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Item 1.01
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Entry into a Material Definitive Agreement.
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Termination of Existing Investment Advisory Agreement
and Existing Administration Agreement and Entry into New Investment Advisory Agreement and New Administration Agreement
On
October 17, 2017, the transactions contemplated by the Asset Purchase Agreement (the “Asset Purchase Agreement”) entered into on July 13, 2017 by Fifth Street Management LLC (“FSM”), Oaktree Capital Management, L.P.
(“Oaktree”), Fifth Street Asset Management Inc. (solely for the purposes set forth therein) and Fifth Street Holdings L.P. (“FSH”) were consummated. In connection therewith, the Investment Advisory Agreement, dated as of
June 27, 2013, between FSM and Oaktree Strategic Income Corporation (f/k/a Fifth Street Senior Floating Rate Corp.) (the “Company”, “we” or “us”), and the Administration Agreement, dated as of January 1, 2015,
between the Company and FSC CT LLC were terminated, and the Company entered into a new Investment Advisory Agreement with Oaktree (the “New Investment Advisory Agreement”) and a new Administration Agreement with Oaktree Fund
Administration, LLC (“Oaktree Administrator”), a subsidiary of Oaktree (the “New Administration Agreement”). The New Investment Advisory Agreement and New Administration Agreement were approved by the Company’s board of
directors (the “Board”) on July 13, 2017, and the Company’s stockholders approved the New Investment Advisory Agreement at a special meeting of our stockholders on September 7, 2017.
Oaktree is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Pursuant
to the New Investment Advisory Agreement, Oaktree will manage our
day-to-day
operations and provide us with investment advisory services. Among other things, Oaktree
will (i) determine the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identify, evaluate and negotiate the structure of the investments we make,
(iii) execute, close, monitor and service the investments we make, (iii) determine what securities and other assets we purchase, retain or sell, (iv) perform due diligence on prospective portfolio companies and (v) provide us
with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our funds.
Oaktree’s services under the New Investment Advisory Agreement will not be exclusive and, Oaktree will generally be free to furnish
similar services to other entities so long as its services to us are not impaired.
We will pay Oaktree a fee for its services under the
New Investment Advisory Agreement consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee payable to Oaktree and any incentive fees earned by Oaktree will ultimately be borne by our
common stockholders.
Base Management Fee
Under the New Investment Advisory Agreement, the base management fee on total gross assets, including any investment made with borrowings, but
excluding cash and cash equivalents, will be 1.00%.
Incentive Fee
The incentive fee consists of two parts. Under the New Investment Advisory Agreement, the first part of the incentive fee, which is referred to
as the incentive fee on income, will be calculated and payable quarterly in arrears based upon our
“pre-incentive
fee net investment income” for the immediately preceding quarter. The payment of the
incentive fee on income will be subject to payment of a preferred return to investors each quarter (i.e., a “hurdle rate”), expressed as a rate of return on the value of our net assets at the end of the most recently completed quarter, of
1.50%, subject to a “catch up” feature.
For this purpose,
“pre-incentive
fee net
investment income” means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies, other
than fees for providing managerial assistance) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the New Administration Agreement and any interest expense and
dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee).
Pre-incentive
fee net investment income includes, in the case of investments with a deferred interest feature
(such as original issue discount debt instruments with
payment-in-kind
interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-incentive
fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under the New Investment Advisory Agreement, the calculation of the incentive fee on income for each quarter will be as follows:
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No incentive fee is payable to Oaktree in any quarter in which our
pre-incentive
fee net investment income does not exceed the preferred return rate of 1.50% (the “preferred
return”) on net assets.
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100% of our
pre-incentive
fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any,
that exceeds the hurdle rate but is less than or equal to 1.8182% in any quarter (7.2727% annualized) is payable to Oaktree. This portion of the
pre-incentive
fee net investment income (which exceeds the
hurdle rate but is less than or equal to 1.8182%) is referred to as the
“catch-up.”
The “catch up” provision is intended to provide Oaktree with an incentive fee of 17.5% on all of our
pre-incentive
fee net investment income as if a hurdle rate did not apply when our
pre-incentive
fee net investment income exceeds 1.8182% in any quarter. Increasing the catch
up rate from the 50% rate in the Current Investment Advisory Agreement may have the effect of increasing the income-based incentive fee payable to Oaktree.
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17.5% of the amount of our
pre-incentive
fee net investment income, if any, that exceeds 1.8182% in any quarter (7.2727% annualized) is payable to Oaktree once the hurdle is
reached and the
catch-up
is achieved (17.5% of all
pre-incentive
fee net investment income thereafter is allocated to Oaktree).
