other dealings both inside and outside of the Firm.


  4. PRIVACY POLICY

We are all responsible for safeguarding confidential information, whether it is information entrusted to us by companies in which we invest, prospective portfolio companies, clients, investors or related parties, information regarding Apollo’s businesses and activities, or information about other Covered Persons.

 

  4.1 Information about the Firm, Clients, Investors, Related Parties, Employees, and Others

You may have access to confidential information related to the Firm’s business. Information related to the Firm’s business includes information about the Firm, as well as information related to the Firm’s portfolio companies, prospective portfolio companies, investments, clients, investors, related parties, independent contractors and other Covered Persons. You may also have access to confidential information about multiple competitors in an industry.

You may not, either during your period of service to the Firm or thereafter, directly or indirectly use or disclose to anyone any such confidential information, except as permitted by the Code and other policies applicable to you. It is impermissible to share confidential information obtained from a portfolio company with anyone outside of the Firm, including another portfolio company, except when a party has signed a confidentiality agreement.

The following are examples of confidential information:

 

   

Information about actual or potential investments, clients or investors;

 

   

Marketing plans or strategies of the Firm, clients or portfolio companies;

 

   

Financial information concerning the Firm, clients, related parties, portfolio companies, or investors;

 

   

Research and development projects of the Firm, clients, related parties, or portfolio companies;

 

   

Personnel information of the Firm, clients, related parties, or portfolio companies;

 

   

Reports or analyses prepared by the Firm, clients, related parties, or portfolio companies based on confidential information; and

 

   

Information subject to written confidentiality agreements between the Firm, its clients, investors, related parties, portfolio companies and third parties.

You should observe the following principles when dealing with information relating to the Firm’s business:

 

   

Assume that all information that you have about the Firm and its business, or about its past, present, or prospective clients, investors, portfolio companies or related parties, is confidential, unless the contrary is clear.


   

Treat all personal information about individuals as confidential.

 

   

Before sharing confidential information with others in the Firm, be sure that you are permitted to do so. If you are permitted to share confidential information, ensure that the recipient knows that the information is confidential and has been instructed about restrictions on further use and dissemination.

 

   

Do not disclose confidential information to anyone outside the Firm unless you are authorized to do so. Where such disclosure is authorized, a confidentiality, non-disclosure or privacy agreement may be required; consult with a member of Legal.

 

   

Comment or provide information on matters related to the Firm’s business and its clients, investors and related parties only if it is part of your job function or you are otherwise authorized to do so.

 

   

Protect confidential information when communicating electronically — for instance, by e-mail or through the internet.

 

   

Remember that all forms of communication are covered, including written, oral, telephonic, and electronic communications such as internet chatrooms, e-mail, Bloomberg messaging and instant messaging.

 

   

Consult a member of Legal if you have any questions about whether information can be shared.

 

   

In situations where confidential information has the potential to affect the market price of securities of any company, you should consult the inside information policy in Section 5 hereof.

 

  4.2 Prior Employer’s Confidential Information and Trade Secrets

Do not disclose to Apollo, or use during your employment at Apollo, any confidential or proprietary information or trade secret of a prior employer, unless the information or trade secret is then public information through no action of your own or unless previously agreed to by the prior employer. In addition, you must not encourage outside parties to share information that may be confidential or proprietary to their employer or their employer’s trade secrets with you.

 

  4.3 Publications, Speeches, and Other Communications Relating to Apollo’s Business

You should be alert to situations in which you may be perceived as representing or speaking for the Firm, especially in public communications (including internet chatrooms, bulletin boards, etc.). You should not make any public statements on behalf of Apollo, or regarding Apollo, its business, its clients, its investors or its related parties.

Public testimony (as an expert witness or otherwise), publications and speaking engagements relating to the Firm’s business must be preapproved. Before engaging in any of these activities,

 

7


consult the Compliance Officer. Immediately notify a member of Legal of subpoenas, media inquiries, supplier forums, and requests from clients for testimonials or endorsements. Refer all media inquiries to the appropriate investor relations representative.

 

  4.4 Privacy Statement

The Federal Trade Commission has promulgated the Privacy of Consumer Financial Information Rules (“ Privacy Rules ”) governing the use by “ financial institutions ” of consumers’ personal financial information. Apollo’s clients are financial institutions under the Privacy Rules. The Privacy Rules mandate that Apollo provide its privacy statement to investors who are natural persons at or before his or her investment and annually thereafter. A sample Firm Privacy Statement is attached hereto as Appendix 4.4.

 

8


  5. INSIDE INFORMATION AND PERSONAL SECURITIES TRANSACTIONS

 

  5.1 Inside Information

Section 204A of the Advisers Act requires that the Firm establish, maintain and enforce written policies and procedures reasonably designed to prevent the Firm and its Covered Persons from misusing material, non-public information (“ inside information ”). Violations of the laws against insider trading and tipping by Covered Persons can expose the Firm and any Covered Person involved to severe criminal and civil liability. In addition, the Firm and its personnel have ethical and legal responsibilities to maintain the confidences of the Funds and to protect as valuable assets confidential and proprietary information developed by or entrusted to the Firm.

The Firm and any Covered Person involved may be exposed to potential insider trading or tipping liability under the federal securities laws if the Firm or any Covered Person executes transactions (whether for a client or otherwise) in, or communicates information regarding, securities for which the Firm or any Covered Person possesses material, non-public information.

This potential liability is particularly problematic because the Firm as a whole maybe deemed to possess material non-public information known by any of its Covered Persons unless the Firm has implemented effective procedures to segment the flow of that information to others within the Firm.

The Firm has adopted the following policies and procedures (i) to ensure the propriety of trading activity by Covered Persons and the Firm on behalf of clients, and (ii) to protect and segment the flow of material, non-public and other confidential information. The Firm’s “open architecture” increases the importance of Covered Persons complying with these policies.

 

  5.1.1     Definition of Material, Non-Public Information

Information is generally considered “ material ” if there is a substantial likelihood that a reasonable investor would consider the information important in deciding whether to buy, sell or hold the securities in question, or if the information is reasonably certain to have an effect on the price of the securities. If the information would influence your decision on whether or not to trade, you should consider it material for purposes of the matters discussed in this policy statement. While it is not possible to identify in advance all information that would be deemed by a court to be material, illustrations of such information include:

 

   

Financial performance, forecasts and changes in previously disclosed financial information;

 

   

Projections and strategic plans;

 

   

Mergers, acquisitions, dispositions or tender offers (whether completed or proposed);

 

   

Purchase or sale of substantial assets (whether completed or proposed);


   

New major contracts, orders, suppliers, customers or finance sources, or the loss thereof;

 

   

Significant new products to be introduced and significant discoveries of natural resources;

 

   

Significant pricing changes;

 

   

Changes in dividend policies or amounts;

 

   

Stock splits, public or private securities/debt offerings;

 

   

Stock repurchase programs;

 

   

Significant changes in management or operations;

 

   

Significant labor disputes or negotiations;

 

   

Actual or threatened major litigation, or the resolution of such litigation;

 

   

Financial liquidity problems or extraordinary borrowings;

 

   

Significant changes in a relationship with a primary lender;

 

   

Material write-offs or restructurings;

 

   

Proposed issuance of new securities;

 

   

Changes in previously disclosed financial information;

 

   

Purchase or sale of substantial assets;

 

   

Significant increase or decrease in backlog orders or the award of a significant contract; and

 

   

Governmental investigations, criminal actions or indictments and any collateral consequences including potential debarment from government contracts.

If there is any doubt as to whether information is material, treat the information as material.

Non-public ” information is information that is not generally available to ordinary investors in the marketplace or in general circulation. As a rule, in order to conclude that information is public, one should be able to point to some fact to show that the information is generally available; for example, its announcement in an SEC filing or in a major news publication such as the Wall Street Journal or other publication of general circulation (including the web site of a major news publication, but not a blog or chat room). The information must also have been publicly available for sufficient time for the market to react and reflect the information in the security’s price.

 

10


  5.1.2     Insider Trading and Tipping

No Covered Person who is aware of material, non-public information may engage in transactions in any securities (including equity securities, bonds and other debt securities, convertible securities, derivatives, options, any stock index including such securities as an element and any other financial instruments) for himself or herself, as well as on behalf of the Firm, including any client of the Firm, while in possession of inside information regarding such securities or the issuer of such securities (“ insider trading ”). Nor may any person communicate such inside information to any person who could use such information to purchase or sell securities (“ tipping ”). These prohibitions are applicable no matter how you acquire the inside information.

Unless a decision has been made by Apollo that the receipt of inside information in connection with the Firm’s business is necessary or desirable, Covered Persons should affirmatively avoid directly or inadvertently coming into possession of inside information, or communicating inside information to others, including information in connection with their personal dealings. For example, Covered Persons may not discuss Firm and client dealings with unrelated business contacts, family, friends and other third parties. Such affirmative actions by Covered Persons will reduce the likelihood of insider trading and tipping and will avoid the unwanted imputation of inside information to the Firm.

Any Covered Person who comes into possession of inside information regarding a security or the issuer of a security must immediately contact a member of Legal and the Compliance Officer, and must refrain from effecting transactions in securities of the issuer or communicating the information to any person inside or outside the Firm unless and until a member of Legal advises the Covered Person to the contrary.

 

  5.1.3     Firm Restricted List

The Firm maintains a list of companies (the “ Restricted List ”) in which transactions in such companies’ securities are prohibited without further clearance by Compliance or Legal. The Restricted List comprises, at a minimum:

 

   

The names of companies about which the Firm has received material, non-public information;

 

   

The names of entities with which Apollo has confidentiality agreements; and

 

   

The names of entities for which members of the Firm are directors, officers or members of the creditors committee.

The Restricted List is generally updated daily. A copy of the Restricted List is available on the intranet, which is available to the Firm’s investment professionals. Prior to sourcing potential opportunities, the Firm’s investment professionals should always check the Restricted List and contact Legal if the name of the company is on the Restricted List. Legal will determine whether or not there are any restrictions in pursuing any such opportunity.

When you receive material, non-public information (for example, by accessing the information through Intralinks), you must immediately notify Legal and the Compliance Officer (see Section

 

11


5.1.4 below). In addition, you must notify Legal and the Compliance Officer prior to being appointed to the board of directors or creditors committee of a publicly traded company. Finally, you must notify the Compliance Officer and Legal in writing (e-mail acceptable) whenever a company is added to the deal pipeline.

The contents of the Restricted List are confidential and proprietary information of the Firm and may not be communicated to anyone outside of the Firm without the prior approval of the Compliance Officer.

 

  5.1.4     Policies and Procedures Concerning Protection of Material, Non-Public and Other    Confidential Information

It is imperative that the Firm exercise control over the circumstances in which it and its Covered Persons receive material, non-public and other confidential information. Absent effective controls in this area, the Firm and its clients may be “frozen” in a position or precluded from taking a new position in a security if the Firm or one of its Covered Persons has come into possession of material, non-public information concerning that security or its issuer. Covered Persons may find themselves in similar situations with respect to their personal investments in the event the Firm or another Covered Person comes into possession of material non-public information concerning a security or its issuer. Therefore, it is essential that Covered Persons not seek information that they believe may be material and non-public without the prior approval of, and subject to any and all restrictions imposed by, the Compliance Officer.