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There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly, there is no clawback of amounts previously
paid if subsequent quarters are below the quarterly hurdle.
Under the New Investment Advisory Agreement, the second part of the incentive
fee will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the New Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ending September 30, 2019 and will equal
17.5% of our realized capital gains, if any, on a cumulative basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital
depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees under the New Investment Advisory Agreement. Any realized capital gains, realized capital losses, unrealized capital appreciation and
unrealized capital depreciation with respect to the Company’s portfolio as of the end of the fiscal year ending September 30, 2018 will be excluded from the calculations of the second part of the incentive fee.
Duration and Termination
Unless earlier terminated as described below, the New Investment Advisory Agreement will remain in effect for two years from the date of its
execution and thereafter from
year-to-year
if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting
securities, including, in either case, approval by a majority of our directors who are not interested persons. The New Investment Advisory Agreement will automatically terminate in the event of its assignment. The New Investment Advisory Agreement
may be terminated by either party without penalty upon 60 days’ written notice to the other. The New Investment Advisory Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Indemnification
The New
Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree and its
officers, managers, partners, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including
reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oaktree’s services under the New Investment Advisory Agreement or otherwise as our investment adviser.
Administrative Services
Upon effectiveness of the New Investment Advisory Agreement, the Company will enter into an the New Administration Agreement with Oaktree
Administrator. Pursuant to the New Administration Agreement, Oaktree Administrator will provide administrative services to the Company necessary for the operations of the Company, which include providing office facilities, equipment, clerical,
bookkeeping and record keeping services at such facilities and such other services as Oaktree Administrator, subject to review by the Board, shall from time to time deem to be necessary or useful to perform its obligations under the New
Administration Agreement. Oaktree Administrator may, on behalf of the Company, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks
and such other persons in any such other capacity deemed to be necessary or desirable. Oaktree Administrator will make reports to the Board of its performance of obligations under the New Administration Agreement and furnish advice and
recommendations with respect to such other aspects of the business and affairs of the Company, in each case, as it shall determine to be desirable or as reasonably required by the Board; provided that the Administrator shall not provide any
investment advice or recommendation.
Oaktree Administrator will also provide portfolio collection functions for interest income, fees and
warrants and is responsible
for the financial and other records that the Company is required to maintain and prepares, prints and disseminates reports to the Company’s stockholders and reports and all other materials
filed with the SEC. In addition, Oaktree Administrator will assist the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns, and generally overseeing the
payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company will reimburse Oaktree Administrator the
allocable portion of overhead and other expenses incurred by Oaktree Administrator in performing its obligations under the New Administration Agreement, including the Company’s allocable portion of the rent of the Company’s principal
executive offices at market rates and the Company’s allocable portion of the costs of compensation and related expenses of its chief financial officer and chief compliance officer and their staffs. Such reimbursement is at cost, with no profit
to, or markup by, Oaktree Administrator. Oaktree Administrator may also offer to provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. Unless earlier terminated as described below, the New
Administration Agreement will remain in effect for two years from the date of its execution and thereafter from
year-to-year
if approved annually by our Board or by the
affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The New Administration Agreement may be terminated by either party
without penalty upon 60 days’ written notice to the other. The New Administration Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Please see the definitive proxy statement filed by the Company pursuant to Regulation 14A with the Securities and Exchange Commission (the
“SEC”) on July 25, 2017 for additional information regarding the New Investment Advisory Agreement and the New Administration Agreement. The New Investment Advisory Agreement and the New Administration Agreement are attached as
Exhibits 10.1 and 10.2 hereto, respectively, and are incorporated herein by reference.
Pledge Agreement
On October 17, 2017, in connection with the Asset Purchase Agreement, the Company entered into a pledge agreement (the “Pledge Agreement”) with
FSH with respect to 1,131,991 shares of the Company’s common stock owned by FSH, pursuant to which FSH pledged such shares to the Company to secure indemnification obligations of FSM and FSH under the Asset Purchase Agreement relating to
certain SEC investigation-related legal costs and expenses, if any, and certain fees, fines, monetary penalties, deductibles and disgorgements, if any, that may be ordered by the SEC to be paid by the Company, net of any disgorgements paid by FSM to
the Company and any insurance recoveries received by the Company. The Pledge Agreement is attached as Exhibit 10.3 hereto and incorporated herein by reference.