 

                5.1.4.1     Confidential Information Process

Generally, as a condition to the Firm receiving material, non-public or other confidential information, the Firm will be asked to enter into a confidentiality agreement whereby the Firm will, among other things, agree to keep such information confidential. All such requests for confidentiality agreements or other means of “going private” on an issuer should be referred to one of the Firm’s in-house lawyers who will first vet the confidentiality agreement or other “going private request” through the Firm’s procedure on receiving confidential information (the “ Confidential Information Process ”). The Confidential Information Process generally begins with the investment professional as follows:

 

  1. The investment professional wishes to receive material non-public information on an issuer pursuant to a confidentiality agreement, electronically through Intralinks or Syndtrak, meeting with an insider, or some other means.

 

  2. The investment professional will then request to “go private” on such issuer by notifying a member of Legal. In cases of confidentiality agreements, forwarding the confidentiality agreement to a member of Legal will suffice as notice.

 

  3. Legal will then vet the issuer’s name with the Firm’s Restricted List and in cases of confidentiality agreements, begin review and negotiation of the confidentiality agreement with the counterparty. If the issuer’s name is on the Firm’s Restricted List, further review is required or Legal may at this point deny the investment professional’s request to “go private.”

 

12


  4. Legal will then vet the issuer’s name with the Firm’s Confidentiality Agreement Committee (the “ CA Committee ”). The CA Committee is tasked with mitigating any potential conflicts that may arise in “going private” on an issuer. The CA Committee may deny the investment professional’s request to “go private.”

 

  5. Once the Restricted List analysis is completed and cleared and the CA Committee has cleared the issuer’s name, then Legal will generally clear the investment professional to “go private” on the issuer.

No Covered Person is authorized to seek any material, non-public information, or enter into any written or oral confidentiality agreement, on behalf of the Firm without the express prior approval of one of the Firm’s in-house lawyers.

Note that if a Covered Person wishes to access public information through an electronic document room (such as Intralinks or Syndtrak), such Covered Person must provide notice to Legal stating that he or she intends to do so. Such issue is then entered on the Firm’s Watch List.

 

                5.1.4.2     Communication with Insiders

Covered Persons should exercise caution when communicating with representatives of companies, creditors’ committees, boards of directors, advisors or significant shareholders (collectively, “ Insiders ”). Covered Persons should: (i) identify themselves and the purpose of their communication; and (ii) make clear that the Firm is seeking information only as to publicly disclosed or non-material, non-public matters (and that the Firm will assume that any and all information given to it by the company or its representatives or advisors has been publicly disclosed or is not material).

Alternatively, if a Covered Person wishes to obtain material non-public or other information during such discussions, such Covered Person must first request clearance from a member of the Legal. Such member of Legal will then properly vet the name of the issuer prior to the Covered Person receiving the material non-public or other confidential information through the Confidential Information Process.

 

                5.1.4.3     Inadvertent or Unauthorized Receipt of Material Non-Public Information

In the event that a Covered Person inadvertently or without authorization comes into possession of information concerning any company or the market for its securities, and the Covered Person believes that this information is material and non-public, the Covered Person must notify a member of Legal and the Compliance Officer immediately. Upon the receipt of such information, the Covered Person will be “frozen” and may not: (i) disclose the material, non-public information to others within or outside of the Firm; (ii) participate in discussions or deliberation with others within or outside of the Firm, or work on any transactions involving the company to which such information relates; or (iii) engage in transactions (or recommend or suggest that any person engage in transactions) in the securities to which such information relates, without the prior approval of, and subject to any and all restrictions imposed by, the Compliance Officer.

 

13


  5.1.5     Limiting Inadvertent Access to Material, Non-Public and Other Confidential Information

Covered Persons should take care that material non-public information is not left in public areas. Documents containing material non-public information, to the extent not being filed, should be shredded or otherwise destroyed when being disposed (prior to disposing of a record or document, check with the Compliance Officer to ensure that it is not required to be maintained by the Firm). Workspaces should be cleared of material, non-public information at the end of each day and whenever left unattended to the extent unauthorized persons may have access to the area. Covered Persons should not discuss material, non-public information in public areas, such as hallways, elevators, restaurants, airplanes or trains. Covered Persons should take care when transmitting material non-public information, particularly by e-mail or fax, and should verify addresses to ensure that only the intended recipients receive the information.

To the extent that persons who have not entered into confidentiality agreements with the Firm visit the Firm’s offices, appropriate care should be taken to ensure that they are not afforded access to any material, non-public or other confidential information.

 

  5.1.6     Arrangements with Consultants

From time to time, the Firm may retain the services of outside consultants to provide advice on economic, financial, or political matters. Apollo’s standard agreement with consultants requires that consultants maintain the confidence of any confidential information of the Firm, Clients or the Funds that is shared with them and, moreover, that they not disclose to any person who does not have a “need-to-know” any material non-public information without the prior written approval of legal or compliance. However, if a Covered Person believes that he or she has come into possession of material non-public information from a consultant, the Covered Person should take the steps outlined above under “Inadvertent or Unauthorized Receipt of Material Non-Public Information” in Section 5.1.4.3, above.

 

  5.1.7     No “Big Boy Letters”

Apollo prohibits trading in public securities while potentially in possession of material non-public information in reliance on “big boy letters.” 1

 

  5.2 Personal Securities Transactions

Your personal investment activities should always be conducted with the Firm’s reputation in mind and in compliance with all applicable laws and regulations. In addition to complying with all other Code provisions and relevant policies and procedures, all trading in Employee Related Accounts (as defined below) must adhere to the following policies.

 

1 A big boy letter states that parties to a transaction understand that one of them may have more information than the other, but because they are both sophisticated investors, they are entering into the transaction notwithstanding the information disparity and its potential effect on the price of the securities.

 

14


  5.2.1     New Issues

No personal transactions in initial public offerings are permitted in Employee Related Accounts.

 

  5.2.2     Employee Related Accounts

The Firm has adopted the following general procedures concerning the pre-clearance of certain transactions in, and the reporting requirements with respect to, “ Employee Related Accounts ,” defined as:

 

   

All accounts in the name of (i) the Covered Person, (ii) any member of the Covered Person’s immediate family who resides with the Covered Person or to whose support the Covered Person significantly contributes, which may include the Covered Person’s spouse, children, stepchildren, grandchildren, parents, grandparents, stepparents, siblings, persons with whom a Covered Person has an adoptive or in-law relationship or (iii) any other person who may reside with a Covered Person or to whose support a Covered Person significantly contributes;

 

   

All accounts in which any of the above persons (collectively, the “ Relevant Persons ”) has a direct or indirect beneficial ownership interest; and

 

   

All other accounts over which any Relevant Person exercises any investment control, influence or discretion.

The term “beneficial ownership,” for purposes of the definition of Employee Related Accounts, is interpreted as set forth in Rule 16a-1(a)(2) of the Securities Exchange Act of 1934, as amended. Under this rule, a person has “ beneficial ownership ” of securities if the person, directly or indirectly, through any contract arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the securities. A “ pecuniary interest ” in a security means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the security. A person is presumed to have an “ indirect pecuniary interest ” in securities held by members of such person’s immediate family sharing the same household, although this presumption may be rebutted. For additional information on what would be considered an “indirect pecuniary interest,” see Appendix 5.2.2.

Consult with the Compliance Officer if you have any questions as to whether an account is covered by the policies in this Section 5.2.2.

 

  5.2.3     Pre-clearance for Trades other than in Apollo

This Section 5.2.3 applies to trades in securities other than in AP Alternative Assets, L.P. (“ AAA ”), Apollo Investment Corporation (“ AINV ”) and Apollo Commercial Real Estate Finance, Inc. ( “ARI” ) securities. The policy for trading in AAA securities is discussed in Section 5.3, below. The policy for trading in AINV securities is discussed in Section 5.4, below. The policy for trading in ARI securities is discussed in Section 5.5, below.

All personal securities transactions not subject to an exception below must be pre-cleared by the Compliance Officer.

 

15


It is our policy that trading approval will not be granted for securities of companies on the Restricted List. Approval will generally not be granted for proposed securities transactions in securities of companies with a market capitalization for the outstanding equity on the date of trade of (x) more than $100 million and (y) less than $20 billion (the “Market Cap Rule”). From time to time, adjustments may be made to the Market Cap Rule. In the event that an exception from the restriction is granted, the Chief Compliance Officer or designee shall make and maintain a record of the basis for the exception. In addition, no personal transactions in initial public offerings are permitted and no securities may be sold short.

Transactions involving the following are excepted from the pre-clearance requirement:

 

   

US government and municipal securities;

 

   

Exchange traded funds (“ ETF ”) and closed-end funds containing a portfolio of securities of more than 29 issuers or containing a portfolio of commodities; 2

 

   

Mutual funds (i.e., open-ended investment companies);

 

   

Gifts of securities to a charitable organization, provided that the securities themselves are donated and not the cash resulting from the sale of such securities;

 

   

Variable annuities; and

 

   

Transactions in fully-managed accounts, where Relevant Persons have no investment control, influence or discretion.

Note that all transactions in bonds issued by foreign sovereigns are subject to pre-clearance.

ALL personal securities transactions in equity or debt securities (including any derivatives thereof) held in Employee Related Accounts require pre-clearance by the Compliance Officer. Pre-cleared trades are authorized for a limited window period of up to 3 business days and are subject to a minimum holding period of 90 days.

Requests for pre-clearance must be sent through the firms on-line trading system, iTrade and must contain a representation that the Relevant Person is not in possession of material non-public information and, in the case of proposed sales, that the securities have been held for a minimum of 90 days.

 

                5.2.3.1     Approval Guidelines for Trades other than in AAA, AINV and ARI Securities

It is our policy that trading approval will not be granted for securities of companies on the Firm’s Restricted List. Approval will generally not be granted for proposed transactions to buy securities of companies with a market capitalization for the outstanding equity on the date of trade of (x) more than $100 million and (y) less than $20 billion. Relevant Persons shall send

 

2 Transactions in ETF’s are not subject to the market capitalization discussed in Section 5.2.3.1 of this manual.

 

16


requests for pre-clearance in writing (email accepted) and shall indicate the market capitalization of the applicable company. Transactions involving close-ended funds must be pre-cleared by Compliance, but are not subject to the Market Cap Rule.

 

                5.2.3.2     Limitations on Trading and Minimum Holding Period for other than AAA

   Securities

Apollo encourages long-term investing by its Covered Persons and discourages active trading because of the potential conflicts of interest and distractions during business hours. Covered Persons are prohibited from engaging in day-trading.

All discretionary authority account transactions in securities are subject to a minimum investment holding period of 90 days.

The holding period for options will be determined at the time approval is provided. Securities may not be sold short in Employee Related Accounts.

 

                5.2.3.3     Private Placements

Investments in private placements (examples include third-party hedge funds, investment partnerships, etc.) must be pre-cleared by the Compliance Officer. Relevant Persons wishing to request pre-clearance of private placements must submit a pre-clearance form to the Compliance Officer. A sample Pre-Clearance Form for Private Placements is available in Appendix 5.2.3.3.

 

                5.2.3.4     Private Funds and Alternative Investments

Sales of, or withdrawals from, private funds and alternative investments must be pre-cleared by the Compliance Officer.

 

                5.2.3.5     Personal Investment Accounts

Investment transactions in fully-managed accounts, where the Covered Person has no investment control, influence or discretion, and accounts in which only mutual funds may be purchased are permitted without pre-clearance by the Compliance Officer. Written certification as to account status will be required at least annually.

 

  5.2.4     Reporting Requirements

Each Covered Person must periodically report to the Compliance Officer all holdings and transactions in Employee Related Accounts, in accordance with this Section 5.2.4.

 

                5.2.4.1     Holdings Reports

New Covered Persons are required to complete the New Covered Person Disclosure Form and provide it to the Compliance Officer within 10 days of joining the Firm. The New Covered Person Disclosure Form shall also function as the initial holdings report for Covered Persons. For a sample copy of this form, see Appendix 5.2.4.1. The information in the New Covered Person Disclosure Form must be current as of a date no more that 45 days prior to the date such

 

17


person became a Covered Person.

In addition, each Covered Person must submit to the Compliance Officer at least annually a report of the holdings of all Relevant Persons in Employee Related Accounts (a “ holdings report ”). The information contained in a Covered Person’s holdings report must be current as of a date no more than 45 days prior to the date such holdings report was submitted.

The holdings report must contain, at a minimum, the following information:

 

   

The title and type of security, and as applicable, the exchange ticker symbol or CUSIP number, number of shares and principal amount of each reportable security in which the Relevant Persons have any direct or indirect beneficial ownership;

 

   

The name of any broker, dealer or bank with which the Relevant Persons maintain an account in which any securities are held for the Relevant Person’s direct or indirect benefit;

 

   

If securities are held other than with a broker, dealer or bank, the location of the securities; and

 

   

The date that the Covered Person submits the report to the Compliance Officer.

A sample holdings report is included in Appendix 5.2.4.1A. Submission to the Compliance Officer of a duplicate copy of the most recent periodic broker statements of the Relevant Persons within the time frame listed herein will be sufficient to fulfill this requirement, if such broker statements include all required information for all securities and there are no securities held outside such accounts. A sample letter to brokers requesting that duplicate copies of statements be sent to the Firm is attached in Appendix 5.2.4.1B.

 

                5.2.4.2     New Employee Related Accounts and Closed Accounts

Each Covered Person must promptly notify the Compliance Officer in writing (e-mails accepted) of the opening of any Employee Related Account. The notice must include the name and number of such Employee Related Account, and the name and address of the broker-dealer or financial institution where such account is maintained.

Each Covered Person also must promptly notify the Compliance Officer if an Employee Related Account is closed.

 

                5.2.4.3     Duplicate Statements

Each Covered Person must send to the broker-dealer(s) or financial institution(s) carrying each Employee-Related Account a letter authorizing and directing that it forward duplicate monthly or periodic statements, as applicable, as well as any other information or documents as the Compliance Officer may request, directly to the Firm. A sample authorization may be obtained in electronic form by contacting the Compliance Officer or a Designee. All duplicate statements must be received by the Compliance Officer within 30 days after the end of the applicable period.

 

18


A sample authorization letter requesting broker-dealers to send duplicate statements to the Firm is available at Appendix 5.2.4.1B.

Access to duplicate account information with respect to Employee-Related Accounts and other personal securities holdings will be restricted to those persons who are assigned by the Firm to perform review functions, and all such materials will be kept confidential except as otherwise required by law.

 

                5.2.4.4     Transactions Reports

Except for accounts where Covered Persons have no influence over trading decisions and automatic investment plans, each Covered Person must also submit to the Compliance Officer quarterly securities transactions reports (“ transaction reports ”), no later than 30 days after the end of each calendar quarter, containing information regarding transactions in all of the Relevant Persons’ Employee Related Accounts and transactions in any securities held outside of such accounts. The transaction reports must cover, at a minimum, all transactions during the quarter, and must include the following information:

 

   

The date of the transaction, the title and, as applicable, the exchange ticker symbol or CUSIP number, the interest rate and maturity date, the number of shares and the principal amount of each reportable security involved;

 

   

The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);

 

   

The price of the security at which the transaction was effected;

 

   

The name of the broker, dealer or bank with or through which the transaction was effected;

 

   

If not effected through a broker, dealer or bank, the location of the securities and a description of how the transaction was effected; and

 

   

The date that the Covered Person submits the report to the Compliance Officer.

Transaction reports shall not be required for the following types of transactions:

 

   

US government and municipal securities;

 

   

Exchange traded funds;

 

   

Mutual funds (i.e., open ended investment companies);

 

   

Gifts of securities to a charitable organization, provided that the securities themselves are donated and not the cash resulting from the sale of such securities;

 

   

Variable annuities; and

 

   

Transactions in fully-managed accounts, where Covered Persons have no investment control, influence or discretion.

 

19


  5.3 AP Alternative Assets, L.P. (“AAA”) Employee Trading Policy

This Section 5.3 applies to trades in AAA which is listed on Euronext and governed by such rules. Definitions applicable to this Section 5.3 are available in Appendix 5.3.

 

  5.3.1     Statutory Framework

Article 5:65 of the Dutch Financial Supervision Act provides that a legal entity with its corporate seat in a non EU-member state that has issued securities as referred to in article 5:56 of the Financial Supervision Act, such as AAA (the “ Company ”), shall draw up an internal code regarding the holding of, and transactions in, its shares or securities of which the value is determined by such shares, by its managing and supervisory directors and its employees. These Insider Regulations apply to all persons who work at the Company, including its managing and supervisory directors. Certain provisions also apply to employees, partners, directors and officers of Apollo Alternative Assets, L.P., and Apollo Management, L.P. and its affiliates. These persons fall under the definition “ Person Not Obliged to Notify ” as defined in Appendix 5.3.

 

  5.3.2     General Rules for all Staff Members

Before a Staff Member may purchase or sell Company securities, a written request must be made to and approved in writing by the Compliance Officer. A sample Staff Member Trading Request is included at Appendix 5.3.2. Any approved purchase or sale must be made within three business days of approval, unless otherwise approved by the Compliance Officer.

In addition to receiving written approval as described in this Section 5.3.2, Staff Members may only purchase or sell Company securities during the following periods:

 

   

Between 48 hours and 15 days after the release of the Company’s quarterly, semi-annual or annual financial information in a press release; and

 

   

Any other time that the Compliance Officer approves such a transaction, but such approval will only be given under extraordinary circumstances.

Notwithstanding any provision of this Section 5.3.2, Staff Members who work in the finance or investor relations departments of Apollo Management, L.P. or any of its affiliates, or other Staff Members who have access to draft financial results of the Company, may only purchase or sell Company securities during the following periods:

 

   

Between 48 hours and 10 days after the release of the Company’s quarterly, half-yearly or annual financial information in a press release; and

 

   

Any other time that the Compliance Officer approves such a transaction, but such approval will only be given under extraordinary circumstances.

Staff Members shall not sell Company securities within six months of the purchase of such

 

20


securities and shall not purchase within six months of their sale, provided, however, that this prohibition does not apply if the first transaction consists of the exercise of options granted by the Company and the second transaction consists of the sale of the Company’s common units acquired through the exercise of such options.

 

  5.3.3     Statutory Notification Obligation for Persons Obliged to Notify

Persons Obliged to Notify are obliged to notify the AFM of their transactions in Company securities in accordance with article 5:60 of the Financial Supervision Act. This notification obligation does not apply to transactions referred to in Section 5.3.4.

The notification to the AFM described in the preceding paragraph must, in accordance with article 5:60 of the Financial Supervision Act, be submitted to the AFM no later than on the fifth working day after the date of the transaction. The notification must be on a standard form of the AFM, a sample copy of which is included at Appendix 5.3.3.

The Compliance Officer will make the relevant notification on behalf of the Person Obliged to Notify. Therefore, a Person Obliged to Notify must immediately inform the Compliance Officer of any transaction in Company securities. A Person Obliged to Notify will be responsible at all times for the accuracy and timely submission of notifications, even in situations where a Person Obliged to Notify has expressly requested the Compliance Officer to submit the notification on his or her behalf.

 

  5.3.4     Exceptions to the Notification Obligation set out in Section 5.3.3

The notification obligation set out in Section 5.3.3 does not apply to transactions based on a discretionary management agreement (i.e., transactions that are conducted or effected by an authorized agent to whom a written mandate has been given for the discretionary management of the securities portfolio). This exception is subject to the condition that under the agreement for asset management, the person in question may not exercise any influence over the securities portfolio, and in fact does not do so.

A notification within the meaning of Section 5.3.3 may be delayed until the moment that the value of the transactions performed for that person’s own account, together with the transactions carried out for the account of the persons associated with that person, reaches or exceeds the amount of EUR 5,000 in the calendar year in question. The amount of EUR 5,000 is to be calculated based on the prices of Company securities, i.e., the purchase or sale price or the amount paid as consideration for the acquisition or disposal of Company securities. Company securities obtained free of charge need not be reported until the threshold of EUR 5,000 is reached. Once this threshold value of EUR 5,000 is reached through other transactions, the transactions effected free of charge must be reported together with the other transactions.

 

  5.3.5     Restrictions on Transactions in Units Issued by AAA

The Company has elected to impose certain restrictions, described below, on the future trading of its common units and the RDUs so that it will not be required to register the offer and sale of its common units and the RDUs under the Securities Act of 1933, as amended; so that it will not have an obligation to register as an investment company under the Investment Company Act of

 

21


1940, as amended (“ Investment Company Act ”) and related rules; and to address certain ERISA (the U.S. Employee Retirement Income Security Act), US Internal Revenue Code and other considerations. As described and defined in greater detail below, a US person wishing to acquire RDUs generally must be (i) a “Qualified Institutional Buyer” or an “Accredited Investor,” and (ii) a “Knowledgeable Employee” or a “Qualified Purchaser.” In addition, the transfer restrictions, which will remain in effect until the Company and the depositary determine to remove them, may impair the ability of Staff Members who hold RDUs to trade such securities. Such restrictions are set forth in detail in the Company’s publicly filed prospectus. Each Staff Member that engages in a transaction involving Company securities is responsible for complying with the applicable restrictions on transactions in Company securities.

Note that pursuant to currently applicable guidance, the following persons generally will not be treated as Knowledgeable Employees:

 

   

An individual who has not, for at least 12 months:

 

   

Participated, in connection with his or her regular functions and duties, in the investment activities of a fund excluded from treatment as an investment company under the Investment Company Act (or an entity under common control with such a fund), or

 

   

Performed substantially similar functions and duties for or on behalf of another company;

 

   

Employees performing solely clerical, secretarial or administrative functions with regard to a fund or its investments; and

 

   

Non-executive employees, such as marketing and investor relations professionals, brokers and traders, attorneys and financial, compliance, operational and accounting officers.

 

  5.4 Policy For Trading in Apollo Investment Corporation (“AINV”) Stock

All Covered Persons other than “ disinterested directors ” of AINV, as defined under Rule 0-1 of the Investment Company Act, 3 are subject to this Section 5.4.

 

  5.4.1     Pre-Clearance

Before a Covered Person may purchase or sell shares of AINV, a written request must be made to and approved by the Compliance Officer. A sample Covered Person Trading Request is included in Appendix 5.4.1. Any approved purchase or sale must be made within three business days of approval.

 

  5.4.2     Trading Window

 

 

3

Purchases and sales of shares of AINV by Independent Directors of the Company are addressed under the Company’s Stock Trading Policy for Independent Directors.

 

22


In addition to receiving written approval as described above, Covered Persons may only purchase or sell shares of AINV during the following periods:

 

   

Between 48 hours and 15 days after the release of AINV’s quarterly or annual financial information in a press release; and

 

   

Any other time that the Compliance Officer approves such a transaction, but such approval will only be given under extraordinary circumstances.

 

  5.4.3     Short-Term Trading and Reporting Requirements

Notwithstanding anything to the contrary set out above, Covered Persons will not be permitted to make a round-trip transaction in shares of AINV (in other words, a purchase followed by a sale, or sale followed by a purchase) until the trading window following the release of the financial information for the next quarterly or annual report, absent extraordinary circumstances.

In addition, Covered Employees who are directors, officers or ten percent beneficial owners (each an “ Insider ”) of AINV are subject to the reporting of transactions under Section 16(a) and the restrictions set out in Section 16(b) of the Securities Exchange Act of 1934 with respect to round-trip transactions in shares of AINV. Section 16(b) generally prohibits a round-trip transaction in shares of AINV in any period of less than six months by any Insider. Any profits made in a round-trip transaction by any Insider of AINV are recoverable by AINV, even if the round-trip transaction was done inadvertently.

 

  5.5 Policy For Trading in Apollo Commercial Real Estate Finance, Inc. (“ARI”) Stock

All Covered Persons are subject to this Section 5.5.

 

  5.5.1     Pre-Clearance

Before a Covered Person may purchase or sell shares of ARI, a written request must be made to and approved by the Compliance Officer. A sample Covered Person Trading Request is included in Appendix 5.5.1. Any approved purchase or sale must be made within three business days of approval.

 

  5.5.2     Trading Window

In addition to receiving written approval as described above, Covered Persons may only purchase or sell shares of ARI during the following periods:

 

   

Between 48 hours and 15 days after the release of ARI’s quarterly or annual financial information in a press release; and

 

   

Any other period, provided that such approval will only be given under extraordinary circumstances.

 

  5.5.3     Short-Term Trading and Reporting Requirements

 

23


Notwithstanding anything to the contrary set out above, Covered Persons will not be permitted to make a round-trip transaction in shares of ARI (in other words, a purchase followed by a sale, or sale followed by a purchase) until the trading window following the release of the financial information for the next quarterly or annual report, absent extraordinary circumstances.

In addition, Insiders of ARI are subject to the reporting of transactions under Section 16(a) and the restrictions set out in Section 16(b) of the Securities Exchange Act of 1934 with respect to round-trip transactions in shares of ARI. Section 16(b) generally prohibits a round-trip transaction in shares of ARI in any period of less than six months by any Insider. Any profits made in a round-trip transaction by any Insider of ARI are recoverable by ARI, even if the round-trip transaction was done inadvertently.

 

24


  6. DEALINGS WITH FUNDS AND INVESTORS

 

  6.1 General Prohibitions

Consistent with Apollo’s duties as a registered investment adviser, all clients of the Firm, and their investors, must be treated fairly and equitably at all times. Generally, fair and equitable treatment means, among other things, acting in the best interests of clients and investors, avoiding actual and potential conflicts of interest and not favoring one client over another.

In addition, Covered Persons shall not:

 

   

Guarantee investors against losses;

 

   

Give any legal or tax advice to any investor, even if qualified to do so;

 

   

Lend to or borrow money or securities from any client or investor;

 

   

Guarantee the performance of an investment;

 

   

Sign any contract or otherwise bind the Firm without proper authorization;

 

   

Disclose any information about a client or investor without proper authorization; and

 

   

Make investment decisions with respect to a client’s assets without proper authorization.

 

  6.2 Marketing Materials

All marketing materials (including updates to previously approved marketing materials) must be reviewed by the relevant portfolio manager, Legal, Finance and Compliance prior to their scheduled use. The responsible marketing professional shall circulate to Compliance, Legal, Finance and the applicable PM marketing materials, together with supporting documentation sufficiently before the anticipated use of the materials so as to allow for the review of the materials. A sample Marketing Approval Form is included in Appendix 6.2.

Rule 206(4)-1 of the Advisers Act defines an “ advertisement ” (referred to in this manual as “ marketing material ”) to include any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula, or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities.

Marketing Material includes, among others:

 

  Offering materials;


   

Pitch books;

 

   

Newsletters;

 

   

Websites;

 

   

Slide presentations;

 

   

Brochures;

 

   

Letters and e-mails sent to current and prospective investors for purposes of soliciting investments;

 

   

Article reprints;

 

   

Quarterly and annual data provided to consultants and consultant questionnaires (the term consultants is an industry term that refers to individuals or firms that collect data on advisers and their fund clients and refer investors to advisers);

 

   

Presentations developed for seminars or investor meetings; and,

 

   

Transcripts, tapes and outlines for media interviews.

 

  6.2.1     General Requirements

Marketing material should fairly present the services that are being offered and should include meaningful reference to any risk and speculative elements associated with the particular investment program or fund offered. The appropriateness of any specific marketing material will depend on all the particular facts relating to the marketing material and the statements contained therein, including: (1) the form as well as the content of the marketing material, (2) implications or inferences arising out of the communication in its total context and (3) the sophistication of the prospective advisory investors. Also, factual statements contained in marketing materials must be clearly supportable, preferably with written evidence.

 

  6.2.2     Antifraud Provisions

Marketing materials may not, directly or indirectly, contain any untrue statement of a material fact or be otherwise false or misleading (i.e., causing someone to infer something that is not in fact true). Marketing materials must not suggest any type of guarantee, especially any guarantee or promise of positive results, or contain any other type of promissory language. Unqualified superlatives and exaggerated or flamboyant statements should not be used in any marketing materials. Anything that could be construed as a claim of potential profit, opportunity or benefit should also disclose the possibility of loss.

 

  6.2.3     Testimonials

A testimonial is any statement of a client, investor or portfolio company’s experience with Apollo, or an endorsement by such person. Testimonials are prohibited in marketing materials

 

26


because they may imply that one client, investor or portfolio company’s experience with Apollo is typical of all such persons and are considered by the SEC to be inherently misleading. Even if unsolicited, testimonials are prohibited.

 

  6.2.4     Past Specific Recommendations

Apollo may not refer to past specific recommendations which were or would have been profitable, unless the marketing materials include a list of all recommendations made within the last year. 4 A partial list of portfolio companies could be viewed as “cherry picking” past recommendations and is considered to be inherently misleading. For these purposes, “ past specific recommendations ” means all prior investments, including all portfolio companies included within client portfolios.

The list must include the following (if applicable):

 

   

The name of each security invested;

 

   

The date and nature (buy or sell) of each investment;

 

   

The market price at that time;

 

   

The price at which the investment was to be acted upon; and

 

   

The market price of each security as of the most recent practicable date.

The following legend (or a similar legend approved by the Compliance Officer) must be included on the first page of the marketing material in type as large as the largest type used in the body or text:

“It should not be assumed that investments made in the future will be profitable or will equal the performance of the investments in this list.”

 

  6.2.5     Preparation of Marketing Materials

While it is Apollo’s general policy not to advertise, some of the Firm’s communications, including but not limited to brochures and pitch books, may be considered to be marketing materials under the Advisers Act. Because the Advisers Act restricts an investment adviser’s ability to promote its advisory services, the Firm must ensure that its advertising to attract portfolio investments will not be construed as promoting its investment advisory services. As a result, Apollo will concentrate its marketing materials for portfolio investments on the factors that make Apollo a desirable investor, such as its available capital (not the total capital committed to the funds), industry sectors, its support of company management, the professionalism of its board representatives, its long-term commitment to portfolio companies, and other factors that may benefit the prospective portfolio company. Advertising by Apollo to

 

 

4

If the marketing material covers more than a one-year period, then the list must cover all recommendations made during the covered period. For example, if an advertisement discusses past investments dating back five years, the list must include all past investments made during the five-year period.

 

27


attract portfolio opportunities should not discuss its investment advisory services.

Apollo’s success depends upon the Firm having the opportunity to participate in deals that will benefit its clients. To attract these opportunities, investment bankers and companies seeking capital must recognize the Firm as a desirable investor. Apollo will advertise its willingness and ability to invest in portfolio companies to heighten its recognition among that audience, but the Firm does not intend to advertise its investment advisory services to attract new Investors. Therefore, the Compliance Officer and Legal must review all communications that may be considered marketing materials.

 

  6.2.6     Performance Gross/Net of Fees

The SEC generally requires investment advisers to present performance data net of advisory fees and other expenses paid by investors, but has created certain exceptions to the rule through a series of no-action letters. The SEC staff has said that investment advisers may present performance figures without reflecting custodian fees paid to a bank or other organization for safekeeping client assets. The SEC staff has also said that investment advisers may provide a prospective investor with gross performance results in a one-to-one presentation if the adviser provides in writing: (1) disclosure that the performance figures do not reflect the deduction of investment advisory fees; (2) disclosure that the investor’s return will be reduced by the advisory fee and any other expenses it may incur; (3) disclosure that the investment advisory fees are described in Part II of the adviser’s Form ADV, and (4) a representative example showing the compounded effect an investment advisory fee could have on the total value of an investor’s portfolio over time. Alternatively, investment advisers may present performance that reflects the deduction of the highest advisory fee charged to any account employing that strategy during the performance period. Advisers may also present gross performance information if the adviser also presents net performance information and provides adequate disclosure.

 

  6.2.7     Performance Data

Performance related information (including statistics) presented to clients or prospective clients is calculated according to the Firm’s valuation procedures and any deviation from such procedures must be approved in advance by the Compliance Officer. In addition, the SEC has issued a number of interpretations of Rule 206(4)-1 concerning presenting past performance data. These interpretations generally prohibit the use of performance data that:

 

   

Fails to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;

 

   

Suggests or makes claims about the potential for profit without also disclosing the possibility of loss;

 

   

Compares actual results to an index without disclosing any material facts relevant to the comparison (e.g., failure to disclose that the volatility of an index is materially different from that of the portfolio);

 

28


   

Fails to disclose any material conditions, objectives or investment strategies used to obtain the results portrayed; or

 

   

Fails to disclose prominently, if applicable, that the results portrayed related only to a select group of accounts managed by Apollo, the basis on which the selection was made, and the effect of this practice on the results portrayed, if material.

 

  6.2.8     Past Performance

The SEC staff has taken the position that prior performance results for accounts managed at a prior entity would not be considered misleading if:

 

   

The person or persons who manage the accounts at Apollo were primarily responsible for achieving the prior performance results at the prior entity and no other person played a significant part in achieving the performance results;

 

   

The investment objectives, policies and strategies for the accounts managed at the prior entity are so similar to the currently managed accounts to make the performance at the predecessor entity relevant to prospective clients;

 

   

The person or persons who manage the accounts at Apollo did not manage comparable accounts while managing the accounts at the prior entity (i.e., you can’t cherry pick prior performance);

 

   

The performance of the other entity is not presented in a misleading manner (e.g. the performance is presented separately from, and given no greater prominence than, Apollo’s performance);

 

   

The marketing material includes all relevant disclosures, including that the performance results are from accounts managed at another entity and the role that the current managers played (or did not play) in achieving the performance;

 

   

Apollo has copies of the backup documentation forming the basis for performance data from the prior entity; and

 

   

Subject to certain exceptions, Apollo must obtain approval from any other entity before using any information that relates to such other entity or the performance of its investments. The principal exception is for materials that repeat information previously approved, information and updated financial performance based upon information that was considered in preparing financial results reported to the public by Apollo.

 

29


  6.2.9     Media and Conferences

You should avoid communications with the media unless approved by Compliance or Legal. All comments to the media must be referred to the Firm’s General Counsel and Director of Investor Relations.

You must receive pre-clearance from Compliance or Legal to participate in any conferences (whether or not media will be present). All materials to be presented at a conference must be reviewed by Compliance or Legal.

 

  6.3 Prohibited Titles and Terms

The Advisers Act prohibits a person to represent or imply in any manner whatsoever that such person has been sponsored, recommended, or approved, or that his abilities or qualifications have in any respect been passed upon by the United States or any agency or any officer thereof. In addition, a person is prohibited from representing that he is an investment counsel or to use the name “investment counsel” as descriptive of his business unless (1) his or its principal business consists of acting as investment adviser, and (2) a substantial part of his or its business consists of rendering investment supervisory services.

 

  6.4 Principal and Cross Trades

Apollo funds may engage in principal and cross trades subject to the limitations of Section 206(3) of the Advisers Act, if applicable. A principal trade occurs when an investment adviser (or an owner, employee or affiliate of such investment adviser), acting for its own account or the account of an affiliate, buys a security from, or sells a security to, the account of a client. A cross trade is a pre-arranged transaction between two or more different funds or accounts, each of which is managed by the same adviser and where no broker-dealer or brokerage commission is involved). 5

Prior to executing a principal trade or a cross trade, notice must be provided to, and approval obtained from, the Compliance Officer and a member of Legal. Notice is provided by completing and providing to the Compliance Officer and Legal the Cross Trade and Principal Trade Approval Form, a sample copy of which is attached at Appendix 6.4.

 

  6.4.1     When Cross Trades are Principal Trades

A cross trade that involves an account or fund which the adviser (or its owners, employees or affiliates) controls, will be deemed to be a principal trade and therefore subject to Section 206(3) of the Advisers Act. The SEC staff has stated that Section 206(3) applies to a cross trade between a client account and an account of which the investment adviser and/or its controlling

 

5

A trade that occurs where an investment adviser who is also a broker-dealer acts as adviser and broker to its advisory client and as broker to a non-advisory client is known as an ‘agency cross trade.’ Rule 206(3)-2 under the Advisers Act provides a safe harbor for certain agency cross trades. However, the safe harbor is generally not available where both a buyer and seller are advised on the trade by the same investment adviser (or a person controlling, controlled by or under common control with the adviser), since the protection of arm’s length bargaining may not be present. Apollo does not engage in agency cross trades.

 

30


persons, in the aggregate, own(s) more than 25% of ownership interests, while it would not apply to a cross trade between a client account and an account of which the adviser and/or its controlling persons hold ownership interests, in the aggregate, of 25% or less.

 

  6.5 Piggy-Backing and Front-Running

You may not receive any personal advantage from information which has been obtained by, or in the course of, the performance of your duties at the Firm. Therefore, “ piggy-backing ” and “ front-running ” (i.e., purchasing or selling a security for an account of the adviser or an affiliate or employee of an adviser prior to its purchase for a client account) are prohibited.

 

31


  7. OTHER BUSINESS CONDUCT

You are expected to conduct the Firm’s business in accordance with the highest legal and ethical standards, respecting the Firm’s clients, investors and related parties, dealing responsibly with the Firm’s assets, and complying with applicable legal and regulatory requirements.

 

  7.1 Assets of the Firm

You are expected to protect the Firm’s assets as well as the assets of others that come into your custody.

The Firm’s assets include not only financial assets such as cash and securities and physical assets such as furnishings, equipment and supplies, but also client relationships and intellectual property such as information about clients, investors, related parties, systems and people. All property created, obtained, or compiled by or on behalf of the Firm belongs to the Firm.

The Firm’s assets should be used only for the conduct of the Firm’s business, except where limited incidental personal use is authorized by the Code or other applicable policies.

 

  7.2 Telephones, E-Mail, Internet and other Electronic Communications Devices

Telephones, electronic mail (e-mail) systems and other electronic communications devices provided by Apollo, whether in the workplace or elsewhere, are the property of the Firm and should be used for business purposes. Limited incidental personal use is permitted, consistent with the Code and all other policies of the Firm.

The Firm’s computer and electronic communications systems are configured to retain records consistent with the Advisers Act. To ensure compliance, you must:

 

   

Save and store all files, including but not limited to documents, spreadsheets, and presentations, on the Firm network. Files should not be stored on personal computer hard drives; and

 

   

Use only Firm electronic communications systems for e-mail, messaging and other communication functions at all times, including when away from the office.

The use of e-mail and the internet must conform to the Firm’s policies. E-mail and internet systems may be used to transmit or provide access to confidential information only when such information is adequately protected and transmitting such information is necessary for business purposes.

Among other things, unless used for a permitted purpose, the following are prohibited:

 

   

Statements, which if made in any other forum, would violate any of our policies, including policies against discrimination and harassment, participation in impermissible or illegal activities, and the misuse of confidential information, and


   

Accessing, downloading, uploading, saving, or sending sexually-oriented or other lewd or offensive materials.

In addition, you must not forward documents which would be considered proprietary to the Firm and/or marked “For Internal Use Only” outside the Firm without the consent of your supervisor or legal.

There is no right to privacy in any data and/or communications transmitted through, received by, or contained in the Firm’s electronic or telephonic equipment or systems. The Firm considers all such data and communications to be the property of the Firm. Subject to applicable laws and regulations, the Firm reserves the right to monitor, review and disclose all such data and communications as it deems appropriate. In addition, the Firm has implemented an e-mail surveillance program pursuant to which your e-mails may be reviewed by Compliance.

 

  7.3 Internal Controls, Record Retention and Reporting

Internal controls and record retention policies have been established in order for Apollo to meet both legal and business requirements.

The falsification of any book, record or account relating to the business of Apollo, its clients or to the disposition of assets of the Firm or its clients (including, without limitation, the submission of any false personal expense statement, claim for reimbursement of a non-business expense or a false record or claim under an employee benefit plan) is prohibited.

All forms of recorded information created or received in the course of conducting the Firm’s business or involving the Firm’s legal obligations must be maintained and/or discarded in accordance with the Firm’s policies on record retention set forth in Apollo’s Supervisory Procedures Manual. All Covered Persons are responsible for being familiar, and complying, with these policies. Notwithstanding any other provision of such record retention policies, no document or record may be destroyed if you have been advised or otherwise should recognize that it may be relevant to a pending or threatened legal or regulatory proceeding.

It is of critical importance that Apollo’s filings with regulatory authorities be accurate and timely. Information provided to those involved in preparation of the Firm’s disclosures to regulators and investors should be complete, accurate and informative.

 

  7.4 Limits of your Authority

Your authority to act on behalf of Apollo is limited by various laws, regulations, corporate charters, bylaws and resolutions and by internal policies and procedures. You may not sign any documents, or otherwise represent or exercise authority on behalf of any Apollo entity unless you are specifically authorized to do so.

Any Covered Person who is authorized to take action on behalf of Apollo must first conduct appropriate inquiries and due diligence to determine that the taking of such action is appropriate and consistent with the Firm’s business objectives, policies and procedures. Covered Persons who are responsible for supervising any other person in connection with actions taken on behalf of the Firm, must provide appropriate supervision under the circumstances, which may include

 

33


independently verifying information and conducting additional inquiries, to ensure that it is appropriate to rely on such information.

 

  7.5 Post-Employment Responsibilities

As a condition of continued employment or other association with Apollo, Covered Persons will have certain responsibilities after their employment or other association with Apollo terminates. Specifically, all Covered Persons, after the termination of their employment or other association, must (in addition to other specific requirements of the Code and any employment agreements with the Firm):

 

   

Return all Firm assets in their possession, including, but not limited to, files, records, building access cards, keys, cell phones, mobile or remote computers, corporate credit cards, computer software, hardware and disks;

 

   

Maintain the confidentiality of confidential information relating to the Firm, its clients, investors, related parties, or any other confidential information obtained in the course of their employment;

 

   

Refrain from insider trading based on information obtained in the course of employment by Apollo;

 

   

If requested, assist Apollo with investigations, litigation, and the protection of intellectual property relating to their employment;

 

   

Refrain from soliciting a business or investment opportunity that you became aware of during your employment or other association with the Firm, from someone doing business or seeking to do business with Apollo; and

 

   

Refrain from taking for yourself a business opportunity belonging to the Firm or any client that you became aware of during your employment or other association with the Firm.

 

  7.6 Improper Expenditures and the Foreign Corrupt Practices Act

Federal law of the United States and the laws of many other countries prohibit bribes, kickbacks or other similar remuneration or consideration given to any person or organization, such as a domestic or foreign government official, political party, or candidate for political office, or to any intermediaries, such as agents, attorneys or consultants in order to attract or retain business or to influence any governmental decision or action. Offering or paying such remuneration or consideration is strictly prohibited.

In addition, you may not accept any such payments in connection with any business decision or transaction.

Outside the U.S., the Firm will honor local laws and applicable U.S. laws, including the Foreign Corrupt Practices Act (“ FCPA ”). The FCPA prohibits the Firm from directly or indirectly offering, promising to pay, or authorizing the payment of money or anything of value to foreign

 

34


government officials, parties or candidates for the purpose of influencing the acts or decisions of foreign officials or to obtain an unfair advantage. This law is very complex and each situation may dictate a different course of action. Therefore, the approval of the Compliance Officer should be obtained before making or authorizing any payment of any kind to any public official, their designee or agent, political party or official or candidate for office whether or not it is believed to be to secure routine governmental action.

 

  7.7 Soft Dollar Arrangements

Soft dollar arrangements require the prior approval of the Compliance Officer. The SEC defines a “soft dollar arrangement” as an arrangement under which products or services other than execution of securities transactions are obtained by an adviser from or through a broker-dealer in exchange for the adviser directing client brokerage transactions to the broker-dealer. Soft dollar arrangements may be formal written agreements or informal agreements to direct trades to a particular broker-dealer.

Because soft dollar arrangements may present conflicts of interest between Apollo and its clients, the Fund Trader must disclose any proposed soft dollar arrangements on the Broker Request Form and obtain approval from Compliance before entering into a soft dollar arrangement.

 

35


  8. MONEY LAUNDERING

It is the policy of Apollo to comply with all applicable federal and state laws and regulations designed to combat money laundering. The Firm is committed to taking reasonable and practical steps to help achieve this goal.

Apollo has established policies, procedures and internal controls designed to assure compliance with federal law and regulations regarding money laundering and terrorist financing. In this regard, the Firm’s goal is to:

 

   

Accept investments only from legitimate law-abiding investors;

 

   

Cause each of our clients to accept investments only from legitimate, law-abiding investors; and

 

   

Invest, and cause each of our clients to invest, only in legitimate, law-abiding companies.

 

  8.1 AML Compliance Officer

Apollo has appointed Cindy Michel to serve as its Anti-Money Laundering (“ AML ”) Compliance Officer (the “ AML Compliance Officer ”). The AML Compliance Officer is responsible for monitoring compliance with applicable federal and state law regarding the AML efforts, conducting or overseeing ongoing training programs designed to familiarize employees with the requirements of AML laws and compliance efforts, and updating senior management of developments in AML compliance efforts and/or applicable laws. Any questions or comments regarding these policies and procedures should be directed to the AML Compliance Officer.

 

  8.2 Money Laundering

In general, money laundering consists of moving cash or other financial assets attributable to illicit activities through one or more legitimate accounts, businesses or other conduits for the purposes of making such cash or assets appear to be attributable to legitimate activities or otherwise more difficult to trace back to their illicit source.

Regulators and law enforcement agencies will prosecute firms and individuals for assisting a money launderer, disregarding legal requirements or deliberately “turning a blind eye” to criminal activity. Covered Persons are personally responsible for complying with anti-money launderings laws and must immediately report suspicions of money laundering to the AML Compliance Officer.

The following policies and procedures must be adhered to at all times.

 

  8.2.1     Know Your Customer (“KYC”)

The “Know Your Customer” process is a vital element of the investor acquisition and retention process. Appropriate due diligence must be completed prior to establishing a business relationship with any investor. The due diligence review must be designed to address any money


laundering risks based on the nature and geographic location of the investor. The level of due diligence conducted must be reasonable under the circumstances and may require that additional steps be taken with regard to investors who appear to present an increased money laundering risk. In some instances it may be reasonable for the Firm to rely on a placement agent or other financial intermediary with appropriate AML policies and procedures in place to conduct the due diligence required with respect to investors introduced to the Firm by such placement agent or financial intermediary.

Procedures for verifying the identity of investors are set forth in the Supervisory Procedures Manual. The Firm is required to comply with the economic sanctions imposed by the U.S. against certain countries. The Department of Treasury’s Office of Foreign Assets Control (“ OFAC ”) maintains a list of certain foreign governments and certain specially designated nationals on which sanctions have been imposed. In connection with KYC due diligence, the AML Compliance Officer or designee will compare each potential investor to the OFAC list to ensure that funds are not accepted from or paid to any geographic region, person or entity subject to U.S. sanctions. These comparisons must be completed prior to the acceptance of any investor.

Procedures for performing OFAC checks are set forth in the Supervisory Procedures Manual.

 

  8.3 OFAC Prohibited Assets

The United States Department of Treasury has enacted regulations that prohibit effecting transactions in certain assets. The following are generally prohibited:

 

   

Securities registered or inscribed in the name of a Cuban national;

 

   

Sovereign debt securities representing obligations of the governments of Cuba, Iran, Libya, North Korea, and Sudan;

 

   

Debt or equity securities representing obligations of, or ownership interests in, companies appearing on OFAC’s Specifically Designated Nationals list;

 

   

Debt or equity securities representing obligations of, or ownership interests in, companies located in Cuba; and

 

   

Any bankers acceptances or any other securities which represent obligations of, or ownership interests in, entities owned or controlled by blocked commercial or governmental entities referenced above.

 

  8.4 Suspicious Activity

Any “suspicious activities” of any of the Firm’s potential investors or investors must be reported promptly to the AML Compliance Officer. Suspicious activities are difficult to define and are generally left to the common sense of the individual. However, signs of suspicious activity may include:

 

   

Unusual concern exhibited by an investor regarding Apollo’s compliance with the AML laws, rules and regulations or other government reporting requirements;

 

37


   

An investor (or persons/entities publicly associated with such investor) that has a questionable background or is the subject of news reports indicating possible criminal, civil or regulatory violations;

 

   

An investor who appears to be acting as the agent for another entity but declines, evades or is reluctant, without legitimate commercial reasons, to provide any information in response to questions about that entity;

 

   

An investor is a non-U.S. bank that declines to provide information regarding ownership;

 

   

An investor refuses or fails to provide requested information;

 

   

Information provided by the investor appears false or suspicious, is inconsistent or cannot be explained after additional inquiries;

 

   

The investor appears to be controlled by a senior foreign political figure;

 

   

Wire transfers or transactions with individuals or entities, or through countries, identified by the U.S. Department of Treasury as being a “primary money laundering concern,” financial secrecy haven countries, or otherwise reasonably suspected of money laundering, terrorism or other illegal activities without an apparent business reason; and

 

   

Any suspicious financial transactions, such as capital contributions made in the form of cash, travelers checks, money orders, cashiers checks or third-party checks.

For business and security purposes, no one other than the AML Compliance Officer or a person approved by the AML Compliance Officer may contact any person suspected of suspicious activities.

 

38


  9. OUTSIDE ACTIVITIES, GIFTS, POLITICAL ACTIVITY AND OTHER POTENTIAL CONFLICTS OF INTEREST

A conflict of interest may arise from an employee’s involvement in outside interests or relationships that may either conflict with the employee’s duty to the Firm, adversely affect the employee’s judgment in the performance of his or her responsibilities or provide an actual or potential personal benefit. The benefit may be direct or indirect, financial or non-financial, through family connections, personal associations or otherwise. It is the policy of Apollo that all employees conduct the business affairs of the Firm in accordance with the highest principles of business ethics and in such a manner so as to avoid such conflicts of interest, whether actual or potential.

Covered Persons should promptly report to the Compliance Officer any situation or circumstance which may give rise to a conflict of interest.

While it is not possible to describe all circumstances where a conflict of interest exists or may exist, the following is intended to provide some guidance about potential conflicts of interest.

 

  9.1 Making Impartial Business Decisions

To avoid a conflict of interest, employees should approach all persons doing or seeking to do business with Apollo in an entirely impartial manner. The only criterion of any business decision should be whether Apollo’s clients’ best interests are promoted, and any circumstances which could call such impartiality into question should be disclosed to the Compliance Officer. For example, any factors suggestive of a possible conflict in connection with recommending an investment must be disclosed, as should any personal connection that an employee may have with an outside party, such as a consultant, with which we are considering doing business.

 

  9.2 Potential Conflicts of Interest under Limited Partnership Agreements and Offering Materials

The Apollo Limited Partnership Agreements and the offering materials of the various Apollo funds contain various provisions relating to possible conflicts of interest, which are too detailed to summarize in this Code. If you are aware of circumstances that you feel might constitute a conflict of interest between Apollo or any of its Covered Persons and our limited partners you must bring the matter to the attention of a member of legal.

 

  9.3 Dealing With Portfolio Companies

Having an interest in a Firm that does business with a portfolio company could create a conflict of interest. Covered Persons must make full disclosure of any such interests to the Compliance Officer.

 

  9.4 Personal Relationships

In general, without prior approval from the Compliance Officer, you may not act on behalf of Apollo in any transaction or business relationship involving yourself, members of your family, or other persons or organizations with which you or your family have any significant personal


connection or financial interest.

You may not engage in self-dealing or otherwise trade upon your position with Apollo or accept or solicit any personal benefit from a client, investor or related party that is not generally available to other persons or made available to you due to your position with Apollo (except in accordance with our policies regarding the occasional acceptance of gifts).

Negotiating with Apollo on behalf of others with whom you or your family have a significant connection should be avoided if there is a risk that your involvement would be perceived as self-dealing or trading upon your position with the Firm.

 

  9.5 Outside Business and Memberships

Your outside activities must not reflect adversely on Apollo or give rise to a real or apparent conflict of interest with your duties to the Firm. You must be alert to potential conflicts of interest and be aware that, as a condition to your continued employment or other association with the Firm, you may be asked to discontinue any outside activity if a potential conflict arises. Outside activities must not interfere with your job performance or require such long hours as to affect your physical or mental effectiveness. Your job at Apollo should always be your first work priority.

 

  9.5.1     Pursuing Firm Business or Investment Opportunities

Without the approval of the Compliance Officer, you may not, directly or indirectly:

 

 

Accept a business or investment opportunity from someone doing business or seeking to do business with Apollo that is made available to you solely as a result of your association with the Firm and whose acceptance would create a perception that actions you take may not be in the Firm’s or its clients best interest;

 

 

Take for yourself a business opportunity belonging to the Firm or any client; or

 

 

Engage in personal investing or trading, except as otherwise permitted herein.

 

  9.5.2     Outside Employment

Except as authorized by the Compliance Officer, Covered Persons may not be employed, provide services for, or receive remuneration from any person or entity other than the Firm or any related party.

Covered Persons and their immediate family members may not work for, or serve as a director, officer, trustee of or adviser to, a competitor of the Firm, except with the prior approval of the Compliance Officer. In addition, Covered Persons may not serve as a director of any for-profit institution or member of a creditors’ committee except in connection with such Covered Person’s employment responsibilities, without the prior approval of the Compliance Officer.

Each Covered Person who seeks approval for engaging in any outside employment described in this Section 9.5.2, must send a written or electronic request to the Compliance Officer describing

 

40


the nature of the outside employment, the time commitment involved, the parties for whom such Covered Person will be working or associated with, and other relevant particulars of the employment. Requests to engage in such outside employment will be reviewed by the Compliance Officer on a case-by-case basis.

 

  9.5.3     Memberships

The Firm supports its employees’ involvement in community activities, professional organizations and not-for-profit organizations, provided such activities do not violate the law or directly and materially affect the Firm. Before joining an organization or engaging in such activities, Covered Persons should evaluate whether the membership or participation could cause, or appear to cause, a conflict of interest. If there is any question as to whether a conflict of interest exists or may exist, the Covered Person should consult with the Compliance Officer before joining such organization or engaging in such activities.

 

  9.5.4     Government Positions

Covered Persons must consult the Compliance Officer before becoming a candidate for public office or accepting any government position, including as a member, director, officer or employee of a governmental agency, authority, advisory board or other board (e.g., a public school or library board).

 

  9.6 Gifts

You must promptly report to the Chief Compliance Officer or designee all gifts received from or given to anyone doing business with, or who is seeking to do business with, the Firm that exceed $100 in value. You are prohibited from soliciting gifts for yourself or for anyone else, or accepting gifts from, or giving gifts to, anyone in return for any business, service, or confidential information of the Firm.

For the purposes of the Code, the term “ gift ” includes anything of value for which you are not required to pay the retail or usual and customary cost. A gift may include meals or refreshments, goods, services, tickets to entertainment or sporting events, or the use of a residence, vacation home, or other accommodations. Gifts given by others to members of your family, to those with whom you have a close personal relationship, and to charities designated by you, are considered to be gifts to you for purposes of the Code.

Covered Persons may, however, accept or give customary and inexpensive gifts (including birthday and anniversary gifts, gifts for recognition of service and accomplishment), common courtesies, promotional items, business-related meals, entertainment or favors, and attend or host permitted golf outings and similar business related functions, when (i) such gifts are neither so frequent nor so generous as to appear excessive, (ii) the acceptance or giving of such gift will not place the recipient under any obligation to the donor and will not create the appearance of influencing the recipient and (iii) the level of expense associated with such gift is reasonable and customary in the context of the Firm’s business and the relationship with the donor or recipient. As a general matter, gifts having a value of $100 or less will be considered immaterial and therefore permissible. All investment professionals must record gifts of a material value they

 

41


accept or give on a semi-annual basis on their semi-annual Investment Professional Questionnaire.

The giving of gifts to governmental officials is in most cases strictly limited by law or regulation. However, depending on the jurisdiction, there may be exceptions. All gifts to governmental officials must be pre-approved by the Compliance Officer.

 

  9.7 Political Activity and Political Contributions

Civil laws, criminal laws and regulations vary by jurisdiction regarding interactions with public officials. Improper contact with public employees at any level of government – including elected officials, appointed officials, and public employees at the federal, state, and local levels – may adversely impact Apollo’s business interests and reputation. Improper contact may also lead to civil and criminal liability for the individual employee, and potentially for the Firm as well. In order to ensure compliance with the numerous applicable regulatory regimes, the following actions must be pre-cleared by the Compliance Officer:

 

   

Political contributions, including contributions to political parties and PACs made either in your professional or personal capacity;

 

   

Contacts with elected officials, appointed officials or public employees at any level of government (federal, state or local) in your professional capacity; and

 

   

Gifts to government officials or public employees who are not members of your immediate family given in either your professional or personal capacity.

Covered Persons must submit a request in writing to the Compliance Officer (e-mails acceptable) and receive pre-clearance before engaging in any of these activities.

 

  9.8 Political Contributions of Portfolio Companies

It is Apollo’s policy not to direct the political contributions of its portfolio companies.

 

  9.9 Policy for Solicitation of Campaign Contributions

 

  9.9.1     General Solicitation Policy

This policy applies to the solicitation of other employees to make contributions to federal, state, or local campaigns. Solicitations may not involve coercion or the appearance of coercion, and must be made in a personal, not a professional capacity.

 

  9.9.2     Definitions

The term “solicitor” means any individual who asks any other individual to make a contribution to any candidate for federal, state, or local office.

The term “contribution” means anything of value given to influence a federal, state, or local election, including money, loans, and in-kind donations of goods and services. In-kind

 

42


contributions include goods and services offered free of charge or at a discount to a campaign, as well as payments to third party vendors for goods and services provided to a campaign.

 

  9.9.3     Avoiding Coercion and the Appearance of Coercion

Federal, state, and local campaign finance law prohibits coercion in connection with the solicitation of campaign finance contributions. To avoid coercion and the appearance of coercion, the solicitor should:

 

   

Only solicit individuals of the same management level as the solicitor (i.e., partners should not solicit junior employees).

 

   

Avoid linking the making of a contribution, whether directly or by implication, with the potential donor’s employment at the firm, their prospects for a promotion, or any other condition of their employment.

 

   

Inform the potential donor that contributions are voluntary and will not be reimbursed, and that the potential donor may refuse to contribute without fear of reprisal.

 

   

Refrain from pressuring colleagues to make a contribution if they express hesitation about doing so.

 

   

Refrain from stating that the election of the candidate would benefit Apollo, though the solicitor may make general statements about the importance of the election to private equity firms.

 

  9.9.4     Use of Firm Name and Resources

The use of firm resources to solicit contributions should be avoided. Solicitations should not involve:

 

   

The use of Apollo computers, phones, and facilities such as meeting or conference rooms for more than one hour per week or four hours per month.

 

   

Communications drafted or sent out on Apollo letterhead.

 

   

The assistance of Apollo staff, including assistants and support staff.

 

  9.9.5     Reimbursement of Contributions

The reimbursement of campaign contributions is a violation of federal, state, and local campaign finance law, and should be diligently avoided. Solicitors should under no circumstances agree to reimburse all or any portion of a contribution, or imply that reimbursement will be forthcoming.

 

43


  9.9.6     Firm Sponsored Fundraising Events

The firm may from time to time elect to hold a fundraising event in coordination with a candidate for federal, state, or local office. All fundraising events must be pre-cleared by the Chief Compliance Officer, or designee, who may consult with Legal as required.

 

  9.10 Solicitation of Potential Investors

Proper solicitation of potential limited partner investors should emphasize the experience and other advantages of Apollo, and concentrate on providing accurate information to investors so they can make informed decisions. Solicitations that could cast doubt on the integrity of Apollo, its employees, or its portfolio companies are prohibited regardless of the justification for such activities. Prohibited activities include:

 

   

Using deceptive or misleading statements.

 

   

Attempting to induce individuals to place their personal interests above those of the companies or organizations they represent.

 

   

Inducing an individual to breach a contract with a third party.

 

   

Violating any law, regulation or Apollo policy.

 

   

Engaging in any activity that could damage Apollo’s reputation.

 

   

Entering agreements with competitors, or violating antitrust laws.

In sum, Covered Persons may only use legal, ethical, and proper methods to solicit potential limited partner investments. No Covered Person shall make payments to solicit potential investors.

 

  9.11 Donations to Charities Suggested by Investors

Donations to a charity suggested by an investor that is a pension or sovereign wealth fund are generally prohibited.

 

44


  10. NOTICE REQUIREMENTS

 

  10.1 Ownership Interest in Registered Securities

You are required to notify a member of Legal prior to Apollo’s clients obtaining, in the aggregate, 10% or more of any class of registered equity securities, or upon becoming a member of a group that, including the aggregate position of Apollo’s clients, obtains more than 10% of any class of registered equity securities. Apollo is obligated to report any change in beneficial ownership of the reporting company. You are required to notify a member of Legal the same day of any transaction that affects the beneficial ownership of a reporting company.

 

  10.2 Section 13 Reportable Company

You are required to notify a member of Legal of any Section 13 Reportable Transaction involving investments. A “ Section 13 Reportable Transaction ” is any transaction in which Apollo, or any group in which it participates, intends to acquire or has acquired more than 5% of a registered class of the voting securities of a reporting company. You are also required to report all transactions in a reporting company that you effect in your Employee Related Accounts.

 

  10.3 Board Membership

You are required to notify a member of Legal and the Compliance Officer prior to becoming the officer or director of a reporting company, and to notify a member of Legal of any security interest in the reporting company.

All investment professionals must update their board memberships on their semi-annual Investment Processional Questionnaire.

 

  10.4 Complaints

You must promptly notify the Compliance Officer if you receive written complaints. A “ complaint ” is defined as any written communication (including electronic communication) from an investor, or any person acting on behalf of an investor, alleging a grievance involving the activities of the Firm or any of its employees.

 

  10.5 Proxies

You must forward to the Fund Controller any proxy you receive on behalf of a client.


  11. BUSINESS CONTINUITY PLAN

Apollo has created a business continuity plan (the “BCP”) to provide guidance to all Covered Persons in the event of an emergency. The purpose of the BCP is to ensure that Apollo can continue to conduct its business in the event of an emergency that results in a business disruption. A copy of the BCP is distributed only to those with a role in implementing the BCP. Covered Persons should call the Firm’s emergency hotline number (800) 609-0140 if a business interruption has occurred.

 

  12. ANTI-BRIBERY POLICY AND PROCEDURES

The Foreign Corrupt Practices Act (“FCPA”) is a U.S. criminal statute that prohibits promising, authorizing, offering or giving anything of value, directly or indirectly, to Covered Officials (a broad term that includes employees at all levels of non-U.S. governments, including all state agencies as well, as employees of state-owned or state-controlled commercial enterprises, such as banks, and non-U.S. political parties and candidates) to corruptly influence them to misuse their position or obtain an improper advantage for the purpose of obtaining or retaining business for Apollo. The FCPA applies to the conduct of Apollo and its officers and employees worldwide because Apollo is a U.S. based company. However, countries besides the U.S. also prohibit bribery of their officials so complying with this policy also ensures compliance with these laws as well. This policy makes references to the FCPA because it is often stricter than those laws.

You cannot avoid the law by making payments to Covered Officials through a third party. At Apollo it is also prohibited to make payments to third parties where there is a likelihood that the third party will use any of the funds to make a prohibited payment to a Covered Official. Facilitation payments and payments for reasonable and bona fide expenses incurred by a Covered Official must generally be approved by Legal and Compliance before making the payment and in all instances reported to Compliance and recorded accurately.

All individuals subject to this Policy must promptly report any violation or suspected violation of this Policy to Compliance.

Apollo will investigate all reports made and will not tolerate any kind of retaliation for reports or complaints made in good faith. To the contrary, Apollo protects all reporters, and employees are expected to cooperate in internal investigations.

 

  12.1 Overview of the Foreign Corrupt Practices Act (FCPA)

The FCPA applies to the worldwide conduct of Apollo and its officers, employees, consultants, agents, joint venture partners and other persons acting on behalf of the Company. The FCPA has two principal parts: (1) anti-bribery and (2) accounting.

 

  12.1.1     Anti-Bribery Provision

Generally, the FCPA prohibits Apollo and its officers and employees, from:

 

46


   

promising, authorizing, giving, or offering payment

 

   

of money or anything of value (including gifts, meals and entertainment), or providing any other benefit (e.g., such as offering an intern position to a related person of a Covered Official)

 

   

directly or indirectly (i.e., through third parties such as agents)

 

   

to a Covered Official (as defined below)

 

   

corruptly to induce the recipient to misuse his or her official position or to obtain an improper advantage

 

   

in connection with Apollo’s business.

 

                12.1.1.1     Restrictions on Payments to Third Parties

You must never promise, authorize, give, or offer anything of value to a third party that you suspect may be passed to Covered Officials or other persons to improperly influence any person’s decision-making. You must not use or allow an agent, consultant, representative or business partner (such as a joint venture participant) to make any payment that Apollo itself cannot make. Under the FCPA, Apollo and individual employees may be held liable for consciously disregarding indications (by ignoring or failing to investigate warning signs) that a third party may be making improper payments. Examples include location of bank wire instructions are different from location of third party agent, size of payment is not commensurate with services performed, general lack of visibility of third party agent’s activities. If you suspect or have reason to suspect that a third party is using even its own funds to make such payments, you must report your suspicions to Compliance.

 

  12.1.2     Accounting Provisions

The FCPA also prohibits the submission of false or misleading records (e.g., misstating the number of guests at a business dinner in an employee expense report, or attaching a fictitious receipt to support an expense report).

 

                12.1.2.1     Accurate Records

All of Apollo’s books, records, accounts and financial statements must be maintained in reasonable detail, must accurately reflect Apollo’s transactions, and must be maintained in accordance with Apollo’s system of internal controls.

Any employee who creates or causes the creation of a false or misleading record or accounting entry, or fails to disclose payments, assets or liabilities will be subject to disciplinary action. If you learn of any false or misleading entries, or unrecorded payments, you should report them immediately to Compliance. As noted above, Apollo protects all reporters and will not tolerate any retaliation against parties who report behavior that may be improper.

 

47


                12.1.2.2     Restrictions on Reimbursements and Use of Cash

Apollo will only pay reimbursements for goods, services, or other expenditures that are fully and properly supported by third-party invoices or receipts in accordance with Apollo’s Travel & Expense Policy. You should refer to Apollo’s Expense Reporting Guidelines. With the exception of normal and customary petty cash requirements, cash transactions in connection with the Apollo’s business are to be avoided.

Cash or cash equivalents may never be provided to a Covered Official unless approved by Compliance in advance. Notwithstanding the forgoing, this prohibition shall not apply to payments for purposes of protecting the health and safety of an Apollo employee or payments made under other extraordinary circumstances where obtaining pre-approval is not feasible. If such payment is made, it should still be accurately recorded and reported to Compliance promptly.

 

                12.1.2.3     Covered Officials

A Covered Official is called a “foreign official” in the FCPA, and is defined broadly to cover any employee of any instrumentality at any level (federal, state, or local) of a non-U.S. government, a non-U.S. political party, or a “public international organization,” a term that includes, among other entities, the United Nations, the World Bank, and the World Health Organization. This definition covers any employees, officers, or agents of any entity in which a non-U.S. government has substantial direct or indirect ownership or control, and therefore includes employees of commercial enterprises in which there is a sufficient level of governmental ownership or control.

Covered Officials under the FCPA are often a broader group of people than the commonplace concept of a government official or public official under the law where the official lives. Thus, an individual may be a Covered Official even if he or she does not have a government title or is not directly employed by a government agency. For example, employees of state-owned or controlled banks, airlines, airports and phone companies are likely covered under the FCPA.

A Covered Official can be any of the following:

 

   

Any employee of a government or state-owned or state-controlled entity such as a state-owned airline (even if the person and entity are performing what we consider commercial functions);

 

   

Any employee of a public international organization (such as the United Nations, World Bank, or World Health Organization);

 

   

Any candidate for a political office, and any political party official; or

 

   

Family members of any of the above persons

 

                12.1.2.4     State-Owned Entities

Employees of state-owned or state controlled entities Covered Officials under the FCPA.

 

48


In general, a State-Owned or State-Controlled entity (SOE) is an entity in which the government of any non-US country (either as one agency or collectively through many different agencies or instrumentalities) holds equity interests exceeding 30% in the entity. Determining whether an entity is state-owned or state-controlled can be complex. Please refer to Compliance for questions regarding an entity’s SOE status. Determining whether a particular person is a Covered Official can be complex and may require legal advice. If you are uncertain whether any individual with whom you have business contacts meets this definition, please consult the Legal Department.

 

  12.2 Payments, Recordkeeping, and Reimbursements

 

  12.2.1     Payments That May Be Made in the Course of Apollo Business

Apollo employees making business payments must always ensure that any such payments:

 

  i. reflect the actual value of the services provided;

 

  ii. are made for a proper business reason;

 

  iii. are made to legitimate service providers;

 

  iv. are accurately and completely recorded, and

 

  v. meet the requirements of the laws of the U.S. and of other countries where we do business.

These fundamental requirements take on even greater significance in connection with Apollo’s international business.

 

  12.3 Permissible Payments, Gifts, Travel, Entertainment and Educational Expenses Involving Covered Officials

 

  12.3.1     Types of Prohibited Payments, Gifts, Travel, Entertainment and Educational Expenses for
     Covered Officials

Some business people with general awareness of the FCPA mistakenly assume that the statute prohibits only “bribes” in the form of cash payments to Covered Officials. The FCPA is much broader than that; it prohibits improperly giving, promising, authorizing, or offering the payment of anything of value to a Covered Official to induce the official to misuse his or her office or secure an improper advantage in an effort to obtain or retain business.

Accordingly, the FCPA’s restrictions extends to many forms of travel and entertainment expenditures for the benefit of Covered Officials, as well as non-cash gifts and other benefits, such as offers of employment, educational placement, and charitable donations to entities related to Covered Officials. In short, customary business practices that are appropriate with respect to non-government related customers, suppliers or other entities may be impermissible under the FCPA if a Covered Official is involved.

 

49


No gift of cash or its equivalent to a Covered Official is ever permitted (subject to a narrow exception, discussed below, for “facilitating payments” and in the extraordinary circumstances as described above). Any stipend, per diem payment or gift of any instrument exchangeable for cash, products or services is prohibited.

 

  12.3.2     Types of Permitted Payments, Gifts, Travel, Entertainment and Educational Expenses for
     Covered Officials

The FCPA and other anti-bribery rules do not prohibit all gifts and entertainment for Covered Officials. These laws focus on gifts and payments made with the intention or appearance of improperly influencing Covered Officials to misuse their office. These laws permit gifts and entertainment for Covered Officials in certain circumstances where such gifts are reasonable, consistent with local law, and made for legitimate business purposes.

Paying for customary and reasonable business meals for Covered Officials in conjunction with legitimate business activities may be appropriate and permissible. Similarly, it is sometimes permissible to give Covered Officials gifts of minimal value that promote, demonstrate or explain Apollo’s products or services (such as small gifts bearing a Apollo logo).

Before offering or making such a payment, you must follow the procedures outlined in Section 5 below.

Any expenses for gifts or entertainment for Covered Officials must be recorded with care and complete detail in Apollo’s books and records and entered into the database maintained by Compliance . You must always submit receipts for gifts or entertainment for Covered Officials.

 

  12.3.3     Facilitating Payments

Covered Officials sometimes request payments or other things of value to expedite or “facilitate” routine, non-discretionary government actions (for example, obtaining utility services or visas, obtaining electrical service, or processing certain papers). In limited cases, these payments may be appropriate; in others, they may violate local law and/or the FCPA. The laws of many countries do not distinguish between a “bribe” and a “facilitating payment.” Thus, determining whether such payments are lawful and consistent with Apollo policy requires complicated judgments of law and policy. Accordingly, you must never offer such a payment. If a Covered Official requests such a payment, before responding (and before making any payments of this sort), you must review the details of the requested payment with the Chief Legal Officer and obtain written approval. You will be asked to provide the name of the official requesting the payment, whether such payments have been requested or paid before, the purpose of the payment, the amount, how it will be recorded, and who is aware of the payment request and whether the payment is lawful under local law.

A facilitating payment may be approved only if the payment, gift, or thing of value is:

 

   

requested by the Covered Official;

 

   

required because the Covered Official would not otherwise timely perform a non-discretionary and routine function that he is required to discharge as part of his duties;

 

50


   

legal under local law and regulations;

 

   

less than $50 (or the equivalent in local currency) in value when aggregated with other payments made to a single Covered Official in a year; and

 

   

unrelated to any decision to award or to continue business with Apollo.

If any such payments are approved, they must be accurately documented in Apollo’s books and records.

 

  12.4 Contracts with Third Party Agents and Consultants (“Intermediaries”)

You, as an individual , and Apollo can be held criminally liable for improper payments by third parties acting on behalf of Apollo. For this reason, Apollo policy requires that you follow certain steps, detailed below, when obtaining the services of a certain category of third parties (referred to below as “Intermediaries”) in connection with Apollo’s business. These steps include due diligence procedures to be performed before engaging Intermediaries, and certain contractual provisions that must be included in the relevant agreements.

 

  12.4.1     Covered Intermediaries

“Covered Intermediaries” include all third parties engaged by Apollo:

(1) to assist in obtaining, conducting or retaining business outside of the U.S. with a government entity or state-owned entity; or

(2) to assist in obtaining permits, licenses or other documentation or certification needed to conduct business outside of the U.S.; or

(3) to represent Apollo in dealing or having contact with any Covered Officials or government entities or state-owned entities.

Examples of the types of third parties subject to this policy are:

 

   

Apollo’s “authorized agents” such as “placement agents”; and

 

   

Certain consultants not typically engaged by Apollo in high-risk countries who deal with discretionary matters relating to Apollo’s business before Covered Officials. A high risk country is a country that has a score of 6.0 or less on Transparency International’s Corruption Perceptions Index. http://www.transparency.org/news_room/in_focus/2008/cpi2008/cpi_2008_table. For countries not listed on the Transparency International Corruption Perceptions Index, please contact Compliance for guidance.

Determining whether a particular third party falls within the definition of Covered Intermediary can be difficult and may require legal advice. However, any “authorized agent” (i.e., parties contractually designated as agents authorized to act on Apollo’s behalf) and any third party

 

51


acting on Apollo’s behalf in dealing with any unit of government (including state-owned enterprises) will fall within the definition. If you are uncertain whether any third party with whom you have business contacts meets this definition, please consult the Legal Department.

 

  12.4.2     Due Diligence Required in Order to Engage an Intermediary

Before entering into any contract for more than $10,000 per year with a Covered Intermediary, you must first conduct a reasonable due diligence investigation into the background, reputation, and business capabilities of the Intermediary. This due diligence should be documented on the Intermediary Diligence Form, Appendix 12.4.2.

Compliance shall review completed Intermediary Diligence Forms and perform additional investigation, as appropriate. The overall investigation should include:

 

   

Verification of the Covered Intermediary’s credentials and reputation with reputable source in the U.S. or the local jurisdiction;

 

   

Inquiry into whether the Covered Intermediary has been subject to any formal or informal allegations (including in the media) regarding any misconduct indicating dishonesty;

 

   

Documentation of the reason for the retention, including an analysis of the Covered Intermediary’s qualifications and expertise;

 

   

Review the appropriateness of the cost of services when compared to compensation paid to others for similar services under similar circumstances;

 

   

Make reasonable inquiries that no owner, employee, consultant, or representative of the Intermediary is a Covered Official or an official’s family member or close business associate;

 

   

Determine the location of where the Covered Intermediary’s fee will be paid, and whether it is in the same location/country where the Covered Intermediary is located; and

 

   

Make reasonable inquiries as to whether the Covered Intermediary will retain or has retained any subcontractors or consultants, what type of investigation it has done into the reputation of those persons, and whether those persons are under the control of the Covered Intermediary.

Each of these steps must be fully documented before the contract is signed as part of the contract review. A copy of the due diligence file shall be maintained by Compliance for each Covered Intermediary reviewed, whether or not retained.

 

  12.4.3     Provisions Required To Be Included in Contracts with Intermediaries

Every Covered Intermediary must enter into a written agreement with Apollo, which must contain representations relating to the FCPA as approved by Compliance. Annual certifications should also be obtained from Covered Intermediaries by the appropriate business unit

 

52


representative in the form of a completed Appendix 12.4.3 or in a form approved by Compliance and submitted to Compliance.

Contracts that provide for payments to parties other than the contracting Covered Intermediary, or payments to countries other than the home country of the contracting party, are generally not acceptable.

Compensation to Covered Intermediaries must be commercially reasonable and commensurate with the tasks that the contractor actually undertakes. Payments to Covered Intermediaries must be made in accordance with the terms of their contracts. You must not honor requests to vary the terms of contracts by:

 

   

Increasing or decreasing agreed amounts on any invoice if such a request is contrary to Apollo’s standards, procedures or applicable laws; or

 

   

Submitting multiple invoices if you suspect such invoices may be used in a manner contrary to Apollo standards, procedures or applicable laws or otherwise used improperly.

 

  12.5 Procedures for Gifts, Travel and Entertainment Expenses Involving Covered Officials

All gifts, travel and entertainment to Covered Officials require written approval from Compliance. Gifts of less than $100 are permissible without seeking additional approval. Higher amounts require written approval from Compliance and completion of the Gift, Travel and Entertainment Pre-Approval Form, Appendix 12.5.

 

  12.5.1     Entertainment

If the expense is below the following amounts and is incurred in connection with the same Covered Official no more than four times per year in the aggregate, no additional approvals are required:

 

breakfast

   $50

lunch

   $75

dinner

   $100 (or the limits as stated in the Firm’s Travel and Expense Policy by city)

Note the above amounts are guidelines.

Higher amounts or more frequent entertainment may be appropriate in a specific country and must be approved, in writing in advance by Compliance by submitting a completed Gift, Travel and Entertainment Pre-Approval Form. The frequency of hospitality must be carefully monitored, as the cumulative effect of frequent hospitality can give rise to the appearance of corruption. Hospitality for an individual should not exceed four events (across all categories) in any calendar year except with prior approval of Compliance.

 

53


Any request for the payment of a Covered Official’s travel can only be approved by Compliance and will only be approved if it is bona fide, reasonable and directly related to either (a) the promotion, demonstration or explanation of products or services or (b) the execution or performance of a contract with a foreign government.

 

  12.6 Mergers, Acquisitions and Joint Ventures

From time to time, Apollo will engage in business transactions such as mergers, acquisitions and/or joint ventures. As part of due diligence procedures for Anti-Corruption, and prior to the execution of these transactions, the Deal Team must ensure that outside counsel representing the Firm on such transactions conducts and documents an FCPA review. Documentation shall be forwarded and maintained by the Legal Department or by the law firm conducting the review. For joint ventures where Apollo does not own majority interest, Apollo must make reasonable efforts to ensure that the joint venture business partner maintains a system of internal controls, accurate books and records and does not engage in corrupt payments. For additional information regarding Mergers, Acquisitions, and/or joint ventures, please contact the Legal Department.

 

54